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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 March 31, 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
    
    (I.R.S. Employerincorporation or organization)
    
    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 o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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
 PART I-FINANCIAL INFORMATION
    
    
    4ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    4ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    16ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
    
    
    19ITEM 4. CONTROLS AND PROCEDURES
    
    
    19PART II
    
    
    20ITEM 1. LEGAL PROCEEDINGS
    
    
    20ITEM 1A. RISK FACTORS
    
    
    20ITEM 6. EXHIBITS
    
    
    22SIGNATURES
    
    
    23Letter Regarding Unaudited Interim Financial InformationCertificationCertificationCertification
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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
 March 31,
    
    
    December 31,(Amounts in thousands, except share and per share data)
    
    2008
    
    
    2007(UNAUDITED)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,549
    
    
    $
    1,671Accounts receivable, less allowance for doubtful accounts
    
    
    56,888
    
    
    
    58,882Inventories
    
    
    97,768
    
    
    
    96,785Miscellaneous receivables and prepaid expenses
    
    
    8,043
    
    
    
    10,303Deferred income taxes
    
    
    3,010
    
    
    
    3,226Discontinued current assets
    
    
    1,003
    
    
    
    1,064Total current assets
    
    
    169,261
    
    
    
    171,931Property, plant and equipment, less accumulated
depreciation and amortization
    
    
    52,158
    
    
    
    53,031Deferred income taxes
    
    
    20,515
    
    
    
    21,344Goodwill
    
    
    27,999
    
    
    
    27,999Other assets
    
    
    24,571
    
    
    
    25,558Total assets
    
    $
    294,504
    
    
    $
    299,863LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,700
    
    
    $
    16,266Revolving line of credit
    
    
    15,500
    
    
    
    11,000Accrued expenses and other liabilities
    
    
    34,616
    
    
    
    45,254Discontinued current liabilities
    
    
    333
    
    
    
    322Total current liabilities
    
    
    67,149
    
    
    
    72,842Accrued liability under security bonus plans
    
    
    25,993
    
    
    
    25,491Other
    
    
    24,528
    
    
    
    27,16950,521
    
    
    
    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 in 2008 and 2007
    
    
    8,522
    
    
    
    8,522Capital in excess of par value
    
    
    4,774
    
    
    
    4,774Retained earnings
    
    
    163,270
    
    
    
    160,606Accumulated other comprehensive income
    
    
    268
    
    
    
    459Total stockholders equity
    
    
    176,834
    
    
    
    174,361Total liabilities and stockholders equity
    
    $
    294,504
    
    
    $
    299,863
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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
 For theThree Months EndedMarch 31,(Amounts in thousands, except per share data)
    
    2008
    
    
    2007Net sales
    
    $
    125,004
    
    
    $
    129,669Cost of goods sold
    
    
    51,742
    
    
    
    53,842Gross profit
    
    
    73,262
    
    
    
    75,827Operating expenses:Selling, general and administrative expenses
    
    
    64,713
    
    
    
    65,961Severance and other charges
    
    
    602
    
    
    
    1,721Operating income
    
    
    7,947
    
    
    
    8,145Investment and other income
    
    
    108
    
    
    
    102Interest expense
    
    
    (229
    )
    
    
    (81
    )Income from continuing operations before income taxes
    
    
    7,826
    
    
    
    8,166Income tax expense
    
    
    3,302
    
    
    
    3,440Income from continuing operations
    
    
    4,524
    
    
    
    4,726Loss from discontinued operations, net of income taxes
    
    
    (155
    )
    
    
    (156
    )Net income
    
    $
    4,369
    
    
    $
    4,570Basic income (loss) per share of common stock:Continuing operations
    
    $
    0.53
    
    
    $
    0.55Discontinued operations
    
    
    (0.02
    )
    
    
    (0.02
    )$
    0.51
    
    
    $
    0.54Diluted income (loss) per share of common stock:Continuing operations
    
    $
    0.53
    
    
    $
    0.55Discontinued operations
    
    
    (0.02
    )
    
    
    (0.02
    )$
    0.51
    
    
    $
    0.54Cash dividends declared per share of common stock
    
    $
    0.20
    
    
    $
    0.20Weighted average shares outstanding:Basic
    
    
    8,522
    
    
    
    8,521Diluted
    
    
    8,523
    
    
    
    8,524
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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 For theThree Months EndedMarch 31,(Amounts in thousands)
    
    2008
    
    
    2007Operating activities:Net income
    
    $
    4,369
    
    
    $
    4,570Adjustments to reconcile net income to net cash used for operating activities:Depreciation and amortization
    
    
    2,142
    
    
    
    1,920Changes in operating assets and liabilities
    
    
    (5,006
    )
    
    
    (16,637
    )Other
    
    
    (2,234
    )
    
    
    917Net cash used for operating activities
    
    
    (729
    )
    
    
    (9,230
    )Investing activities:Additions to property, plant and equipment
    
    
    (1,206
    )
    
    
    (3,528
    )Net cash used for investing activities
    
    
    (1,206
    )
    
    
    (3,528
    )Financing activities:Proceeds from revolving line of credit, net of payments
    
    
    4,500
    
    
    
    11,000Dividends paid
    
    
    (1,704
    )
    
    
    (1,704
    )Net cash provided by financing activities
    
    
    2,796
    
    
    
    9,296Increase (decrease) in cash and cash equivalents
    
    
    861
    
    
    
    (3,462
    )Cash and cash equivalents at beginning of period
    
    
    2,473
    
    
    
    4,320Cash and cash equivalents at end of period
    
    
    3,334
    
    
    
    858Cash held by discontinued operations
    
    
    (785
    )
    
    
    (639
    )Cash and cash equivalents held by continuing operations at end of period
    
    $
    2,549
    
    
    $
    219
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Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
 Note A  Basis of Presentation and Summary of Significant Accounting Policies
    Note B  Comprehensive Income
   Note C  Earnings Per Share
  Three months ended March 312008
    
    2007Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,521Dilutive impact of options outstanding
    
    
    1
    
    
    
    3Dilutive weighted average shares outstanding
    
    
    8,523
    
    
    
    8,524
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Note D  Revolving Line of Credit
  Note E  Reserve for Severance
  2008
    
    
    2007Balance at beginning of year
    
    $
    7,058
    
    
    $
    962Charged to earnings
    
    
    602
    
    
    
    279Cash paid
    
    
    (1,315
    )
    
    
    (604
    )Adjustment to reserves
    
    
    (42
    )
    
    
    (120
    )Balance at March 31
    
    $
    6,303
    
    
    $
    517
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Note F  Intangible Assets
  March 31, 2008NetGross
    
    
    Accumulated
    
    
    CarryingBalance
    
    
    Amortization
    
    
    AmountTrademarks and tradenames
    
    $
    1,400
    
    
    $
    750
    
    
    $
    650Non-compete covenant
    
    
    1,000
    
    
    
    450
    
    
    
    550$
    2,400
    
    
    $
    1,200
    
    
    $
    1,200
 December 31, 2007NetGross
    
    
    Accumulated
    
    
    CarryingBalance
    
    
    Amortization
    
    
    AmountTrademarks and tradenames
    
    $
    1,400
    
    
    $
    737
    
    
    $
    663Non-compete covenant
    
    
    1,000
    
    
    
    400
    
    
    
    600$
    2,400
    
    
    $
    1,137
    
    
    $
    1,263
  Note G  Stock-Based Compensation
  Stock Performance Rights
  March 31, 2008Expected volatility
    
    38.77% to 48.65%Risk-free interest rate
    
    1.57% to 2.66%Expected term (in years)
    

    1.4 to 6.0Expected dividend yield
    

    2.90%
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Average SPRExercise Price
    
    
    # of SPRsOutstanding December 31, 2007 (1)
    
    $
    34.17
    
    
    
    209,250Granted
    
    
    25.43
    
    
    
    86,500Exercised
    
    
    27.08
    
    
    
    (28,000
    )Outstanding March 31, 2008 (2)
    
    $
    32.09
    
    
    
    267,750
 
 (1)
    
    Includes 132,117 SPRs vested at December 31, 2007 at a weighted average
exercise price of $31.26 per SPR.(2)
    
    Includes 104,117 SPRs vested at March 31, 2008 at a weighted average
exercise price of $32.38 per SPR.    10




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Stock Options
  Average OptionExercise Price
    
    
    # of OptionsOutstanding December 31, 2007
    
    $
    23.11
    
    
    
    5,000Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited/expired/cancelled
    
    
    
    
    
    
    Outstanding March 31, 2008
    
    $
    23.11
    
    
    
    5,000
 WeightedAverageExercisable options at:
    
    Price
    
    Option SharesDecember 31, 2007
    
    $
    23.11
    
    
    
    5,000March 31, 2008
    
    $
    23.11
    
    
    
    5,000
  Exercise price
    
    $
    23.56
    
    
    $
    22.44Options outstanding:
    
    
    3,000
    
    
    
    2,000Weighted average exercise price
    
    $
    23.56
    
    
    $
    22.44Weighted average remaining life (in years)
    
    
    2.1
    
    
    
    1.4Options exercisable:
    
    
    3,000
    
    
    
    2,000Weighted average exercise price
    
    $
    23.56
    
    
    $
    22.44
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Note H  Segment Reporting
      Three Months EndedMarch 312008
    
    
    2007Net salesMRO
    
    $
    104,538
    
    
    $
    106,286OEM
    
    
    20,466
    
    
    
    23,383Consolidated total
    
    $
    125,004
    
    
    $
    129,669Operating incomeMRO
    
    $
    7,494
    
    
    $
    6,273OEM
    
    
    453
    
    
    
    1,872Consolidated total
    
    $
    7,947
    
    
    $
    8,145
  Three Months EndedMarch 312008
    
    
    2007Total operating income from reportable segments
    
    $
    7,947
    
    
    $
    8,145Investment and other income
    
    
    108
    
    
    
    102Interest expense
    
    
    (229
    )
    
    
    (81
    )Income from continuing operations before income taxes
    
    $
    7,826
    
    
    $
    8,166
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March 31,
    
    
    December 31,2008
    
    
    2007Total assetsMRO
    
    $
    216,447
    
    
    $
    221,274OEM
    
    
    53,529
    
    
    
    52,955Total for reportable segments
    
    
    269,976
    
    
    
    274,229Corporate
    
    
    23,525
    
    
    
    24,570Consolidated total
    
    $
    293,501
    
    
    $
    298,799
  MRO
    
    $
    25,748OEM
    
    
    2,251Consolidated total
    
    $
    27,999
 Note I  Income Tax Expense
     Note J  Legal Proceedings
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Quarter ended March 31, 2008 compared to Quarter ended March 31, 2007
  % of
    
    
    
    
    
    
    % of(Dollars in thousands)
    
    2008
    
    
    Net Sales
    
    
    2007
    
    
    Net SalesNet sales
    
    $
    125,004
    
    
    
    100.0
    
    
    $
    129,669
    
    
    
    100.0Cost of goods sold
    
    
    51,742
    
    
    
    41.4
    
    
    
    53,842
    
    
    
    41.5Gross profit
    
    
    73,262
    
    
    
    58.6
    
    
    
    75,827
    
    
    
    58.5Operating expenses:Selling, general and administrative expenses
    
    
    64,713
    
    
    
    51.8
    
    
    
    65,961
    
    
    
    50.9Severance and other charges
    
    
    602
    
    
    
    0.5
    
    
    
    1,721
    
    
    
    1.3Operating income
    
    
    7,947
    
    
    
    6.4
    
    
    
    8,145
    
    
    
    6.3Other, net
    
    
    (121
    )
    
    
    (0.1
    )
    
    
    21
    
    
    
    0.0Income from
continuing operations before income tax expense
    
    
    7,826
    
    
    
    6.3
    
    
    
    8,166
    
    
    
    6.3Income tax expense
    
    
    3,302
    
    
    
    2.6
    
    
    
    3,440
    
    
    
    2.7Income from continuing operations
    
    
    4,524
    
    
    
    3.6
    
    
    
    4,726
    
    
    
    3.6Loss from discontinued operations
    
    
    (155
    )
    
    
    (0.1
    )
    
    
    (156
    )
    
    
    (0.1
    )Net income
    
    $
    4,369
    
    
    
    3.5
    
    
    $
    4,570
    
    
    
    3.5
 Net Sales and Gross Profit
   (Dollars in millions)
    
    2008
    
    
    2007MRO
    
    $
    104.5
    
    
    $
    106.3OEM
    
    
    20.5
    
    
    
    23.4$
    125.0
    
    
    $
    129.7
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Operating Expenses and Operating Income
 Selling, General and Administrative Expenses (SG&A)
   Severance and Other Charges
  Operating Income
  Income Tax Expense
  Income from Continuing Operations
  Loss from Discontinued Operations
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Liquidity and Capital Resources
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
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PART II
 OTHER INFORMATION
  
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 1A. RISK FACTORS
 If the Company is unable to successfully conclude the pending governmental investigation of the
Company, the Companys business, financial condition, results of operations and stock price could
be adversely affected.
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ITEM 6. EXHIBITS
  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
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SIGNATURES
  LAWSON PRODUCTS, INC.
(Registrant)Dated April 30, 2008
    /s/ Thomas J. NeriThomas J. NeriChief Executive Officer Dated April 30, 2008
    /s/ Scott F. StephensScott F. StephensChief Financial Officer 23