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, 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




---



##### 



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




---



##### 



TABLE OF CONTENTS
 PART I-FINANCIAL INFORMATIONITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II-OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURES
  3




---



##### 



PART I-FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 June 30,
    
    
    December 31,(Amounts in thousands, except share and per share data)
    
    2008
    
    
    2007(UNAUDITED)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,070
    
    
    $
    1,671Accounts receivable, less allowance for doubtful accounts
    
    
    55,998
    
    
    
    58,882Inventories
    
    
    95,906
    
    
    
    96,785Miscellaneous receivables and prepaid expenses
    
    
    10,821
    
    
    
    10,303Deferred income taxes
    
    
    2,984
    
    
    
    3,226Discontinued current assets
    
    
    394
    
    
    
    1,064Total current assets
    
    
    171,173
    
    
    
    171,931Property, plant and equipment, less accumulated depreciation and amortization
    
    
    50,467
    
    
    
    53,031Deferred income taxes
    
    
    20,380
    
    
    
    21,344Goodwill
    
    
    27,999
    
    
    
    27,999Other assets
    
    
    25,233
    
    
    
    25,558Total assets
    
    $
    295,252
    
    
    $
    299,863LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    15,715
    
    
    $
    16,266Revolving line of credit
    
    
    13,500
    
    
    
    11,000Settlement payable  current (Note J)
    
    
    10,000
    
    
    
    Accrued expenses and other liabilities
    
    
    39,708
    
    
    
    45,254Discontinued current liabilities
    
    
    120
    
    
    
    322Total current liabilities
    
    
    79,043
    
    
    
    72,842Accrued liability under security bonus plans
    
    
    25,900
    
    
    
    25,491Settlement payable  noncurrent (Note J)
    
    
    20,000
    
    
    
    Other
    
    
    24,752
    
    
    
    27,16970,652
    
    
    
    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
    
    
    131,914
    
    
    
    160,606Accumulated other comprehensive income
    
    
    347
    
    
    
    459Total stockholders equity
    
    
    145,557
    
    
    
    174,361Total liabilities and stockholders equity
    
    $
    295,252
    
    
    $
    299,863
  4




---



##### 



Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    126,310
    
    
    $
    129,178
    
    
    $
    251,314
    
    
    $
    258,847Cost of goods sold
    
    
    53,704
    
    
    
    52,481
    
    
    
    105,446
    
    
    
    106,323Gross profit
    
    
    72,606
    
    
    
    76,697
    
    
    
    145,868
    
    
    
    152,524Operating expenses:Selling, general and administrative expenses
    
    
    65,411
    
    
    
    68,588
    
    
    
    129,373
    
    
    
    133,463Settlement and related costs (Note J)
    
    
    30,417
    
    
    
    2,689
    
    
    
    31,168
    
    
    
    3,775Severance and other charges
    
    
    5,913
    
    
    
    5,642
    
    
    
    6,515
    
    
    
    7,363Operating (loss) income
    
    
    (29,135
    )
    
    
    (222
    )
    
    
    (21,188
    )
    
    
    7,923Investment and other income
    
    
    165
    
    
    
    293
    
    
    
    273
    
    
    
    395Interest expense
    
    
    (214
    )
    
    
    (286
    )
    
    
    (443
    )
    
    
    (367
    )(Loss) income from continuing operations before income taxes
    
    
    (29,184
    )
    
    
    (215
    )
    
    
    (21,358
    )
    
    
    7,951Provision (benefit) for income taxes
    
    
    51
    
    
    
    (195
    )
    
    
    3,353
    
    
    
    3,245(Loss) income from continuing operations
    
    
    (29,235
    )
    
    
    (20
    )
    
    
    (24,711
    )
    
    
    4,706Loss from discontinued operations, net of income taxes
    
    
    (418
    )
    
    
    (329
    )
    
    
    (573
    )
    
    
    (485
    )Net (loss) income
    
    $
    (29,653
    )
    
    $
    (349
    )
    
    $
    (25,284
    )
    
    $
    4,221Basic (loss) income per share of common stock:Continuing operations
    
    $
    (3.43
    )
    
    $
    (0.00
    )
    
    $
    (2.90
    )
    
    $
    0.55Discontinued operations
    
    
    (0.05
    )
    
    
    (0.04
    )
    
    
    (0.07
    )
    
    
    (0.06
    )$
    (3.48
    )
    
    $
    (0.04
    )
    
    $
    (2.97
    )
    
    $
    0.50Diluted (loss) income per share of common stock:Continuing operations
    
    $
    (3.43
    )
    
    $
    (0.00
    )
    
    $
    (2.90
    )
    
    $
    0.55Discontinued operations
    
    
    (0.05
    )
    
    
    (0.04
    )
    
    
    (0.07
    )
    
    
    (0.06
    )$
    (3.48
    )
    
    $
    (0.04
    )
    
    $
    (2.97
    )
    
    $
    0.50Cash dividends declared per share of common stock
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40Weighted average shares outstanding:Basic
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,521Diluted
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,523
  5




---



##### 



Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 For theSix Months EndedJune 30,(Amounts in thousands)
    
    2008
    
    
    2007Operating activities:Net (loss) income
    
    $
    (25,284
    )
    
    $
    4,221Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities:Depreciation and amortization
    
    
    4,353
    
    
    
    3,890Provision for settlement
    
    
    30,000
    
    
    
    Changes in operating assets and liabilities
    
    
    (2,154
    )
    
    
    (12,705
    )Other
    
    
    (1,529
    )
    
    
    988Net cash provided by (used for) operating activities
    
    
    5,386
    
    
    
    (3,606
    )Investing activities:Additions to property, plant and equipment
    
    
    (1,664
    )
    
    
    (10,440
    )Net cash used for investing activities
    
    
    (1,664
    )
    
    
    (10,440
    )Financing activities:Proceeds from revolving line of credit, net of payments
    
    
    2,500
    
    
    
    16,000Dividends paid
    
    
    (3,409
    )
    
    
    (3,409
    )Other
    
    
    
    
    
    
    27Net cash (used for) provided by financing activities
    
    
    (909
    )
    
    
    12,618Increase (decrease) in cash and cash equivalents
    
    
    2,813
    
    
    
    (1,428
    )Cash and cash equivalents at beginning of period
    
    
    2,473
    
    
    
    4,320Cash and cash equivalents at end of period
    
    
    5,286
    
    
    
    2,892Cash held by discontinued operations
    
    
    (216
    )
    
    
    (1,031
    )Cash and cash equivalents held by continuing operations at end of period
    
    $
    5,070
    
    
    $
    1,861
  6




---



##### 



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)
    Note C  Earnings Per Share
  Three months ended June 302008
    
    
    2007Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522Dilutive impact of options outstanding
    
    
    
    
    
    
    Dilutive weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522
 Six months ended June 302008
    
    
    2007Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,521Dilutive impact of options outstanding
    
    
    
    
    
    
    2Dilutive weighted average shares outstanding
    
    
    8,522
    
    
    
    8,523
 7




---



##### 



Note D  Revolving Line of Credit
   Note E  Severance and Other Charges
   2008
    
    
    2007Balance at beginning of year
    
    $
    7,058
    
    
    $
    962Charged to earnings
    
    
    2,915
    
    
    
    7,363Cash paid
    
    
    (2,804
    )
    
    
    (2,906
    )Adjustment to reserves
    
    
    (42
    )
    
    
    (120
    )Balance at June 30
    
    $
    7,127
    
    
    $
    5,299
 Note F  Intangible Assets
  June 30, 2008NetGross
    
    
    Accumulated
    
    
    CarryingBalance
    
    
    Amortization
    
    
    AmountTrademarks and tradenames
    
    $
    1,400
    
    
    $
    762
    
    
    $
    638Non-compete covenant
    
    
    1,000
    
    
    
    500
    
    
    
    500$
    2,400
    
    
    $
    1,262
    
    
    $
    1,138
 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
 8




---



##### 



Note G  Stock-Based Compensation
  Stock Performance Rights
  June 30, 2008Expected volatility
    
    39.73% to 52.09%Risk-free interest rate
    
    2.42% to 3.46%Expected term (in years)
    
    1.2 to 5.9Expected dividend yield
    
    3.23%
   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
    
    
    
    267,750Granted
    
    
    26.33
    
    
    
    65,000Forfeited
    
    
    25.53
    
    
    
    (24,100
    )Outstanding June 30, 2008 (3)
    
    $
    31.39
    
    
    
    308,650
 
 (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.(3)
    
    Includes 137,517 SPRs vested at June 30, 2008 at a weighted average
exercise price of $34.52 per SPR. 9




---



##### 



Stock Options
  Exercise price
    
    $
    23.56
    
    
    $
    22.44Options outstanding:
    
    
    3,000
    
    
    
    2,000Weighted average exercise price
    
    $
    23.56
    
    
    $
    22.44Weighted average remaining life (in years)
    
    
    1.9
    
    
    
    1.1Options exercisable:
    
    
    3,000
    
    
    
    2,000Weighted average exercise price
    
    $
    23.56
    
    
    $
    22.44
  Note H  Segment Reporting
      Three Months EndedJune 302008
    
    
    2007Net salesMRO
    
    $
    104,781
    
    
    $
    108,875OEM
    
    
    21,529
    
    
    
    20,303Consolidated total
    
    $
    126,310
    
    
    $
    129,178Operating lossMRO
    
    $
    (29,466
    )
    
    $
    (1,075
    )OEM
    
    
    331
    
    
    
    853Consolidated total
    
    $
    (29,135
    )
    
    $
    (222
    )
 10




---



##### 



Three Months EndedJune 302008
    
    
    2007Total operating loss from reportable segments
    
    $
    (29,135
    )
    
    $
    (222
    )Investment and other income
    
    
    165
    
    
    
    293Interest expense
    
    
    (214
    )
    
    
    (286
    )Loss from continuing operations before income taxes
    
    $
    (29,184
    )
    
    $
    (215
    )
 Six Months EndedJune 302008
    
    
    2007Net salesMRO
    
    $
    209,319
    
    
    $
    215,161OEM
    
    
    41,995
    
    
    
    43,686Consolidated total
    
    $
    251,314
    
    
    $
    258,847Operating (loss) incomeMRO
    
    $
    (21,972
    )
    
    $
    5,198OEM
    
    
    784
    
    
    
    2,725Consolidated total
    
    $
    (21,188
    )
    
    $
    7,923
  Six Months EndedJune 302008
    
    
    2007Total operating (loss) income from reportable segments
    
    $
    (21,188
    )
    
    $
    7,923Investment and other income
    
    
    273
    
    
    
    395Interest expense
    
    
    (443
    )
    
    
    (367
    )(Loss) income from continuing operations before income taxes
    
    $
    (21,358
    )
    
    $
    7,951
 11




---



##### 



June 30,
    
    
    December 31,2008
    
    
    2007Total assetsMRO
    
    $
    218,597
    
    
    $
    221,274OEM
    
    
    52,897
    
    
    
    52,955Total for reportable segments
    
    
    271,494
    
    
    
    274,229Corporate
    
    
    23,364
    
    
    
    24,570Consolidated total
    
    $
    294,858
    
    
    $
    298,799
  MRO
    
    $
    25,748OEM
    
    
    2,251Consolidated total
    
    $
    27,999
 Note I  Income Tax Expense
     Note J  Legal Proceedings
   12




---



##### 



13




---



##### 



14




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Quarter ended June 30, 2008 compared to Quarter ended June 30, 2007
  % of
    
    
    
    
    
    
    % of(Dollars in thousands)
    
    2008
    
    
    Net Sales
    
    
    2007
    
    
    Net SalesNet sales
    
    $
    126,310
    
    
    
    100.0
    
    
    $
    129,178
    
    
    
    100.0Cost of goods sold
    
    
    53,704
    
    
    
    42.5
    
    
    
    52,481
    
    
    
    40.6Gross profit
    
    
    72,606
    
    
    
    57.5
    
    
    
    76,697
    
    
    
    59.4Operating expenses:Selling, general and administrative expenses
    
    
    65,411
    
    
    
    51.8
    
    
    
    68,588
    
    
    
    53.1Settlement and related costs
    
    
    30,417
    
    
    
    24.1
    
    
    
    2,689
    
    
    
    2.1Severance and other charges
    
    
    5,913
    
    
    
    4.7
    
    
    
    5,642
    
    
    
    4.4Operating loss
    
    
    (29,135
    )
    
    
    (23.1
    )
    
    
    (222
    )
    
    
    (0.2
    )Other, net
    
    
    (49
    )
    
    
    (0.0
    )
    
    
    7
    
    
    
    0.0Loss from continuing operations before income
tax expense
    
    
    (29,184
    )
    
    
    (23.1
    )
    
    
    (215
    )
    
    
    (0.2
    )Income tax expense (benefit)
    
    
    51
    
    
    
    0.0
    
    
    
    (195
    )
    
    
    (0.2
    )Loss from continuing operations
    
    
    (29,235
    )
    
    
    (23.1
    )
    
    
    (20
    )
    
    
    (0.0
    )Loss from discontinued operations
    
    
    (418
    )
    
    
    (0.3
    )
    
    
    (329
    )
    
    
    (0.3
    )Net loss
    
    $
    (29,653
    )
    
    
    (23.5
    )
    
    $
    (349
    )
    
    
    (0.3
    )
 Net Sales and Gross Profit
   (Dollars in millions)
    
    2008
    
    
    2007MRO
    
    $
    104.8
    
    
    $
    108.9OEM
    
    
    21.5
    
    
    
    20.3$
    126.3
    
    
    $
    129.2
    15




---



##### 



Operating Expenses and Operating Income
 Selling, General and Administrative Expenses (SG&A)
  Settlement and Related Costs
  Severance and Other Charges
  Operating Loss
  Income Tax Expense
  Loss from Discontinued Operations
  16




---



##### 



Six Months ended June 30, 2008 compared to Six Months ended June 30, 2007
  % of
    
    
    
    
    
    
    % of(Dollars in thousands)
    
    2008
    
    
    Net Sales
    
    
    2007
    
    
    Net SalesNet sales
    
    $
    251,314
    
    
    
    100.0
    
    
    $
    258,847
    
    
    
    100.0Cost of goods sold
    
    
    105,446
    
    
    
    42.0
    
    
    
    106,323
    
    
    
    41.1Gross profit
    
    
    145,868
    
    
    
    58.0
    
    
    
    152,524
    
    
    
    58.9Operating expenses:Selling, general and administrative expenses
    
    
    129,373
    
    
    
    51.5
    
    
    
    133,463
    
    
    
    51.6Settlement and related costs
    
    
    31,168
    
    
    
    12.4
    
    
    
    3,775
    
    
    
    1.5Severance and other charges
    
    
    6,515
    
    
    
    2.6
    
    
    
    7,363
    
    
    
    2.8Operating (loss) income
    
    
    (21,188
    )
    
    
    (8.4
    )
    
    
    7,923
    
    
    
    3.1Other, net
    
    
    (170
    )
    
    
    (0.1
    )
    
    
    28
    
    
    
    0.0(Loss) income from continuing operations before
income tax expense
    
    
    (21,358
    )
    
    
    (8.5
    )
    
    
    7,951
    
    
    
    3.1Income tax expense
    
    
    3,353
    
    
    
    1.3
    
    
    
    3,245
    
    
    
    1.3(Loss) income from continuing operations
    
    
    (24,711
    )
    
    
    (9.8
    )
    
    
    4,706
    
    
    
    1.8Loss from discontinued operations
    
    
    (573
    )
    
    
    (0.2
    )
    
    
    (485
    )
    
    
    (0.2
    )Net (loss) income
    
    $
    (25,284
    )
    
    
    (10.0
    )
    
    $
    4,221
    
    
    
    1.6
 Net Sales and Gross Profit
   (Dollars in millions)
    
    2008
    
    
    2007MRO
    
    $
    209.3
    
    
    $
    215.1OEM
    
    
    42.0
    
    
    
    43.7$
    251.3
    
    
    $
    258.8
    17




---



##### 



Operating Expenses and Operating Income
 Selling, General and Administrative Expenses (SG&A)
  Settlement Related Costs
  Severance and Other Charges
  Operating Income
  Income Tax Expense
  Loss from Discontinued Operations
  Liquidity and Capital Resources
     18




---



##### 



19




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   20




---



##### 



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.
   21




---



##### 



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   WithheldName
    
    For
    
    AuthorityRonald B. Port, M.D.
    
    
    7,822,564
    
    
    
    62,587Robert G. Rettig
    
    
    7,760,204
    
    
    
    124,947Wilma J. Smelcer
    
    
    7,773,133
    
    
    
    112,018
  For
    
    Against
    
    AbstainRatification of the Appointment of
Ernst & Young LLP as Lawsons
independent registered public
accounting firm for the fiscal year
ending December 31, 2008
    
    
    7,848,992
    
    
    
    34,649
    
    
    
    1,510Approval of the Lawson Products, Inc.
Long-Term Incentive Plan
    
    
    7,056,580
    
    
    
    222,278
    
    
    
    3,113
 
 ITEM 5. OTHER INFORMATION
  22




---



##### 



ITEM 6. EXHIBITS
  10.1
    
    Deferred Prosecution Agreement, dated August 11, 2008.10.2
    
    Eighth Modification of Loan Documents and Covenant Waiver, dated August 6, 200815
    
    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
 23




---



##### 



SIGNATURES
  LAWSON PRODUCTS, INC.(Registrant)Dated August 11, 2008
    
    /s/ Thomas J. Neri

Thomas J. NeriChief Executive OfficerDated August 11, 2008
    
    /s/ F. Terrence Blanchard

F. Terrence BlanchardChief Financial Officer
 24