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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, 2011
 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
 o 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:
  
    
    the effect of general economic and market conditions;
    
    inventory obsolescence;
    
    work stoppages and other disruptions at transportation centers or shipping ports;
    
    changing customer demand and product mixes;
    
    increases in commodity prices;
    
    disruptions of the Companys information and communication systems;
    
    the inability of management to successfully implement strategic initiatives;
    
    failure to manage change;
    
    failure to retain a talented workforce;
    
    the influence of controlling stockholders;
    
    changes in taxation; and,
    2




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TABLE OF CONTENTS
 Page #PART I  FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
    
    
    4Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    13Item 4 Controls and Procedures
    
    
    13PART II  OTHER INFORMATIONItem 6 Exhibits Index
    
    
    13SIGNATURES
    
    
    14Exhibit 31.1Exhibit 31.2Exhibit 32
  3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1
    
     FINANCIAL STATEMENTS
 Lawson Products, Inc.
 
 Condensed Consolidated Balance Sheets
 (Dollars in thousands, except per share data)
 March 31,
    
    
    December 31,2011
    
    
    2010(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,242
    
    
    $
    40,566Accounts receivable, less allowance for doubtful accounts
    
    
    36,749
    
    
    
    33,398Inventories
    
    
    51,314
    
    
    
    47,167Miscellaneous receivables and prepaid expenses
    
    
    9,022
    
    
    
    8,905Deferred income taxes
    
    
    4,275
    
    
    
    4,251Discontinued operations
    
    
    661
    
    
    
    619Total current assets
    
    
    129,263
    
    
    
    134,906Property, plant and equipment, net
    
    
    47,544
    
    
    
    44,442Cash value of life insurance
    
    
    15,939
    
    
    
    15,660Deferred income taxes
    
    
    10,570
    
    
    
    11,492Goodwill
    
    
    28,504
    
    
    
    28,307Other assets
    
    
    1,296
    
    
    
    1,577Total assets
    
    $
    233,116
    
    
    $
    236,384LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    20,637
    
    
    $
    18,195Accrued expenses and other liabilities
    
    
    28,939
    
    
    
    35,348Discontinued operations
    
    
    687
    
    
    
    2,008Total current liabilities
    
    
    50,263
    
    
    
    55,551Security bonus plan
    
    
    25,382
    
    
    
    25,602Deferred compensation
    
    
    11,353
    
    
    
    10,792Other liabilities
    
    
    1,585
    
    
    
    1,57438,320
    
    
    
    37,968Stockholders 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  8,534,028 shares 
Outstanding  8,531,325 shares
    
    
    8,534
    
    
    
    8,534Capital in excess of par value
    
    
    5,625
    
    
    
    5,328Retained earnings
    
    
    127,095
    
    
    
    126,098Treasury stock  2,703 shares
    
    
    (70
    )
    
    
    (70
    )Accumulated other comprehensive income
    
    
    3,349
    
    
    
    2,975Stockholders equity
    
    
    144,533
    
    
    
    142,865Total liabilities and stockholders equity
    
    $
    233,116
    
    
    $
    236,384
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Lawson Products, Inc.
 
 Condensed Consolidated Statements of Operations
 (Amounts in thousands, except per share data)
 (Unaudited)
 Three Months Ended March 31,2011
    
    
    2010Net sales
    
    $
    82,579
    
    
    $
    74,910Cost of goods sold
    
    
    32,640
    
    
    
    28,585Gross profit
    
    
    49,939
    
    
    
    46,325Operating expenses:Selling, general and administrative expenses
    
    
    45,449
    
    
    
    43,719Severance expenses
    
    
    745
    
    
    
    426Gain on sale of assets
    
    
    
    
    
    
    (1,701
    )Legal settlement
    
    
    
    
    
    
    (550
    )Operating income
    
    
    3,745
    
    
    
    4,431Interest expense
    
    
    (512
    )
    
    
    (85
    )Other income
    
    
    16
    
    
    
    16Income from continuing operations before income taxes
    
    
    3,249
    
    
    
    4,362Income tax expense
    
    
    1,199
    
    
    
    2,130Income from continuing operations
    
    
    2,050
    
    
    
    2,232Discontinued operations, net of income taxes
    
    
    (30
    )
    
    
    100Net income
    
    $
    2,020
    
    
    $
    2,332Basic income per share of common stock:Continuing operations
    
    $
    0.24
    
    
    $
    0.26Discontinued operations
    
    
    
    
    
    
    0.01Net income
    
    $
    0.24
    
    
    $
    0.27Diluted income per share of common stock:Continuing operations
    
    $
    0.24
    
    
    $
    0.26Discontinued operations
    
    
    (0.01
    )
    
    
    0.01Net income
    
    $
    0.23
    
    
    $
    0.27Cash dividends declared per share of common stock
    
    $
    0.12
    
    
    $
    0.06Basic weighted average shares outstanding:
    
    
    8,531
    
    
    
    8,522Dilutive effect of stock based compensation
    
    
    74
    
    
    
    Diluted weighted average share outstanding
    
    
    8,605
    
    
    
    8,522
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Lawson Products, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Dollars in thousands)
 (Unaudited)
 Three Months Ended March 31,2011
    
    
    2010Operating activities:Net income
    
    $
    2,020
    
    
    $
    2,332Loss (income) from discontinued operations
    
    
    30
    
    
    
    (100
    )Income from continuing operations
    
    
    2,050
    
    
    
    2,232Adjustments to reconcile to net cash used in operating activities:Depreciation and amortization
    
    
    1,334
    
    
    
    1,490Deferred income taxes
    
    
    898
    
    
    
    2,957Stock based compensation
    
    
    227
    
    
    
    (269
    )Gain on sale of property
    
    
    
    
    
    
    (1,701
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,335
    )
    
    
    (3,177
    )Inventories
    
    
    (4,026
    )
    
    
    (2,532
    )Prepaid expenses and other assets
    
    
    (385
    )
    
    
    (1,378
    )Accounts payable and accrued expenses
    
    
    (3,110
    )
    
    
    1,321Other
    
    
    (510
    )
    
    
    (653
    )Net cash used in operating activities of continuing operations
    
    $
    (6,857
    )
    
    $
    (1,710
    )Investing activities:Additions to property, plant and equipment
    
    $
    (4,301
    )
    
    $
    (299
    )Net outlay from sale of businesses
    
    
    (692
    )
    
    
    Proceeds from sale of property
    
    
    
    
    
    
    2,027Net cash (used in) provided by investing activities of continuing operations
    
    $
    (4,993
    )
    
    $
    1,728Financing activities:Dividends paid
    
    $
    (1,023
    )
    
    $
    (511
    )Other
    
    
    
    
    
    
    (32
    )Net cash used in financing activities of continuing operations
    
    $
    (1,023
    )
    
    $
    (543
    )Net cash (used in) provided by operating activities of discontinued operations
    
    $
    (451
    )
    
    $
    569Increase (decrease) in cash and cash equivalents
    
    
    (13,324
    )
    
    
    44Cash and cash equivalents at beginning of period
    
    
    40,566
    
    
    
    8,787Cash and cash equivalents at end of period
    
    $
    27,242
    
    
    $
    8,831
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Lawson Products, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 Note 1  Basis of Presentation and Summary of Significant Accounting Policies
  Discontinued
Operations
  Note 2  Discontinued operations
   Note 3  Inventories
  (Amounts in thousands)March 31,
    
    
    December 31,2011
    
    
    2010Finished goods
    
    $
    52,628
    
    
    $
    49,084Work in progress
    
    
    1,424
    
    
    
    1,203Raw materials
    
    
    1,557
    
    
    
    1,591Total
    
    
    55,609
    
    
    
    51,878Reserve for obsolete and excess inventory
    
    
    (4,295
    )
    
    
    (4,711
    )$
    51,314
    
    
    $
    47,167
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Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 4  Severance Reserve
  (Amounts in thousands)Three Months Ended March 31,2011
    
    
    2010Balance at beginning of year
    
    $
    3,062
    
    
    $
    4,086Charged to earnings
    
    
    745
    
    
    
    426Cash paid
    
    
    (1,111
    )
    
    
    (1,087
    )Balance at end of the period
    
    $
    2,696
    
    
    $
    3,425
 Note 5  Gain on Sale of Assets
  Note 6  Legal Settlement
  Note 7  Income Tax
  Note 8  Comprehensive Income
  (Amounts in thousands)Three Months Ended March 31,2011
    
    
    2010Net income
    
    $
    2,020
    
    
    $
    2,332Foreign currency translation adjustment
    
    
    374
    
    
    
    352Comprehensive income
    
    $
    2,394
    
    
    $
    2,684
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Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 9 Related Party Transaction
   Note 10  Segment Reporting
   (Amounts in thousands)Three Months Ended March 31,2011
    
    
    2010Net salesMRO
    
    $
    79,255
    
    
    $
    71,935OEM
    
    
    3,324
    
    
    
    2,975Consolidated total
    
    $
    82,579
    
    
    $
    74,910Operating incomeMRO
    
    $
    4,345
    
    
    $
    2,745OEM
    
    
    145
    
    
    
    (139
    )Severance expenses
    
    
    (745
    )
    
    
    (426
    )Gain on sale of assets
    
    
    
    
    
    
    1,701Legal settlement
    
    
    
    
    
    
    550Consolidated total
    
    
    3,745
    
    
    
    4,431Interest expense
    
    
    (512
    )
    
    
    (85
    )Other income
    
    
    16
    
    
    
    16Income from continuing operations before income taxes
    
    $
    3,249
    
    
    $
    4,362
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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Quarter ended March 31, 2011 compared to Quarter ended March 31, 2010
  2011
    
    
    2010% of
    
    
    
    
    
    
    % of($ in thousands)
    
    Amount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    79,255
    
    
    
    96.0
    %
    
    $
    71,935
    
    
    
    96.0
    %OEM
    
    
    3,324
    
    
    
    4.0
    
    
    
    2,975
    
    
    
    4.0Consolidated total
    
    $
    82,579
    
    
    
    100.0
    %
    
    $
    74,910
    
    
    
    100.0
    %Gross profitMRO
    
    $
    49,280
    
    
    
    62.2
    %
    
    $
    45,926
    
    
    
    63.8
    %OEM
    
    
    659
    
    
    
    19.8
    
    
    
    399
    
    
    
    13.4Consolidated total
    
    
    49,939
    
    
    
    60.5
    
    
    
    46,325
    
    
    
    61.8Operating expenses:Selling, general and
administrative expenses
    
    
    45,449
    
    
    
    55.0
    
    
    
    43,719
    
    
    
    58.4Severance expenses
    
    
    745
    
    
    
    1.0
    
    
    
    426
    
    
    
    0.6Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    (1,701
    )
    
    
    (2.3
    )Legal settlement
    
    
    
    
    
    
    
    
    
    
    (550
    )
    
    
    (0.8
    )Operating income
    
    
    3,745
    
    
    
    4.5
    
    
    
    4,431
    
    
    
    5.9Other expense, net
    
    
    (496
    )
    
    
    (0.6
    )
    
    
    (69
    )
    
    
    (0.1
    )Income from continuing
operations before income tax
expense
    
    
    3,249
    
    
    
    3.9
    
    
    
    4,362
    
    
    
    5.8Income tax expense
    
    
    1,199
    
    
    
    1.4
    
    
    
    2,130
    
    
    
    2.8Income from continuing operations
    
    $
    2,050
    
    
    
    2.5
    %
    
    $
    2,232
    
    
    
    3.0
    %
 Net Sales
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Gross Profit
   Selling, General and Administrative Expenses (SG&A)
    Severance Expenses
  Gain on Sale of Assets
  Legal Settlement
  Interest Expense
  Income Tax Expense
   11




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Income from Continuing Operations
  Liquidity and Capital Resources
      Covenant
    

Minimum
Requirement
    
    
    ActualCash plus accounts receivable and inventory to debt ratio
    
    2.00:1.00
    
    
    87.42:1.00Tangible net worth
    
    $55.0 million
    
    
    $90.8 millionDebt service ratio
    
    1.2
    
    
    15.3
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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
   
 PART II
OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
 Exhibit #31.1
    
    
    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
  13




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SIGNATURES
  LAWSON PRODUCTS, INC.
(Registrant)Dated April 28, 2011
    /s/ Thomas J. NeriThomas J. NeriPresident and Chief Executive Officer
(principal executive officer)Dated April 28, 2011
    /s/ Ronald J. KnutsonRonald J. KnutsonSenior Vice President and Chief Financial Officer
(principal financial and accounting officer)  14