##### 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, 2010
 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
 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:
    2




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##### 



TABLE OF CONTENTS
 Page #PART I  FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2010
and December 31, 2009 (Unaudited)
    
    
    4Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2010
and 2009 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2010 and 2009
(Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4 Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 6 Exhibits
    
    
    18SIGNATURES
    19Exhibit 31.1Exhibit 31.2Exhibit 32
   3




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PART I  FINANCIAL INFORMATION
 
 ITEM 1
    
     FINANCIAL STATEMENTS
 Lawson Products, Inc.
 
 Condensed Consolidated Balance Sheets
 (Dollars in thousands, except per share data)
 (Unaudited)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,170
    
    
    $
    8,787Accounts receivable, less allowance for doubtful accounts
    
    
    39,032
    
    
    
    32,225Inventories
    
    
    55,802
    
    
    
    54,692Miscellaneous receivables and prepaid expenses
    
    
    11,281
    
    
    
    10,214Deferred income taxes
    
    
    4,711
    
    
    
    2,935Property held for sale
    
    
    
    
    
    
    332Discontinued operations
    
    
    1,106
    
    
    
    29,135Total current assets
    
    
    135,102
    
    
    
    138,320Property, plant and equipment, less accumulated
depreciation and amortization
    
    
    41,012
    
    
    
    40,394Cash value of life insurance
    
    
    14,983
    
    
    
    17,021Deferred income taxes
    
    
    11,795
    
    
    
    14,313Goodwill
    
    
    28,099
    
    
    
    27,957Other assets
    
    
    2,132
    
    
    
    2,524Discontinued operations
    
    
    
    
    
    
    1,118Total assets
    
    $
    233,123
    
    
    $
    241,647LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,704
    
    
    $
    14,191Settlement payable
    
    
    
    
    
    
    10,000Accrued expenses and other liabilities
    
    
    32,402
    
    
    
    34,681Discontinued operations
    
    
    314
    
    
    
    4,368Total current liabilities
    
    
    52,420
    
    
    
    63,240Security bonus plan
    
    
    25,365
    
    
    
    25,931Deferred compensation
    
    
    10,249
    
    
    
    10,374Other
    
    
    1,186
    
    
    
    5,45636,800
    
    
    
    41,761Stockholders 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
    
    
    5,124
    
    
    
    4,780Retained earnings
    
    
    127,632
    
    
    
    121,888Accumulated other comprehensive income
    
    
    2,625
    
    
    
    1,456Stockholders equity
    
    
    143,903
    
    
    
    136,646Total liabilities and stockholders equity
    
    $
    233,123
    
    
    $
    241,647
   4




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Lawson Products, Inc.
 
 Condensed Consolidated Statements of Operations
 (Amounts in thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    89,264
    
    
    $
    84,054
    
    
    $
    260,102
    
    
    $
    254,483Cost of goods sold
    
    
    33,210
    
    
    
    30,009
    
    
    
    96,792
    
    
    
    94,550Gross profit
    
    
    56,054
    
    
    
    54,045
    
    
    
    163,310
    
    
    
    159,933Operating expenses:Selling, general and administrative expenses
    
    
    49,512
    
    
    
    49,947
    
    
    
    150,195
    
    
    
    153,210Severance and other expenses (benefits)
    
    
    (2,024
    )
    
    
    464
    
    
    
    (875
    )
    
    
    6,253Loss (gain) on disposal of property, plant
and equipment
    
    
    
    
    
    
    
    
    
    
    (1,701
    )
    
    
    16Operating income
    
    
    8,566
    
    
    
    3,634
    
    
    
    15,691
    
    
    
    454Other income (expense), net
    
    
    (14
    )
    
    
    124
    
    
    
    32
    
    
    
    896Interest expense
    
    
    (105
    )
    
    
    (132
    )
    
    
    (386
    )
    
    
    (474
    )Income from continuing operations before
income taxes
    
    
    8,447
    
    
    
    3,626
    
    
    
    15,337
    
    
    
    876Income tax expense
    
    
    2,584
    
    
    
    853
    
    
    
    5,880
    
    
    
    254Income from continuing operations
    
    
    5,863
    
    
    
    2,773
    
    
    
    9,457
    
    
    
    622Loss from discontinued operations,
net of income taxes
    
    
    (2,434
    )
    
    
    (1,270
    )
    
    
    (2,009
    )
    
    
    (3,220
    )Net income (loss)
    
    $
    3,429
    
    
    $
    1,503
    
    
    $
    7,448
    
    
    $
    (2,598
    )Basic and diluted income (loss) per share of
common stock:Continuing operations
    
    $
    0.69
    
    
    $
    0.33
    
    
    $
    1.11
    
    
    $
    0.07Discontinued operations
    
    
    (0.29
    )
    
    
    (0.15
    )
    
    
    (0.24
    )
    
    
    (0.37
    )Net income (loss) per share

    
    $
    0.40
    
    
    $
    0.18
    
    
    $
    0.87
    
    
    $
    (0.30
    )Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522Dilutive effect of stock based compensation
    
    
    12
    
    
    
    
    
    
    
    6
    
    
    
    Diluted weighted average shares outstanding
    
    
    8,534
    
    
    
    8,522
    
    
    
    8,528
    
    
    
    8,522Cash dividends declared per share of common
stock
    
    $
    0.08
    
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    0.12
   5




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Lawson Products, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Dollars in thousands)
 (Unaudited)
 Nine Months Ended September 30,2010
    
    
    2009Operating activities:Net income (loss)
    
    $
    7,448
    
    
    $
    (2,598
    )Loss from discontinued operations
    
    
    2,009
    
    
    
    3,220Income from continuing operations
    
    
    9,457
    
    
    
    622Adjustments to reconcile to net cash provided by operating
activities:Depreciation and amortization
    
    
    4,489
    
    
    
    5,265Deferred income taxes
    
    
    3,325
    
    
    
    2,219Settlement payment
    
    
    (10,000
    )
    
    
    (5,000
    )Loss (gain) from disposal of property, plant and equipment
    
    
    (1,701
    )
    
    
    16Changes in operating assets and liabilitiesAccounts receivable
    
    
    (7,471
    )
    
    
    3,031Inventories
    
    
    (1,013
    )
    
    
    6,196Prepaid expenses and other assets
    
    
    1,549
    
    
    
    118Accounts payable and accrued expenses
    
    
    2,612
    
    
    
    5Other
    
    
    (247
    )
    
    
    2,169Net cash provided by operating activities of continuing
operations
    
    
    1,000
    
    
    
    14,641Investing activities:Additions to property, plant and equipment
    
    
    (5,218
    )
    
    
    (2,352
    )Proceeds from sale of property
    
    
    2,027
    
    
    
    2,179Proceeds from sale of business
    
    
    16,000
    
    
    
    Net cash provided by (used in) investing activities of
continuing operations
    
    
    12,809
    
    
    
    (173
    )Financing activities:Net payments of revolving line of credit
    
    
    
    
    
    
    (7,700
    )Dividends paid
    
    
    (1,534
    )
    
    
    (2,216
    )Other
    
    
    (32
    )
    
    
    (420
    )Net cash used in financing activities of continuing operations
    
    
    (1,566
    )
    
    
    (10,336
    )Discontinued operations:Operating cash flows
    
    
    2,144
    
    
    
    2,407Investing cash flows
    
    
    (4
    )
    
    
    (43
    )Net cash provided by discontinued operations
    
    
    2,140
    
    
    
    2,364Increase in cash and cash equivalents
    
    
    14,383
    
    
    
    6,496Cash and cash equivalents at beginning of period
    
    
    8,787
    
    
    
    4,300Cash and cash equivalents at end of period
    
    $
    23,170
    
    
    $
    10,796
   6




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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
     7




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Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  (Amounts in thousands, except per share data)Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales of ACS
    
    $
    8,928
    
    
    $
    7,134
    
    
    $
    34,786
    
    
    $
    31,119Pre-tax income (loss) from
discontinued operationsACS
    
    $
    186
    
    
    $
    (779
    )
    
    $
    979
    
    
    $
    (3,135
    )Mexico
    
    
    (76
    )
    
    
    (19
    )
    
    
    (172
    )
    
    
    (96
    )Total pre-tax income (loss)
    
    
    110
    
    
    
    (798
    )
    
    
    807
    
    
    
    (3,231
    )Income tax expense (benefit)
    
    
    44
    
    
    
    472
    
    
    
    316
    
    
    
    (11
    )Income (loss) from discontinued
operations
    
    
    66
    
    
    
    (1,270
    )
    
    
    491
    
    
    
    (3,220
    )Pre-tax loss on sale of ACS
    
    
    (3,858
    )
    
    
    
    
    
    
    (3,858
    )
    
    
    Income tax benefit
    
    
    (1,358
    )
    
    
    
    
    
    
    (1,358
    )
    
    
    Loss on sale of ACS
    
    
    (2,500
    )
    
    
    
    
    
    
    (2,500
    )
    
    
    Loss from discontinued operations
    
    $
    (2,434
    )
    
    $
    (1,270
    )
    
    $
    (2,009
    )
    
    $
    (3,220
    )Diluted loss per shareACS
    
    $
    (0.28
    )
    
    $
    (0.15
    )
    
    $
    (0.22
    )
    
    $
    (0.36
    )Mexico
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )Total
    
    $
    (0.29
    )
    
    $
    (0.15
    )
    
    $
    (0.24
    )
    
    $
    (0.37
    )
 Note 3  Inventories
  (Amounts in thousands)September 30,
    
    
    December 31,2010
    
    
    2009Finished goods
    
    $
    60,270
    
    
    $
    59,172Work in progress
    
    
    1,275
    
    
    
    1,227Raw materials
    
    
    1,640
    
    
    
    1,759Total
    
    
    63,185
    
    
    
    62,158Reserve for obsolete and excess inventory
    
    
    (7,383
    )
    
    
    (7,466
    )$
    55,802
    
    
    $
    54,692
  8




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Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 4 Severance Reserve
  (Amounts in thousands)Nine Months Ended September 30,2010
    
    
    2009Balance at beginning of year
    
    $
    4,086
    
    
    $
    6,012Charged to earnings
    
    
    3,242
    
    
    
    6,418Payments
    
    
    (3,699
    )
    
    
    (6,653
    )Adjustment to prior reserve
    
    
    (67
    )
    
    
    (165
    )Balance at end of the period
    
    $
    3,562
    
    
    $
    5,612
 Note 5  Litigation Settlement Proceeds
  Note 6  Loss (Gain) on Disposal of Property, Plant and Equipment
  Note 7  Stock Based Compensation
 Service based awards
  Performance based awards
    9




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Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Stock Performance Rights (SPRs)
   WeightedNumber
    
    
    Averageof SPRs
    
    
    Exercise PriceOutstanding on December 31, 2009
    
    
    388,300
    
    
    $
    28.31Granted
    
    
    2,600
    
    
    
    14.04Cancelled
    
    
    (27,150
    )
    
    
    23.16Outstanding on September 30, 2010
    
    
    363,750
    
    
    
    28.59
  Expected volatility
    
    50.9% to 88.6%Risk-free interest rate
    
    0.2% to 1.1%Expected remaining term (in years)
    
    0.1 to 4.5Expected annual dividend
    
    $0.32
   10




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Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 8  Income Tax
  Note 9  Contingencies
  Note 10  Comprehensive Income (loss)
  (Amounts in thousands)Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    3,429
    
    
    $
    1,503
    
    
    $
    7,448
    
    
    $
    (2,598
    )Foreign currency translation adjustment
    
    
    1,296
    
    
    
    701
    
    
    
    1,169
    
    
    
    1,190Comprehensive income (loss)
    
    $
    4,725
    
    
    $
    2,204
    
    
    $
    8,617
    
    
    $
    (1,408
    )
 Note 11  Related Party Transaction
    11




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Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 12  Segment Reporting
   (Amounts in thousands)Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net salesMRO
    
    $
    85,660
    
    
    $
    81,359
    
    
    $
    250,014
    
    
    $
    244,748OEM
    
    
    3,604
    
    
    
    2,695
    
    
    
    10,088
    
    
    
    9,735Consolidated total
    
    $
    89,264
    
    
    $
    84,054
    
    
    $
    260,102
    
    
    $
    254,483Operating income (loss)MRO
    
    $
    6,390
    
    
    $
    4,384
    
    
    $
    13,129
    
    
    $
    7,144OEM
    
    
    152
    
    
    
    (286
    )
    
    
    (14
    )
    
    
    (421
    )Severance
and other benefits (expense)
    
    
    2,024
    
    
    
    (464
    )
    
    
    875
    
    
    
    (6,253
    )Gain (loss) from disposal
of property, plant and
equipment
    
    
    
    
    
    
    
    
    
    
    1,701
    
    
    
    (16
    )Consolidated total
    
    $
    8,566
    
    
    $
    3,634
    
    
    $
    15,691
    
    
    $
    454Other income (expense), net
    
    
    (14
    )
    
    
    124
    
    
    
    32
    
    
    
    896Interest expense
    
    
    (105
    )
    
    
    (132
    )
    
    
    (386
    )
    
    
    (474
    )Income from continuing
operations before income taxes
    
    $
    8,447
    
    
    $
    3,626
    
    
    $
    15,337
    
    
    $
    876
  (Amounts in thousands)September 30,
    
    
    December 31,2010
    
    
    2009Total assetsMRO
    
    $
    201,030
    
    
    $
    181,717OEM
    
    
    14,481
    
    
    
    12,429Segment total
    
    
    215,511
    
    
    
    194,146Corporate
    
    
    16,506
    
    
    
    17,248Discontinued operations
    
    
    1,106
    
    
    
    30,253Consolidated total
    
    $
    233,123
    
    
    $
    241,647
  12




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Quarter ended September 30, 2010 compared to Quarter ended September 30, 2009
  2010
    
    
    2009% of
    
    
    
    
    
    
    % of($ in thousands)
    
    Amount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    85,660
    
    
    
    96.0
    %
    
    $
    81,359
    
    
    
    96.8
    %OEM
    
    
    3,604
    
    
    
    4.0
    
    
    
    2,695
    
    
    
    3.2Consolidated total
    
    $
    89,264
    
    
    
    100.0
    %
    
    $
    84,054
    
    
    
    100.0
    %Gross profitMRO
    
    $
    55,440
    
    
    
    64.7
    %
    
    $
    53,784
    
    
    
    66.1
    %OEM
    
    
    614
    
    
    
    17.0
    
    
    
    261
    
    
    
    9.7Consolidated total
    
    
    56,054
    
    
    
    62.8
    
    
    
    54,045
    
    
    
    64.3Operating expenses:Selling, general and administrative
expenses
    
    
    49,512
    
    
    
    55.5
    
    
    
    49,947
    
    
    
    59.4Severance and other expenses (benefits)
    
    
    (2,024
    )
    
    
    (2.3
    )
    
    
    464
    
    
    
    0.6Operating income
    
    
    8,566
    
    
    
    9.6
    
    
    
    3,634
    
    
    
    4.3Other (expense), net
    
    
    (119
    )
    
    
    (0.1
    )
    
    
    (8
    )
    
    
    Income from continuing operations
before income tax expense
    
    
    8,447
    
    
    
    9.5
    
    
    
    3,626
    
    
    
    4.3Income tax expense
    
    
    2,584
    
    
    
    2.9
    
    
    
    853
    
    
    
    1.0Income from continuing operations
    
    $
    5,863
    
    
    
    6.6
    %
    
    $
    2,773
    
    
    
    3.3
    %
 Net Sales
   Gross Profit
   13




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##### Table of Contents



Selling, General and Administrative Expenses (SG&A)
  Severance and Other Expenses (Benefits)
   Income Tax Expense
  Discontinued Operations
  Net Income
   14




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##### Table of Contents



Nine Months ended September 30, 2010 compared to Nine Months ended September 30, 2009
  2010
    
    
    2009% of
    
    
    
    
    
    
    % of($ in thousands)
    
    Amount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    250,014
    
    
    
    96.1
    %
    
    $
    244,748
    
    
    
    96.2
    %OEM
    
    
    10,088
    
    
    
    3.9
    
    
    
    9,735
    
    
    
    3.8Consolidated total
    
    $
    260,102
    
    
    
    100.0
    %
    
    $
    254,483
    
    
    
    100.0
    %Gross profitMRO
    
    $
    161,700
    
    
    
    64.7
    %
    
    $
    158,560
    
    
    
    64.8
    %OEM
    
    
    1,610
    
    
    
    16.0
    
    
    
    1,373
    
    
    
    14.1Consolidated total
    
    
    163,310
    
    
    
    62.8
    
    
    
    159,933
    
    
    
    62.8Operating expenses:Selling, general and administrative
expenses
    
    
    150,195
    
    
    
    57.7
    
    
    
    153,210
    
    
    
    60.2Severance and other expenses (benefits)
    
    
    (875
    )
    
    
    (0.3
    )
    
    
    6,253
    
    
    
    2.4Loss (gain) on disposal of property,
plant and equipment
    
    
    (1,701
    )
    
    
    (0.6
    )
    
    
    16
    
    
    
    Operating income
    
    
    15,691
    
    
    
    6.0
    
    
    
    454
    
    
    
    0.2Other income (expense), net
    
    
    (354
    )
    
    
    (0.1
    )
    
    
    422
    
    
    
    0.1Income from continuing operations
before income tax expense
    
    
    15,337
    
    
    
    5.9
    
    
    
    876
    
    
    
    0.3Income tax expense
    
    
    5,880
    
    
    
    2.3
    
    
    
    254
    
    
    
    0.1Income from continuing operations
    
    $
    9,457
    
    
    
    3.6
    %
    
    $
    622
    
    
    
    0.2
    %
 Net Sales
  Gross Profit
  Selling, General and Administrative Expenses (SG&A)
   15




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##### Table of Contents



Severance and Other Restructuring Charges
   Loss (Gain) on Disposal of Property, Plant and Equipment
  Income Tax Expense
  Discontinued Operations
  Net Income (loss)
   16




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##### Table of Contents



Liquidity and Capital Resources
    Covenant
    
    Requirement
    
    
    ActualMinimum
EBITDA, as defined in the amended Credit Agreement
    
    $

    10.0 million
    
    
    $

    21.0 millionCash plus accounts receivable and inventory to debt ratio
    
    
    2.00:1.00
    
    
    
    89.46:1.00Minimum tangible net worth
    
    $

    55.0 million
    
    
    $

    85.6 million
   17




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##### Table of Contents



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
  18




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##### Table of Contents



SIGNATURES
  LAWSON PRODUCTS, INC.
(Registrant)Dated October 28, 2010
    /s/ Thomas J. NeriThomas J. NeriPresident and Chief Executive Officer(principal executive officer) Dated October 28, 2010
    /s/ Ronald J. KnutsonRonald J. KnutsonSenior Vice President and Chief Financial Officer
(principal financial and accounting officer)  19