##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report under Section 13 OR 15(d) of the Securities
Exchange Act of 1934
 For quarterly period ended September 30, 2008
 or
 o
    
    Transition Report under Section 13 OR 15(d) of the Securities
Exchange Act of 1934
 For the transition period from  to
 Commission file Number: 0-10546
 LAWSON PRODUCTS, INC.
  Delaware
    
    36-2229304(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 1666 East Touhy Avenue, Des Plaines, Illinois
    
    60018(Address of principal executive offices)
    
    (Zip Code)
 (847) 827-9666
 þ o
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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Safe Harbor Statement under the Securities Litigation Reform Act of 1995:
   2




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##### 



TABLE OF CONTENTS
 Page #PART I  FINANCIAL INFORMATIONItem 1
    
    Condensed Consolidated Financial Statements
    
    
    4Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4
    
    Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    20Item 1A
    
    Risk Factors
    
    
    20Item 6
    
    Exhibits
    
    
    21SIGNATURES
    
    
    22EX-15EX-31.1EX-31.2EX-32
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 September 30,
    
    
    December 31,(Amounts in thousands, except share data)
    
    2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,651
    
    
    $
    1,671Accounts receivable, less allowance for doubtful accounts
    
    
    56,372
    
    
    
    58,882Inventories
    
    
    88,806
    
    
    
    96,785Miscellaneous receivables and prepaid expenses
    
    
    10,032
    
    
    
    10,303Deferred income taxes
    
    
    5,417
    
    
    
    3,226Discontinued current assets
    
    
    509
    
    
    
    1,064Total current assets
    
    
    167,787
    
    
    
    171,931Property, plant and equipment, less accumulated depreciation and
amortization
    
    
    49,481
    
    
    
    53,031Deferred income taxes
    
    
    19,044
    
    
    
    21,344Goodwill
    
    
    27,999
    
    
    
    27,999Other assets
    
    
    23,636
    
    
    
    25,558Total assets
    
    $
    287,947
    
    
    $
    299,863LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    21,797
    
    
    $
    16,266Revolving line of credit
    
    
    10,500
    
    
    
    11,000Settlement payable  current (Note J)
    
    
    10,000
    
    
    
    Accrued expenses and other liabilities
    
    
    41,865
    
    
    
    45,254Discontinued current liabilities
    
    
    87
    
    
    
    322Total current liabilities
    
    
    84,249
    
    
    
    72,842Accrued liability under security bonus plans
    
    
    26,311
    
    
    
    25,491Settlement payable  noncurrent (Note J)
    
    
    10,000
    
    
    
    Other
    
    
    20,767
    
    
    
    27,16957,078
    
    
    
    52,660Stockholders equity:Preferred stock, $1 par value:Authorized  500,000 shares, Issued and outstanding  None
    
    
    
    
    
    
    Common stock, $1 par value:Authorized  35,000,000 shares, Issued and outstanding  8,522,001 shares
    
    
    8,522
    
    
    
    8,522Capital in excess of par value
    
    
    4,774
    
    
    
    4,774Retained earnings
    
    
    133,287
    
    
    
    160,606Accumulated other comprehensive income
    
    
    37
    
    
    
    459Stockholders equity:
    
    
    146,620
    
    
    
    174,361Total liabilities and stockholders equity
    
    $
    287,947
    
    
    $
    299,863
  4




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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Amounts in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    124,567
    
    
    $
    127,913
    
    
    $
    375,881
    
    
    $
    386,760Cost of goods sold
    
    
    54,275
    
    
    
    51,456
    
    
    
    159,721
    
    
    
    157,779Gross profit
    
    
    70,292
    
    
    
    76,457
    
    
    
    216,160
    
    
    
    228,981Operating expenses:Selling, general and administrative expenses
    
    
    62,994
    
    
    
    66,251
    
    
    
    192,367
    
    
    
    199,714Settlement and related costs (Note J)
    
    
    394
    
    
    
    1,172
    
    
    
    31,562
    
    
    
    4,947Severance and other charges
    
    
    1,144
    
    
    
    3,671
    
    
    
    7,659
    
    
    
    11,034Operating income (loss)
    
    
    5,760
    
    
    
    5,363
    
    
    
    (15,428
    )
    
    
    13,286Other income
    
    
    55
    
    
    
    160
    
    
    
    328
    
    
    
    555Interest expense
    
    
    (247
    )
    
    
    (295
    )
    
    
    (690
    )
    
    
    (662
    )Income (loss) from continuing operations
before income taxes
    
    
    5,568
    
    
    
    5,228
    
    
    
    (15,790
    )
    
    
    13,179Provision for income taxes
    
    
    2,500
    
    
    
    2,818
    
    
    
    5,853
    
    
    
    6,063Income (loss) from continuing operations
    
    
    3,068
    
    
    
    2,410
    
    
    
    (21,643
    )
    
    
    7,116Income (loss) from discontinued operations,
net of income taxes
    
    
    10
    
    
    
    (11
    )
    
    
    (563
    )
    
    
    (496
    )Net income (loss)
    
    $
    3,078
    
    
    $
    2,399
    
    
    $
    (22,206
    )
    
    $
    6,620Basic income (loss) income per share of
common stock:Continuing operations
    
    $
    0.36
    
    
    $
    0.28
    
    
    $
    (2.54
    )
    
    $
    0.84Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.07
    )
    
    
    (0.06
    )$
    0.36
    
    
    $
    0.28
    
    
    $
    (2.61
    )
    
    $
    0.78Diluted income (loss) income per share of
common stock:Continuing operations
    
    $
    0.36
    
    
    $
    0.28
    
    
    $
    (2.54
    )
    
    $
    0.83Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.07
    )
    
    
    (0.06
    )$
    0.36
    
    
    $
    0.28
    
    
    $
    (2.61
    )
    
    $
    0.78Cash dividends declared per share of common
stock
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.60Weighted average shares outstanding:Basic
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522Diluted
    
    
    8,523
    
    
    
    8,524
    
    
    
    8,522
    
    
    
    8,524
  5




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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended September 30,(Amounts in thousands)
    
    2008
    
    
    2007Operating activities:Net (loss) income
    
    $
    (22,206
    )
    
    $
    6,620Adjustments to reconcile net (loss) income to net
cash provided by operating activities:Depreciation and amortization
    
    
    6,474
    
    
    
    6,003Provision for settlement
    
    
    30,000
    
    
    
    Settlement payment
    
    
    (10,000
    )
    
    
    Changes in operating assets and liabilities
    
    
    14,951
    
    
    
    (10,117
    )Other
    
    
    (6,261
    )
    
    
    1,610Net cash provided by operating activities
    
    
    12,958
    
    
    
    4,116Investing activities:Additions to property, plant and equipment
    
    
    (2,736
    )
    
    
    (13,805
    )Net cash used for investing activities
    
    
    (2,736
    )
    
    
    (13,805
    )Financing activities:Net (payments) proceeds from revolving line of credit
    
    
    (500
    )
    
    
    13,000Dividends paid
    
    
    (5,113
    )
    
    
    (5,113
    )Other
    
    
    
    
    
    
    27Net cash (used for) provided by financing activities
    
    
    (5,613
    )
    
    
    7,914Increase (decrease) in cash and cash equivalents
    
    
    4,609
    
    
    
    (1,775
    )Cash and cash equivalents at beginning of period
    
    
    2,473
    
    
    
    4,320Cash and cash equivalents at end of period
    
    
    7,082
    
    
    
    2,545Cash held by discontinued operations
    
    
    (431
    )
    
    
    (881
    )Cash and cash equivalents held by continuing
operations at end of period
    
    $
    6,651
    
    
    $
    1,664
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##### Table of Contents



Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands, except per share data)
 Note A  Basis of Presentation and Summary of Significant Accounting Policies
    Note B  Comprehensive Income (loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    3,078
    
    
    $
    2,399
    
    
    $
    (22,206
    )
    
    $
    6,620Foreign currency translation adjustment
    
    
    (310
    )
    
    
    466
    
    
    
    (422
    )
    
    
    922Comprehensive income (loss)
    
    $
    2,768
    
    
    $
    2,865
    
    
    $
    (22,628
    )
    
    $
    7,542
 Note C  Earnings Per Share
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522Dilutive impact of stock options outstanding
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    2Dilutive weighted average shares outstanding
    
    
    8,523
    
    
    
    8,524
    
    
    
    8,522
    
    
    
    8,524
 S
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Note D  Revolving Line of Credit
   Note E  Severance and Other Charges
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Severance
    
    $
    809
    
    
    $
    3,671
    
    
    $
    3,724
    
    
    $
    11,034Unclaimed Property
    
    
    335
    
    
    
    
    
    
    
    3,935
    
    
    
    Total Severance and Other Charges
    
    $
    1,144
    
    
    $
    3,671
    
    
    $
    7,659
    
    
    $
    11,034
   2008
    
    
    2007Balance at beginning of year
    
    $
    7,058
    
    
    $
    962Charged to earnings
    
    
    3,724
    
    
    
    11,034Cash paid
    
    
    (4,655
    )
    
    
    (3,924
    )Adjustment to reserves
    
    
    (42
    )
    
    
    (120
    )Balance at September 30
    
    $
    6,085
    
    
    $
    7,952
 Note F  Intangible Assets
  September 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    
    
    
    
    NetGross
    
    
    Accumulated
    
    
    Carrying
    
    
    Gross
    
    
    Accumulated
    
    
    CarryingBalance
    
    
    Amortization
    
    
    Amount
    
    
    Balance
    
    
    Amortization
    
    
    AmountTrademarks and
tradenames
    
    $
    1,400
    
    
    $
    775
    
    
    $
    625
    
    
    $
    1,400
    
    
    $
    737
    
    
    $
    663Non-compete covenant
    
    
    1,000
    
    
    
    550
    
    
    
    450
    
    
    
    1,000
    
    
    
    400
    
    
    
    600$
    2,400
    
    
    $
    1,325
    
    
    $
    1,075
    
    
    $
    2,400
    
    
    $
    1,137
    
    
    $
    1,263
  8




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Note G  Stock-Based Compensation
  Stock Performance Rights
  Expected volatility
    
    30.9% to 44.0%Risk-free interest rate
    
    1.8% to 3.1%Expected term (in years)
    
    1.1 to 5.6Expected dividend yield
    
    2.9%
   Number
    
    Average SPRof SPRs
    
    Exercise PriceOutstanding on December 31, 2007
    
    
    209,250
    
    
    $
    34.17Granted
    
    
    151,500
    
    
    
    25.82Exercised
    
    
    (28,250
    )
    
    
    27.14Forfeited
    
    
    (24,100
    )
    
    
    25.53Outstanding on September 30, 2008
    
    
    308,400
    
    
    $
    31.39Exercisable on September 30, 2008
    
    
    140,067
    
    
    $
    34.38
   Stock Options
   Note H  Segment Reporting
  9




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net salesMRO
    
    $
    102,692
    
    
    $
    108,183
    
    
    $
    312,011
    
    
    $
    323,344OEM
    
    
    21,875
    
    
    
    19,730
    
    
    
    63,870
    
    
    
    63,416Consolidated total
    
    $
    124,567
    
    
    $
    127,913
    
    
    $
    375,881
    
    
    $
    386,760Operating income (loss)MRO
    
    $
    8,547
    
    
    $
    5,065
    
    
    $
    (13,425
    )
    
    $
    10,263OEM
    
    
    (2,787
    )
    
    
    298
    
    
    
    (2,003
    )
    
    
    3,023Consolidated total
    
    $
    5,760
    
    
    $
    5,363
    
    
    $
    (15,428
    )
    
    $
    13,286Investment and other income
    
    
    55
    
    
    
    160
    
    
    
    328
    
    
    
    555Interest expense
    
    
    (247
    )
    
    
    (295
    )
    
    
    (690
    )
    
    
    (662
    )Income (loss) from continuing
operations before income taxes
    
    $
    5,568
    
    
    $
    5,228
    
    
    $
    (15,790
    )
    
    $
    13,179
  September 30,
    
    
    December 31,2008
    
    
    2007Total assetsMRO
    
    $
    211,523
    
    
    $
    221,274OEM
    
    
    51,454
    
    
    
    52,995Segment total
    
    
    262,977
    
    
    
    274,229Corporate
    
    
    24,461
    
    
    
    24,570Consolidated total
    
    $
    287,438
    
    
    $
    298,799
  MRO
    
    $
    25,748OEM
    
    
    2,251Consolidated total
    
    $
    27,999
 10




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Note I  Income Tax Expense
     Note J  Legal Proceedings
     11




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12




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Report of Independent Registered Public Accounting Firm
 
     
 13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Quarter ended September 30, 2008 compared to Quarter ended September 30, 2007
  2008
    
    
    2007% of
    
    
    
    
    
    
    % ofAmount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    102,692
    
    
    
    82.4
    %
    
    $
    108,183
    
    
    
    84.6
    %OEM
    
    
    21,875
    
    
    
    17.6
    
    
    
    19,730
    
    
    
    15.4Consolidated total
    
    $
    124,567
    
    
    
    100.0
    
    
    $
    127,913
    
    
    
    100.0Gross profitMRO
    
    $
    68,833
    
    
    
    67.0
    %
    
    $
    72,154
    
    
    
    66.7
    %OEM
    
    
    1,459
    
    
    
    6.7
    
    
    
    4,302
    
    
    
    21.8Consolidated total
    
    
    70,292
    
    
    
    56.4
    
    
    
    76,456
    
    
    
    59.8Operating expenses:Selling, general and
administrative expenses
    
    
    62,994
    
    
    
    50.6
    
    
    
    66,251
    
    
    
    51.8Settlement related costs
    
    
    394
    
    
    
    0.3
    
    
    
    1,172
    
    
    
    0.9Severance and other charges
    
    
    1,144
    
    
    
    0.9
    
    
    
    3,671
    
    
    
    2.9Operating income
    
    
    5,760
    
    
    
    4.6
    
    
    
    5,363
    
    
    
    4.2Other, net
    
    
    (192
    )
    
    
    (0.1
    )
    
    
    (135
    )
    
    
    (0.1
    )Income from continuing
operations before income tax
expense
    
    
    5,568
    
    
    
    4.5
    
    
    
    5,228
    
    
    
    4.1Income tax expense
    
    
    2,500
    
    
    
    2.0
    
    
    
    2,818
    
    
    
    2.2Income from continuing operations
    
    $
    3,068
    
    
    
    2.5
    %
    
    $
    2,410
    
    
    
    1.9
    %
 Net Sales
    Gross Profit
   14




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Selling, General and Administrative Expenses (SG&A)
  Settlement Related Costs
  Severance and Other Charges
  Income Tax Expense
  15




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Nine Months ended September 30, 2008 compared to Nine Months ended September 30, 2007
  2008
    
    
    2007% of
    
    
    
    
    
    
    % ofAmount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    312,011
    
    
    
    83.0
    %
    
    $
    323,344
    
    
    
    83.6
    %OEM
    
    
    63,870
    
    
    
    17.0
    
    
    
    63,416
    
    
    
    16.4Consolidated total
    
    $
    375,881
    
    
    
    100.0
    
    
    $
    386,760
    
    
    
    100.0Gross profitMRO
    
    $
    205,836
    
    
    
    66.0
    %
    
    $
    214,216
    
    
    
    66.3
    %OEM
    
    
    10,324
    
    
    
    16.2
    
    
    
    14,764
    
    
    
    23.3Consolidated total
    
    
    216,160
    
    
    
    57.5
    
    
    
    228,980
    
    
    
    59.2Operating expenses:Selling, general and administrative
expenses
    
    
    192,367
    
    
    
    51.2
    
    
    
    199,714
    
    
    
    51.6Settlement and related costs
    
    
    31,562
    
    
    
    8.4
    
    
    
    4,947
    
    
    
    1.3Severance and other charges
    
    
    7,659
    
    
    
    2.0
    
    
    
    11,034
    
    
    
    2.9Operating (loss) income
    
    
    (15,428
    )
    
    
    (4.1
    )
    
    
    13,286
    
    
    
    3.4Other, net
    
    
    (362
    )
    
    
    (0.1
    )
    
    
    (107
    )
    
    
    (Loss) income from continuing
operations before income tax expense
    
    
    (15,790
    )
    
    
    (4.2
    )
    
    
    13,179
    
    
    
    3.4Income tax expense
    
    
    5,853
    
    
    
    1.6
    
    
    
    6,063
    
    
    
    1.6(Loss) income from continuing operations
    
    $
    (21,643
    )
    
    
    5.8
    %
    
    $
    7,116
    
    
    
    1.8
    %
 Net Sales
    Gross Profit
   16




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Selling, General and Administrative Expenses
  Settlement Related Costs
  Severance and Other Charges
  Income Tax Expense
  17




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Liquidity and Capital Resources
        18




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   19




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PART II
OTHER INFORMATION
  
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  The signing of a Deferred Prosecution Agreement with the U.S. Attorneys Office for the Northern
District of Illinois, and any potential breach of such agreement, may adversely affect our
business, financial condition, results of operations and stock price.
   Our results of operations may be adversely impacted by a worldwide macroeconomic downturn. As a
result, the market price of our common stock may decline.
  20




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ITEM 6. EXHIBITS
 Exhibit #15
    
    Letter from Ernst & Young LLP Regarding Unaudited Interim Financial Information31.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 21




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SIGNATURES
  LAWSON PRODUCTS, INC.
(Registrant)Dated November 5, 2008
    /s/ Thomas J. NeriThomas J. NeriChief Executive OfficerDated November 5, 2008
    /s/ F. Terrence BlanchardF. Terrence BlanchardChief Financial Officer 22