##### 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, 2009
 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
 Yes
o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No þ




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##### Table of Contents



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 Condensed Consolidated Financial
Statements
    
    
    4Item 2 Managements Discussion and Analysis of
Financial Condition and Results of
Operations
    
    
    12Item 3 Quantitative and Qualitative Disclosures about
Market Risk
    
    
    17Item 4 Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 6 Exhibits
    
    
    17SIGNATURES
    
    
    18Exhibit 31.1Exhibit 31.2Exhibit 32
   3




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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
 September 30,
    
    
    December 31,(Amounts in thousands, except share data)
    
    2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,796
    
    
    $
    4,300Accounts receivable, less allowance for doubtful accounts
    
    
    42,098
    
    
    
    48,634Inventories
    
    
    78,466
    
    
    
    86,435Miscellaneous receivables and prepaid expenses
    
    
    13,567
    
    
    
    11,812Deferred income taxes
    
    
    4,118
    
    
    
    6,127Property held for sale
    
    
    332
    
    
    
    Discontinued assets
    
    
    449
    
    
    
    296Total current assets
    
    
    149,826
    
    
    
    157,604Property, plant and equipment, less accumulated
depreciation and amortization
    
    
    43,023
    
    
    
    47,783Cash value of life insurance
    
    
    16,487
    
    
    
    17,970Deferred income taxes
    
    
    15,219
    
    
    
    18,159Goodwill
    
    
    27,839
    
    
    
    25,748Other assets
    
    
    3,623
    
    
    
    3,732Total assets
    
    $
    256,017
    
    
    $
    270,996LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,006
    
    
    $
    16,334Settlement
payable  current
    
    
    15,000
    
    
    
    10,000Accrued expenses and other liabilities
    
    
    35,554
    
    
    
    41,205Discontinued current liabilities
    
    
    
    
    
    
    53Total current liabilities
    
    
    69,560
    
    
    
    67,592Revolving line of credit
    
    
    
    
    
    
    7,700Security bonus plan
    
    
    25,960
    
    
    
    26,218Deferred compensation
    
    
    13,076
    
    
    
    11,301Settlement payable  noncurrent
    
    
    
    
    
    
    10,000Other
    
    
    10,324
    
    
    
    9,44149,360
    
    
    
    64,660Stockholders 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
    
    
    8,522
    
    
    
    8,522Capital in excess of par value
    
    
    4,774
    
    
    
    4,774Retained earnings
    
    
    122,537
    
    
    
    126,158Accumulated other comprehensive income (loss)
    
    
    1,264
    
    
    
    (710
    )Stockholders equity:
    
    
    137,097
    
    
    
    138,744Total liabilities and stockholders equity
    
    $
    256,017
    
    
    $
    270,996
   4




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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Amounts in thousands, except      per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net sales
    
    $
    95,125
    
    
    $
    125,364
    
    
    $
    289,539
    
    
    $
    378,382Cost of goods sold
    
    
    38,728
    
    
    
    54,275
    
    
    
    123,106
    
    
    
    159,721Gross profit
    
    
    56,397
    
    
    
    71,089
    
    
    
    166,433
    
    
    
    218,661Operating expenses:Selling, general and administrative expenses
    
    
    52,845
    
    
    
    63,791
    
    
    
    162,367
    
    
    
    194,910Severance and other
    
    
    659
    
    
    
    1,144
    
    
    
    6,622
    
    
    
    7,617Settlement and related costs
    
    
    23
    
    
    
    394
    
    
    
    114
    
    
    
    31,562Operating income (loss)
    
    
    2,870
    
    
    
    5,760
    
    
    
    (2,670
    )
    
    
    (15,428
    )Other income
    
    
    110
    
    
    
    55
    
    
    
    886
    
    
    
    328Interest expense
    
    
    (132
    )
    
    
    (247
    )
    
    
    (474
    )
    
    
    (690
    )Income (loss) from continuing operations
before income taxes
    
    
    2,848
    
    
    
    5,568
    
    
    
    (2,258
    )
    
    
    (15,790
    )Income tax expense
    
    
    1,327
    
    
    
    2,500
    
    
    
    244
    
    
    
    5,853Income (loss) from continuing operations
    
    
    1,521
    
    
    
    3,068
    
    
    
    (2,502
    )
    
    
    (21,643
    )(Loss) income from discontinued operations, net
of income taxes
    
    
    (18
    )
    
    
    10
    
    
    
    (96
    )
    
    
    (563
    )Net income (loss)
    
    $
    1,503
    
    
    $
    3,078
    
    
    $
    (2,598
    )
    
    $
    (22,206
    )Basic and diluted income (loss)  per
share of common stock:Continuing operations
    
    $
    0.18
    
    
    $
    0.36
    
    
    $
    (0.29
    )
    
    $
    (2.54
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.07
    )$
    0.18
    
    
    $
    0.36
    
    
    $
    (0.30
    )
    
    $
    (2.61
    )Cash dividends declared per share of common stock
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    0.12
    
    
    $
    0.60Weighted average shares outstanding:Basic
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522Diluted
    
    
    8,522
    
    
    
    8,523
    
    
    
    8,522
    
    
    
    8,522
   5




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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended September 30,(Amounts in thousands)
    
    2009
    
    
    2008Operating activities:Net loss
    
    $
    (2,598
    )
    
    $
    (22,206
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,455
    
    
    
    6,474Provision for settlement
    
    
    
    
    
    
    30,000Settlement payment
    
    
    (5,000
    )
    
    
    (10,000
    )Changes in operating assets and liabilities
    
    
    14,324
    
    
    
    14,951Other
    
    
    4,883
    
    
    
    (6,261
    )Net cash provided by operating activities
    
    
    17,064
    
    
    
    12,958Investing activities:Purchase of property, plant and equipment
    
    
    (2,395
    )
    
    
    (2,736
    )Proceeds from sale of property, plant and equipment
    
    
    2,179
    
    
    
    Net cash used for investing activities
    
    
    (216
    )
    
    
    (2,736
    )Financing activities:Net payments on revolving line of credit
    
    
    (7,700
    )
    
    
    (500
    )Dividends paid
    
    
    (2,216
    )
    
    
    (5,113
    )Other
    
    
    (420
    )
    
    
    Net cash used for financing activities
    
    
    (10,336
    )
    
    
    (5,613
    )Increase in cash and cash equivalents
    
    
    6,512
    
    
    
    4,609Cash and cash equivalents at beginning of period
    
    
    4,581
    
    
    
    2,473Cash and cash equivalents at end of period
    
    
    11,093
    
    
    
    7,082Cash held by discontinued operations
    
    
    (297
    )
    
    
    (431
    )Cash and cash equivalents held by continuing
operations at end of period
    
    $
    10,796
    
    
    $
    6,651
   6




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Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 Note A  Basis of Presentation and Summary of Significant Accounting Policies
    Note B  Fair Value Measurements
 Fair Value Measures and Disclosures
 Level 1 
    
    Financial assets and liabilities valued based on unadjusted quoted market prices for
identical assets and liabilities in an active market that the company has the ability to
access.Level 2 
    
    Financial assets and liabilities valued based on quoted prices in markets that are
not active or model inputs that are observable for substantially the full term of the
asset or liability.Level 3 
    
    Financial assets and liabilities valued based on prices or valuation techniques that
require inputs that are both unobservable and significant to the overall fair value
measurement.
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssets:Cash
equivalents  money market fund
    
    $
    1,093
    
    
    $
    
    
    
    $
    
    
    
    $
    1,093Cash value of life insurance
    
    
    16,487
    
    
    
    
    
    
    
    
    
    
    
    16,487Liabilities:Deferred compensation
    
    $
    13,076
    
    
    $
    
    
    
    $
    
    
    
    $
    13,076
  7




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Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 Note C  Inventories
  September 30,
    
    
    December 31,2009
    
    
    2008Finished goods
    
    $
    86,967
    
    
    $
    92,565Work in progress
    
    
    1,483
    
    
    
    1,791Raw materials
    
    
    1,818
    
    
    
    2,146Total
    
    
    90,268
    
    
    
    96,502Reserve for obsolete and excess inventory
    
    
    (11,802
    )
    
    
    (10,067
    )$
    78,466
    
    
    $
    86,435
 Note D  Credit agreement
    Note
E  Severance, Restructuring and Property Held for Sale
   8




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Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Severance
    
    $
    613
    
    
    $
    809
    
    
    $
    6,646
    
    
    $
    3,724Adjustment to prior year reserve
    
    
    
    
    
    
    
    
    
    
    (165
    )
    
    
    (42
    )Unclaimed property
    
    
    
    
    
    
    335
    
    
    
    
    
    
    
    3,935Other
    
    
    46
    
    
    
    
    
    
    
    141
    
    
    
    Total severance and other
    
    $
    659
    
    
    $
    1,144
    
    
    $
    6,622
    
    
    $
    7,617
    Nine Months Ended September 30,2009
    
    
    2008Balance at beginning of year
    
    $
    6,111
    
    
    $
    7,058Charged to earnings
    
    
    6,646
    
    
    
    3,724Cash paid
    
    
    (6,864
    )
    
    
    (4,655
    )Adjustment to prior year reserve
    
    
    (165
    )
    
    
    (42
    )Balance at end of the period
    
    $
    5,728
    
    
    $
    6,085
 Note F  Deferred Prosecution Agreement
   9




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Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 Note G  Comprehensive Income (loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    1,503
    
    
    $
    3,078
    
    
    $
    (2,598
    )
    
    $
    (22,206
    )Foreign currency translation adjustment
    
    
    784
    
    
    
    (310
    )
    
    
    1,974
    
    
    
    (422
    )Comprehensive income (loss)
    
    $
    2,287
    
    
    $
    2,768
    
    
    $
    (624
    )
    
    $
    (22,628
    )
 Note H  Stock Performance Rights
  Expected volatility
    
    56.4% to 110.8%Risk-free interest rate
    
    0.3% to 2.2%Expected term (in years)
    
    0.6 to 5.4Expected annual dividend
    
    $0.24
  Note I  Income Tax Expense
      10




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Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 Note J  Segment Reporting
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net salesMRO
    
    $
    81,359
    
    
    $
    103,489
    
    
    $
    244,748
    
    
    $
    314,512OEM
    
    
    13,766
    
    
    
    21,875
    
    
    
    44,791
    
    
    
    63,870Consolidated total
    
    $
    95,125
    
    
    $
    125,364
    
    
    $
    289,539
    
    
    $
    378,382Operating income (loss)MRO
    
    $
    4,453
    
    
    $
    10,085
    
    
    $
    7,383
    
    
    $
    25,754OEM
    
    
    (901
    )
    
    
    (2,787
    )
    
    
    (3,317
    )
    
    
    (2,003
    )Severance and other
    
    
    (659
    )
    
    
    (1,144
    )
    
    
    (6,622
    )
    
    
    (7,617
    )Settlement and related costs
    
    
    (23
    )
    
    
    (394
    )
    
    
    (114
    )
    
    
    (31,562
    )Consolidated total
    
    $
    2,870
    
    
    $
    5,760
    
    
    $
    (2,670
    )
    
    $
    (15,428
    )Other income
    
    
    110
    
    
    
    55
    
    
    
    886
    
    
    
    328Interest expense
    
    
    (132
    )
    
    
    (247
    )
    
    
    (474
    )
    
    
    (690
    )Income (loss) from continuing
operations before income taxes
    
    $
    2,848
    
    
    $
    5,568
    
    
    $
    (2,258
    )
    
    $
    (15,790
    )
 Note K  Contingencies
   11




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Quarter ended September 30, 2009 compared to Quarter ended September 30, 2008
  2009
    
    
    2008% of
    
    
    
    
    
    
    % of($ in thousands)
    
    Amount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    81,359
    
    
    
    85.5
    %
    
    $
    103,489
    
    
    
    82.6
    %OEM
    
    
    13,766
    
    
    
    14.5
    
    
    
    21,875
    
    
    
    17.4Consolidated total
    
    $
    95,125
    
    
    
    100.0
    %
    
    $
    125,364
    
    
    
    100.0
    %Gross profitMRO
    
    $
    53,784
    
    
    
    66.1
    %
    
    $
    69,630
    
    
    
    67.3
    %OEM
    
    
    2,613
    
    
    
    19.0
    
    
    
    1,459
    
    
    
    6.7Consolidated total
    
    
    56,397
    
    
    
    59.3
    
    
    
    71,089
    
    
    
    56.7Operating expenses:Selling, general and
administrative expenses
    
    
    52,845
    
    
    
    55.6
    
    
    
    63,791
    
    
    
    50.9Severance and other
    
    
    659
    
    
    
    0.7
    
    
    
    1,144
    
    
    
    0.9Settlement related costs
    
    
    23
    
    
    
    
    
    
    
    394
    
    
    
    0.3Operating income
    
    
    2,870
    
    
    
    3.0
    
    
    
    5,760
    
    
    
    4.6Other, net
    
    
    (22
    )
    
    
    
    
    
    
    (192
    )
    
    
    (0.2
    )Income from continuing
operations before income tax
expense
    
    
    2,848
    
    
    
    3.0
    
    
    
    5,568
    
    
    
    4.4Income tax expense
    
    
    1,327
    
    
    
    1.4
    
    
    
    2,500
    
    
    
    2.0Income from continuing operations
    
    $
    1,521
    
    
    
    1.6
    %
    
    $
    3,068
    
    
    
    2.4
    %
 Net Sales
   Gross Profit
   12




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Selling, General and Administrative Expenses (SG&A)
  Severance and Other
  Income Tax Expense
   13




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Nine months ended September 30, 2009 compared to Nine months ended September 30, 2008
  2009
    
    
    2008% of
    
    
    
    
    
    
    % of($ in thousands)
    
    Amount
    
    
    Net Sales
    
    
    Amount
    
    
    Net SalesNet salesMRO
    
    $
    244,748
    
    
    
    84.5
    %
    
    $
    314,512
    
    
    
    83.1
    %OEM
    
    
    44,791
    
    
    
    15.5
    
    
    
    63,870
    
    
    
    16.9Consolidated total
    
    $
    289,539
    
    
    
    100.0
    %
    
    $
    378,382
    
    
    
    100.0
    %Gross profitMRO
    
    $
    158,560
    
    
    
    64.8
    %
    
    $
    208,337
    
    
    
    66.2
    %OEM
    
    
    7,873
    
    
    
    17.6
    
    
    
    10,324
    
    
    
    16.2Consolidated total
    
    
    166,433
    
    
    
    57.5
    
    
    
    218,661
    
    
    
    57.8Operating expenses:Selling, general and
administrative expenses
    
    
    162,367
    
    
    
    56.1
    
    
    
    194,910
    
    
    
    51.5Severance and other
    
    
    6,622
    
    
    
    2.3
    
    
    
    7,617
    
    
    
    2.0Settlement and related costs
    
    
    114
    
    
    
    
    
    
    
    31,562
    
    
    
    8.4Operating loss
    
    
    (2,670
    )
    
    
    (0.9
    )
    
    
    (15,428
    )
    
    
    (4.1
    )Other, net
    
    
    412
    
    
    
    0.1
    
    
    
    (362
    )
    
    
    (0.1
    )Loss from continuing operations
before income tax expense
    
    
    (2,258
    )
    
    
    (0.8
    )
    
    
    (15,790
    )
    
    
    (4.2
    )Income tax expense
    
    
    244
    
    
    
    0.1
    
    
    
    5,853
    
    
    
    1.5Loss from continuing operations
    
    $
    (2,502
    )
    
    
    (0.9
    )%
    
    $
    (21,643
    )
    
    
    (5.7
    )%
 Net Sales
   Gross Profit
   14




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Selling, General and Administrative Expenses (SG&A)
  Severance and Other
   Settlement Related Costs
  Income Tax Expense
   15




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Liquidity and Capital Resources
          16




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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
  17




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SIGNATURES
  LAWSON PRODUCTS, INC.(Registrant)Dated: October 28, 2009
    
    \s\
Thomas J. NeriThomas J. NeriChief Executive OfficerDated: October 28, 2009
    
    \s\ F. Terrence BlanchardF. Terrence BlanchardChief Financial Officer
  18




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EXHIBIT INDEX
 Exhibit #
    
    Description31.1
    
    
    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