##### 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 June 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
(State or other jurisdiction of 
incorporation or organization)
    
    36-2229304
(I.R.S. Employer
Identification No.)1666 East Touhy Avenue, Des Plaines, Illinois
(Address of principal executive offices)
    
    60018
(Zip Code)
 (847) 827-9666
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Yes o No 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
June 30, 2010 (Unaudited) and December 31, 2009
    
    
    4Condensed Consolidated Statements of
Operations for the Three and Six Months Ended
June 30, 2010 and 2009
(Unaudited)
    
    
    5Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 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
    
    
    10Item 3 Quantitative and Qualitative Disclosures about
Market Risk
    
    
    15Item 4 Controls and Procedures
    
    
    15PART II  OTHER INFORMATIONItem 6 Exhibits
    
    
    15SIGNATURES
    
    
    16Exhibit 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)
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,616
    
    
    $
    8,787Accounts receivable, less allowance for doubtful accounts
    
    
    46,372
    
    
    
    39,804Inventories
    
    
    75,067
    
    
    
    73,696Miscellaneous receivables and prepaid expenses
    
    
    11,567
    
    
    
    10,423Deferred income taxes
    
    
    3,896
    
    
    
    4,819Property held for sale
    
    
    
    
    
    
    332Discontinued assets
    
    
    464
    
    
    
    459Total current assets
    
    
    145,982
    
    
    
    138,320Property, plant and equipment, less accumulated
depreciation and amortization
    
    
    40,961
    
    
    
    40,576Cash value of life insurance
    
    
    17,040
    
    
    
    17,021Deferred income taxes
    
    
    12,977
    
    
    
    15,249Goodwill
    
    
    27,875
    
    
    
    27,957Other assets
    
    
    2,490
    
    
    
    2,524Total assets
    
    $
    247,325
    
    
    $
    241,647LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,233
    
    
    $
    19,968Settlement payable
    
    
    10,000
    
    
    
    10,000Accrued expenses and other liabilities
    
    
    29,857
    
    
    
    33,272Total current liabilities
    
    
    63,090
    
    
    
    63,240Revolving line of credit
    
    
    5,150
    
    
    
    Security bonus plan
    
    
    25,799
    
    
    
    25,931Deferred compensation
    
    
    10,946
    
    
    
    10,374Other
    
    
    2,654
    
    
    
    5,45644,549
    
    
    
    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
    
    
    4,951
    
    
    
    4,780Retained earnings
    
    
    124,884
    
    
    
    121,888Accumulated other comprehensive income
    
    
    1,329
    
    
    
    1,456Stockholders equity
    
    
    139,686
    
    
    
    136,646Total liabilities and stockholders equity
    
    $
    247,325
    
    
    $
    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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    101,623
    
    
    $
    95,033
    
    
    $
    196,696
    
    
    $
    194,414Cost of goods sold
    
    
    42,993
    
    
    
    39,164
    
    
    
    82,584
    
    
    
    84,378Gross profit
    
    
    58,630
    
    
    
    55,869
    
    
    
    114,112
    
    
    
    110,036Operating expenses:Selling, general and administrative expenses
    
    
    54,144
    
    
    
    52,932
    
    
    
    106,252
    
    
    
    109,613Severance and other restructuring
charges (benefits)
    
    
    1,224
    
    
    
    (94
    )
    
    
    1,699
    
    
    
    5,947Loss (gain) on disposal of property, plant
and equipment
    
    
    
    
    
    
    (395
    )
    
    
    (1,701
    )
    
    
    16Operating income (loss)
    
    
    3,262
    
    
    
    3,426
    
    
    
    7,862
    
    
    
    (5,540
    )Other income
    
    
    52
    
    
    
    51
    
    
    
    102
    
    
    
    776Interest expense
    
    
    (196
    )
    
    
    (268
    )
    
    
    (281
    )
    
    
    (342
    )Income (loss) from continuing operations
before income taxes
    
    
    3,118
    
    
    
    3,209
    
    
    
    7,683
    
    
    
    (5,106
    )Income tax expense (benefit)
    
    
    1,344
    
    
    
    1,313
    
    
    
    3,567
    
    
    
    (1,083
    )Income (loss) from continuing operations
    
    
    1,774
    
    
    
    1,896
    
    
    
    4,116
    
    
    
    (4,023
    )Loss from discontinued operations, net of
income taxes
    
    
    (87
    )
    
    
    (49
    )
    
    
    (97
    )
    
    
    (78
    )Net income (loss)
    
    $
    1,687
    
    
    $
    1,847
    
    
    $
    4,019
    
    
    $
    (4,101
    )Basic and diluted income (loss) per share of
common stock:Continuing operations
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.48
    
    
    $
    (0.47
    )Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )$
    0.20
    
    
    $
    0.22
    
    
    $
    0.47
    
    
    $
    (0.48
    )Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522Dilutive effect of stock based compensation
    
    
    7
    
    
    
    
    
    
    
    4
    
    
    
    Diluted weighted average shares outstanding
    
    
    8,529
    
    
    
    8,522
    
    
    
    8,526
    
    
    
    8,522Cash dividends declared per share of common
stock
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.06
   5




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Lawson Products, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Dollars in thousands)
 (Unaudited)
 Six Months Ended June 30,2010
    
    
    2009Operating activities:Net income (loss)
    
    $
    4,019
    
    
    $
    (4,101
    )Loss from discontinued operations
    
    
    97
    
    
    
    78Income (loss) from continuing operations
    
    
    4,116
    
    
    
    (4,023
    )Adjustments
to reconcile to net cash (used in) provided by operating
activities:Depreciation and amortization
    
    
    3,003
    
    
    
    3,679Deferred income taxes
    
    
    3,271
    
    
    
    2,294Loss (gain) from disposal of property, plant and equipment
    
    
    (1,701
    )
    
    
    16Changes in operating assets and liabilitiesAccounts receivable
    
    
    (7,146
    )
    
    
    4,659Inventories
    
    
    (1,434
    )
    
    
    6,880Prepaid expenses and other assets
    
    
    (1,132
    )
    
    
    1,885Accounts payable and accrued expenses
    
    
    424
    
    
    
    2,402Other
    
    
    (1,462
    )
    
    
    (1,189
    )Net cash (used in) provided by operating activities
    
    
    (2,061
    )
    
    
    16,603Investing activities:Additions to property, plant and equipment
    
    
    (3,619
    )
    
    
    (1,996
    )Proceeds from sale of property
    
    
    2,027
    
    
    
    2,179Net cash (used in) provided by investing activities
    
    
    (1,592
    )
    
    
    183Financing activities:Net proceeds from (payments to) revolving line of credit
    
    
    5,150
    
    
    
    (7,700
    )Dividends paid
    
    
    (1,534
    )
    
    
    (1,960
    )Other
    
    
    (32
    )
    
    
    (238
    )Net cash provided by (used in) financing activities
    
    
    3,584
    
    
    
    (9,898
    )Discontinued operations:Operating cash flows
    
    
    (102
    )
    
    
    (220
    )Net cash used for discontinued operations
    
    
    (102
    )
    
    
    (220
    )Increase (decrease) in cash and cash equivalents
    
    
    (171
    )
    
    
    6,668Cash and cash equivalents at beginning of period
    
    
    8,787
    
    
    
    4,300Cash and cash equivalents at end of period
    
    $
    8,616
    
    
    $
    10,968
   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
    Note 2  Inventories
  (Amounts in thousands)June 30,
    
    
    December 31,2010
    
    
    2009Finished goods
    
    $
    82,274
    
    
    $
    81,621Work in progress
    
    
    1,144
    
    
    
    1,227Raw materials
    
    
    1,616
    
    
    
    1,759Total
    
    
    85,034
    
    
    
    84,607Reserve for obsolete and excess inventory
    
    
    (9,967
    )
    
    
    (10,911
    )$
    75,067
    
    
    $
    73,696
 Note 3 Severance Reserve
  (Amounts in thousands)Six Months Ended June 30,2010
    
    
    2009Balance at beginning of year
    
    $
    4,145
    
    
    $
    6,111Charged to earnings
    
    
    1,732
    
    
    
    6,033Cash paid
    
    
    (2,673
    )
    
    
    (4,651
    )Adjustment to prior reserve
    
    
    (33
    )
    
    
    (165
    )Balance at end of the period
    
    $
    3,171
    
    
    $
    7,328
  7




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Lawson Products, Inc.
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 Note 4  Loss (Gain) on Disposal of Property, Plant and Equipment
  Note 5  Stock Based Compensation
   WeightedNumber
    
    
    Averageof SPRs
    
    
    Exercise PriceOutstanding on December 31, 2009
    
    
    388,300
    
    
    $
    28.31Granted
    
    
    2,600
    
    
    
    14.04Cancelled
    
    
    (20,450
    )
    
    
    22.80Outstanding on June 30, 2010
    
    
    370,450
    
    
    
    28.51
  Expected volatility
    
    51.1% to 92.2%Risk-free interest rate
    
    0.2% to 1.7%Expected remaining term (in years)
    
    0.2 to 4.7Expected annual dividend
    
    $0.24
  Note 6  Income Tax Expense (Benefit)
    8




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Lawson Products, Inc.
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
  Note 7  Comprehensive Income (loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    1,687
    
    
    $
    1,847
    
    
    $
    4,019
    
    
    $
    (4,101
    )Foreign currency translation adjustment
    
    
    (479
    )
    
    
    701
    
    
    
    (127
    )
    
    
    1,190Comprehensive income (loss)
    
    $
    1,208
    
    
    $
    2,548
    
    
    $
    3,892
    
    
    $
    (2,911
    )
 Note 8  Segment Reporting
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net salesMRO
    
    $
    84,738
    
    
    $
    80,570
    
    
    $
    164,354
    
    
    $
    163,389OEM
    
    
    16,885
    
    
    
    14,463
    
    
    
    32,342
    
    
    
    31,025Consolidated total
    
    $
    101,623
    
    
    $
    95,033
    
    
    $
    196,696
    
    
    $
    194,414Operating income (loss)MRO
    
    $
    4,117
    
    
    $
    3,841
    
    
    $
    7,289
    
    
    $
    2,839OEM
    
    
    369
    
    
    
    (904
    )
    
    
    571
    
    
    
    (2,416
    )Severance and other
restructuring
(charges) benefits
    
    
    (1,224
    )
    
    
    94
    
    
    
    (1,699
    )
    
    
    (5,947
    )Gain (loss) from
disposal of
property, plant and
equipment
    
    
    
    
    
    
    395
    
    
    
    1,701
    
    
    
    (16
    )Consolidated total
    
    $
    3,262
    
    
    $
    3,426
    
    
    $
    7,862
    
    
    $
    (5,540
    )Other income
    
    
    52
    
    
    
    51
    
    
    
    102
    
    
    
    776Interest expense
    
    
    (196
    )
    
    
    (268
    )
    
    
    (281
    )
    
    
    (342
    )Income (loss) from
continuing operations
before income taxes
    
    $
    3,118
    
    
    $
    3,209
    
    
    $
    7,683
    
    
    $
    (5,106
    )
  9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Quarter ended June 30, 2010 compared to Quarter ended June 30, 2009
  2010
    
    
    2009% of
    
    
    
    
    
    
    % of($ in thousands)
    
    Amount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    84,738
    
    
    
    83.4
    %
    
    $
    80,570
    
    
    
    84.8
    %OEM
    
    
    16,885
    
    
    
    16.6
    
    
    
    14,463
    
    
    
    15.2Consolidated total
    
    $
    101,623
    
    
    
    100.0
    %
    
    $
    95,033
    
    
    
    100.0
    %Gross profitMRO
    
    $
    54,512
    
    
    
    64.3
    %
    
    $
    53,211
    
    
    
    66.0
    %OEM
    
    
    4,118
    
    
    
    24.4
    
    
    
    2,658
    
    
    
    18.4Consolidated total
    
    
    58,630
    
    
    
    57.7
    
    
    
    55,869
    
    
    
    58.8Operating expenses:Selling, general and
administrative expenses
    
    
    54,144
    
    
    
    53.3
    
    
    
    52,932
    
    
    
    55.7Severance and other
restructuring charges
(benefits)
    
    
    1,224
    
    
    
    1.2
    
    
    
    (94
    )
    
    
    (0.1
    )Gain on disposal of
property, plant and
equipment
    
    
    
    
    
    
    
    
    
    
    (395
    )
    
    
    (0.4
    )Operating income
    
    
    3,262
    
    
    
    3.2
    
    
    
    3,426
    
    
    
    3.6Other, net
    
    
    (144
    )
    
    
    (0.1
    )
    
    
    (217
    )
    
    
    (0.2
    )Income from continuing
operations before income tax
expense
    
    
    3,118
    
    
    
    3.1
    
    
    
    3,209
    
    
    
    3.4Income tax expense
    
    
    1,344
    
    
    
    1.4
    
    
    
    1,313
    
    
    
    1.4Income from continuing operations
    
    $
    1,774
    
    
    
    1.7
    %
    
    $
    1,896
    
    
    
    2.0
    %
 Net Sales
   Gross Profit
   10




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Selling, General and Administrative Expenses (SG&A)
  Severance and Other Restructuring Charges (Benefits)
  Gain on Disposal of Property, Plant and Equipment
  Income Tax Expense
  Net Income
   11




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Six Months ended June 30, 2010 compared to Six Months ended June 30, 2009
  2010
    
    
    2009% of
    
    
    
    
    
    
    % of($ in thousands)
    
    Amount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    164,354
    
    
    
    83.6
    %
    
    $
    163,389
    
    
    
    84.0
    %OEM
    
    
    32,342
    
    
    
    16.4
    
    
    
    31,025
    
    
    
    16.0Consolidated total
    
    $
    196,696
    
    
    
    100.0
    %
    
    $
    194,414
    
    
    
    100.0
    %Gross profitMRO
    
    $
    106,260
    
    
    
    64.7
    %
    
    $
    104,776
    
    
    
    64.1
    %OEM
    
    
    7,852
    
    
    
    24.3
    
    
    
    5,260
    
    
    
    17.0Consolidated total
    
    
    114,112
    
    
    
    58.0
    
    
    
    110,036
    
    
    
    56.6Operating expenses:Selling, general and administrative
expenses
    
    
    106,252
    
    
    
    54.0
    
    
    
    109,613
    
    
    
    56.4Severance and other restructuring
charges
    
    
    1,699
    
    
    
    0.9
    
    
    
    5,947
    
    
    
    3.0Loss (gain) on disposal of
property, plant and equipment
    
    
    (1,701
    )
    
    
    (0.9
    )
    
    
    16
    
    
    
    Operating income (loss)
    
    
    7,862
    
    
    
    4.0
    
    
    
    (5,540
    )
    
    
    (2.8
    )Other, net
    
    
    (179
    )
    
    
    (0.1
    )
    
    
    434
    
    
    
    0.2Income (loss) from continuing
operations before income tax expense
    
    
    7,683
    
    
    
    3.9
    
    
    
    (5,106
    )
    
    
    (2.6
    )Income tax expense (benefit)
    
    
    3,567
    
    
    
    1.8
    
    
    
    (1,083
    )
    
    
    (0.5
    )Income (loss) from continuing operations
    
    $
    4,116
    
    
    
    2.1
    %
    
    $
    (4,023
    )
    
    
    (2.1
    )%
 Net Sales
  Gross Profit
     12




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Selling, General and Administrative Expenses (SG&A)
  Severance and Other Restructuring Charges
  Loss (Gain) on Disposal of Property, Plant and Equipment
  Income Tax Expense (Benefit)
  Net Income
   13




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Liquidity and Capital Resources
      Covenant
    
    Requirement
    
    ActualMinimum EBITDA, as defined in the amended Credit Agreement
    
    $10.0 million
    
    $18.2 millionCash plus accounts receivable and inventory to debt ratio
    
    2.00:1.00
    
    19.65:1.00Minimum tangible net worth
    
    $55.0 million
    
    $80.6 million
   14




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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
  15




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SIGNATURES
  LAWSON PRODUCTS, INC.
              (Registrant)Dated July 28, 2010
    /s/ Thomas J. NeriThomas J. NeriPresident and Chief Executive Officer
(principal executive officer)Dated July 28, 2010
    /s/ Ronald J. KnutsonRonald J. KnutsonSenior Vice President and Chief Financial Officer
(principal financial and accounting officer)  16