UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

----------------------------------

FORM 10-Q/A

(Amendment No. 1)

(Mark one)

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

or

o

TRANSITION REPORT PURSUANT TO 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.

(Exact name of registrant as specified in its charter)

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)

 

Registrant’s telephone no., including area code: (847) 827-9666

Not applicable

Former name, former address and former fiscal year, if changed since last report.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x  

No o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o          Accelerated Filer x          Non-accelerated filer  o 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).     Yes o          No x 

 

 



 

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of October 31, 2006, 8,511,022 shares of common stock were outstanding. 

 

 

 



 

EXPLANATORY NOTE

This amendment is being filed to correct typographical errors in the Form 10-Q of Lawson Products, Inc. for the period ended September 30, 2006 (filed with the Securities and Exchange Commission on November 9, 2006). The amount representing “Cost of goods sold” as reflected in the Condensed Consolidated Statements of Income for the three months ended September 30, 2006 was incorrectly reported in EDGAR as $5,194,000 rather than the correct amount of $52,194,000. Additionally, in the Condensed Consolidated Statements of Income, the duplicate line showing "Cumulative effect of accounting change" under the caption "Basic Income (Loss) per share of common stock" has been deleted.

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

LAWSON PRODUCTS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

September 30,

 

December 31,

(Amounts in thousands, except share data)

2006

 

2005

 


 


 

 

 

 

 

 

 

 

 

(UNAUDITED)

 

 

ASSETS

 

 

 

Current Assets:

 

 

 

Cash and cash equivalents

$20,142

 

$15,467

Accounts receivable, less allowance for doubtful accounts

62,673

 

60,102

Inventories

84,727

 

79,125

Miscellaneous receivables and prepaid expenses

5,862

 

10,958

Deferred income taxes

3,097

 

3,115

Discontinued current assets

603

 

1,462

 


 


 

 

 

 

Total Current Assets

177,104

 

170,229

 

 

 

 

 

Property, plant and equipment, less

 

 

 

allowances for depreciation and amortization

42,265

 

45,662

Deferred income taxes

18,533

 

16,009

Goodwill, less accumulated amortization

27,999

 

27,999

Other assets

21,143

 

19,322

Discontinued non-current assets

3

 

3

 


 


 

 

 

 

Total Assets

$287,047

 

$279,224

 


 


 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

Current Liabilities:

 

 

 

Accounts payable

$10,559

 

$9,380

Accrued expenses and other liabilities

38,844

 

41,495

Income taxes

1,668

 

---

Discontinued current liabilities

827

 

1,668

 


 


 

 

 

 

 

 

 



 

 

 

Total Current Liabilities

51,898

 

52,543

 


 


 

 

 

Accrued liability under security bonus plans

25,002

 

23,866

Other

18,090

 

17,390

 


 


 

 

 

 

 

43,092

 

41,256

 


 


 

 

 

 

 

 

 

 

Stockholders' 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-(2006-8,997,515

 

 

 

shares; 2005-8,972,041 shares)

8,998

 

8,972

 

 

 

 

Capital in excess of par value

4,787

 

4,137

 

 

 

 

Retained earnings

178,542

 

172,668

 

 

 

 

Accumulated other comprehensive loss

(270)

 

(352)

 


 


 

 

 

 

Total Stockholders' Equity

192,057

 

185,425

 


 


 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$287,047

 

$279,224

 


 


 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 



 

 

 

LAWSON PRODUCTS, INC. AND SUBSIDIARIES

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 


 


 

 

 

 

 

 

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$129,125

 

$116,965

 

$391,990

 

$334,580

 

 

Cost of goods sold

52,194

 

42,884

 

161,001

 

125,933

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

76,931

 

74,081

 

230,989

 

208,647

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

71,311

 

62,966

 

211,159

 

179,523

 

 

Loss on sale of equipment

---

 

---

 

806

 

---

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Operating income

5,620

 

11,115

 

19,024

 

29,124

 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income

223

 

102

 

1,204

 

608

 

 

Interest expense

---

 

(1)

 

---

 

(7)

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

and cumulative effect of accounting change

5,843

 

11,216

 

20,228

 

29,725

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

2,768

 

4,338

 

8,587

 

11,790

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

before cumulative effect of accounting change

3,075

 

6,878

 

11,641

 

17,935

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations,

net of income taxes

---

 

(288)

 

(12)

 

(781)

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Income before cumulative effect of accounting change

3,075

 

6,590

 

11,629

 

17,154

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change, net of income taxes

---

 

---

 

(361)

 

---

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Net income

$3,075

 

$6,590

 

$11,268

 

$17,154

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Income (Loss) per share

of common stock:

 

 

 

 

 

 

 

 

 

Continuing operations before

cumulative effect of accounting change

$0.34

 

$0.76

 

$1.30

 

$1.90

 

 

Discontinued operations

---

 

(0.03)

 

---

 

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change

---

 

---

 

(0.04)

 

---

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.34

 

$0.73

 

$1.25

 

$1.82

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Diluted Income (Loss) per share

of common stock:

 

 

 

 

 

 

 

 

 

Continuing operations before

cumulative effect of accounting change

$0.34

 

$0.76

 

$1.29

 

$1.89

 

 

Discontinued operations

----- 

 

(0.03) 

 

--- 

 

(0.08)

 

 

Cumulative effect of accounting change

---

 

---

 

(0.04)

 

---

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.34

 

$0.73

 

$1.25

 

$1.81

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share of common stock

$0.20

 

$0.20

 

$0.60

 

$0.60

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

8,998

 

9,018

 

8,987

 

9,440

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

9,004

 

9,035

 

8,993

 

9,468

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 



 

 

 

LAWSON PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

(UNAUDITED)

 

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

2006

 

2005

 


 


 

 

 

 

Operating activities:

 

 

 

Net income

$11,268

 

$17,154

Adjustments to reconcile net income to

 

 

 

net cash provided by operating activities:

 

 

 

Depreciation and amortization

6,196

 

5,018

Changes in operating assets and liabilities

(6,200)

 

(16,936)

Other

666

 

4,040

 


 


 

 

 

 

Net Cash Provided by Operating Activities

11,930

 

9,276

 


 


 

 

 

 

 

 

 

 

Investing activities:

 

 

 

Additions to property, plant and equipment

(3,593)

 

(4,491)

Other

356

 

---

 


 


 

 

 

 

Net Cash Used in Investing Activities

(3,237)

 

(4,491)

 


 


 

 

 

 

 

 

 

 

Financing activities:

 

 

 

Purchases of treasury stock

---

 

(12,897)

Payments on long term debt

---

 

(1,169)

Dividends paid

(5,389)

 

(5,440)

Other

676

 

392

 


 


 

 

 

 

Net Cash Used in Financing Activities

(4,713)

 

(19,114)

 


 


 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

3,980

 

(14,329)

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

16,297

(a)

28,872

 


 


 

 

 

 

 

 

 

 

 

 

 



 

 

 

Cash and Cash Equivalents at End of Period

20,277

 

14,543

Cash Held by Discontinued Operations

(135)

 

(710)

 


 


 

 

 

 

Cash and Cash Equivalents Held by

Continuing Operations at End of Period

$20,142

 

$13,833

 


 


 

 

 

 

 

 

 

 

(a) Includes $830 of cash and cash equivalents from discontinued operations

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 



 

 

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

A) Basis of Presentation and Summary of Critical Accounting Policies

As contemplated by the Securities and Exchange Commission, the accompanying consolidated financial statements and footnotes have been condensed and therefore, do not contain all disclosures required by generally accepted accounting principles. Reference should be made to Lawson Products, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2005. The Condensed Consolidated Balance Sheet as of September 30, 2006, the Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2006 and 2005 and the Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2006 and 2005 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) have been made, which are necessary to present fairly the results of operations for the interim periods. Operating results for the three and nine month periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

Certain amounts have been reclassified in the 2005 financial statements to conform to the 2006 presentation.

Stock-Based Compensation - Beginning January 1, 2006 the Company accounted for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, the Company measured share-based compensation cost based on the value of the award, at the grant date which is recognized as expense over the vesting period.

Stock-based compensation expense recognized in the Consolidated Statement of Income for the first nine months of fiscal 2006 is based on awards ultimately expected to vest, reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred. Judgment is required in estimating the amount of share-based awards that are expected to be forfeited. If actual forfeitures differ significantly from these estimates, stock-based compensation expense and the results of operations could be materially impacted.

Compensation expense for all stock-based compensation awards, including stock performance rights (“SPRs”) granted on or prior to January 1, 2006 will be recognized using the straight-line amortization method. Under the terms of the plan, employees and non-employee directors, who are retirement eligible, defined as age 65 or older, are permitted to retain their awards after retirement and exercise them during the remaining contractual life. Grants of share-based awards, with the retirement eligible provision, prior to the adoption of SFAS 123(R) will continue to be recognized as expense over the stated vesting period. Grants of share-based payments to employees and non-employee directors, after the adoption of SFAS 123(R) on January 1, 2006 will be recognized as expense over the requisite service period as determined by each individual grantee’s age at the time of grant. During the first nine months of 2006, the effect of this change in accounting policy on expense for SPRs granted in 2006 was $0.3 million.

Prior to adoption of SFAS 123(R), the Company accounted for stock options and SPRs under the ABP 25 method. As all options were awarded at an exercise price equal to the fair market value of company stock as of the grant date, there was no stock-based expense recorded. SPRs were valued at the intrinsic value of each SPR as of the reporting date, and the expense associated with these awards was included in the Company’s reported net income and net income per share.

 

 

 

 



 

 

B) Comprehensive Income

 

Comprehensive income (in thousands) was $3,104 and $6,966 for the third quarters of 2006 and 2005, respectively. Comprehensive income includes foreign currency translation adjustments, net of related income tax of $29 and $376 for the three months ended September 30, 2006 and 2005, respectively.

For the nine month periods ended September 30, 2006 and 2005, comprehensive income (in thousands) was $11,350 and $16,688, respectively. Comprehensive income (loss) includes foreign currency translation adjustments, net of related income tax of $82 and $(466) for the nine months ended September 30, 2006 and 2005, respectively.

C) Earnings Per Share

The calculation of dilutive weighted average shares outstanding for the three and nine months ended September 30, 2006 and 2005 are as follows (in thousands):

 

Three months ended September 30

 

2006

2005

 

 

 

Basic weighted average shares outstanding

8,998

9,018

Dilutive impact of options outstanding

6

17

 



 

 

 

 

 

 

Dilutive weighted average shares outstanding

9,004

9,035

 



 

 

 

 

 

 

 

 

 

 

Nine months ended September 30

 

2006

2005

 

 

 

Basic weighted average shares outstanding

8,987

9,440

Dilutive impact of options outstanding

6

28

 



 

 

 

Dilutive weighted average shares outstanding

8,993

9,468

 



 

 

 

 

 

 

 

 



 

 

D) Revolving Line of Credit

The revolving line of credit has a maximum borrowing capacity of $75 million and a maturity date of March 27, 2009. The revolving line of credit carries a floating interest rate of prime minus 150 basis points or LIBOR plus 75 basis points, at the Company’s option. Interest is payable quarterly on prime rate borrowings and at contract expirations for LIBOR borrowings. The line of credit contains certain financial covenants regarding interest coverage, minimum stockholders’ equity and working capital, all of which the Company was in compliance with at September 30, 2006. The Company had no borrowings under the line at September 30, 2006 and December 31, 2005.

E) Reserve for Severance

 

The table below shows an analysis of the Company’s reserves for severance and related payments, included in selling, general and administrative expenses, for the first nine months of 2006 and 2005:

In thousands

2006

2005

 

 

 

Balance at beginning of year

$    216

$ 1,042

Charged to earnings

760

---

Cash paid

(148)

(686)

Adjustment to reserves

(153)

---

 



 

 

 

 

 

 

Balance at September 30

$    675

$    356

 



 

 

 

 

 

 

 

In the third quarter of 2006 the Company recorded one-time severance benefits of $0.8 related to the termination of employees in connection with the Company’s process improvement initiatives. These initiatives include a streamlined distribution process and upgraded information systems to improve efficiencies.

 

The severance costs are primarily related to the Maintenance, Repair and Replacement distribution in North America (MRO) segment. The Company estimates the severance costs for 2006 will be approximately $0.9 million.

 

 



 

 

F) Intangible Assets

 

Intangible assets subject to amortization, included within other assets, were as follows (in thousands):

 

September 30, 2006

 

Gross

Balance

Accumulated

Amortization

Net Carrying Amount

 

 

 

 

Trademarks and tradenames

$    1,000

$      275

$        725

Non-compete covenant

1,000

150

850

 




 

 

 

 

 

 

 

 

 

$    2,000

$      425

$    1,575

 




 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2005

 

Gross

Balance

Accumulated

Amortization

Net Carrying Amount

 

 

 

 

Trademarks and tradenames

$     1,000

$     237

$        763

Non-compete covenant

1,000

---

1,000

 

 

 

 

 




 

 

 

 

 

$     2,000

$     237

$     1,763

 




 

 

 

 

 

 

 

 

Trademarks and tradenames are being amortized over 15 years. The non-compete covenant is being amortized over 5 years. Amortization expense for intangible assets is expected to be $250,000 for 2006 and for each of the next four years.

 

G) Stock-Based Compensation

As of January 1, 2006 the Company has adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the recognition of compensation expense related to the fair value of our stock-based compensation awards. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as of January 1, 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

 

For the three and nine months ended September 30, 2005, the Company complied with FASB Statement No.148, “Accounting for Stock Based Compensation – Transition and Disclosure,” which required interim disclosure to show the effect on net income and net income per share as required by FASB Statement No. 123, “Accounting for Stock-Based Compensation.” For the nine months ended September 30, 2005, no fair

 



 

value expense was reported for options as they were fully vested at December 31, 2004. As a result, there was no pro forma expense reported under the fair value method.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes including cumulative effect of accounting change and net income for the three months ended September 30, 2006 are $0.5 million and $0.3 million lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the three months ended September 30, 2006 are $0.03 lower than if the Company had continued to account for share-based compensation under Opinion 25. The Company’s income before income taxes including cumulative effect of accounting change and net income for the nine months ended September 30, 2006, are $1.9 million and $1.1 million lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the nine months ended September 30, 2006 are $0.12 lower than if the Company had continued to account for share-based compensation under Opinion 25.

 

The Incentive Stock Plan (“Plan”), provides for the issuance of incentive compensation to non-employee directors, officers and key employees in the form of stock options, stock performance rights, stock purchase agreements and stock awards. As of December 31, 2005, 493,859 shares of common stock were available for issuance under the Plan.

Stock Options

The following is a summary of the activity in the Company’s stock options during the nine months ended September 30, 2006:

 

Average Option

 

 

Exercise Price

# of Options

 

 

 

 

 

 

Outstanding December 31, 2005

$22.83

37,200 

Granted

 

---

Exercised

22.50

(2,800)

Forfeited

 

---

Cancelled

 

---

 

 


 

Outstanding March 31, 2006

$22.86

34,400 

 

 

 

 

 

 

Granted

 

---

Exercised

22.50

(17,900)

Forfeited

22.50

(500)

Cancelled

 

---

 

 

 

Outstanding June 30, 2006

$23.27

16,000 

 



 

 

 

 

 

 

Granted

 

---

Exercised

 

---

Forfeited

 

---

 

 

 



 

 

 

Cancelled

 

---

 

 

 

Outstanding September 30, 2006

$23.27

16,000 

 

 

 

 

 

 

 

Average

 

Exercisable Options at:

Price

Option Shares

 

 

 

 

 

 

December 31, 2005

$22.83

37,200 

September 30, 2006

$23.27

16,000 

 

The aggregate intrinsic value for options outstanding and exercisable as of September 30, 2006 is $0.3 million.

The aggregate intrinsic value for options exercised during the first nine months of 2006 was $0.3 million.

As of September 30, 2006, the Company had the following outstanding options:

 

Exercise Price

$2.75

$22.44

$23.56

 

 

 




 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

1,000

7,000

8,000

 

 

Weighted Average Exercise Price

$26.75

$22.44

$23.56

 

 

Weighted Average Remaining Life

1.6

2.9

3.6

 

 

Options Exercisable

1,000

7,000

8,000

 

Weighted Average Exercise Price

$26.75

$22.44

$23.56

 

 

 

 

 

 

 

 

 

As of December 31, 2004, all outstanding stock options were fully vested, and no remaining unrecognized compensations expense is to be recorded in 2006.

Stock Performance Rights

The Company grants SPRs pursuant to the Plan to selected executives and outside directors. These SPRs have exercise prices ranging from $38.67 to $41.55 per right granted in 2005 and $44.02 per right granted in 2006. These SPRs vest at 20% to 33% per year and entitle the recipient to receive a cash payment equal to the excess of the market value of the Company’s common stock over the SPR exercise price when the SPRs are surrendered.

Employees and non-employee directors who are retirement eligible, defined as age 65 or older, are permitted to retain their awards after retirement and exercise them during the remaining contractual life.

Grants of SPRs, with the retirement eligible provision, prior to the adoption of SFAS 123(R) will continue to be recognized as expense over the vesting period.

 

 



 

 

Grants of SPRs, with the retirement eligible provision, after the adoption of SFAS 123(R) on January 1, 2006 will be recognized as expense on the grant date. During the first nine months of 2006 expense for these SPRs was $0.3 million.

As required by SFAS 123(R), the SPRs outstanding as of January 1, 2006 have been remeasured at fair value using the Black-Scholes valuation model. Compensation expense (included in selling, general and administrative expenses) for the SPRs in the three months ended September 30, 2006 was $0.5 million and for the first nine months of 2006 was $1.9 million which included $0.6 million for the cumulative effect resulting from the adoption of SFAS 123(R).

The following is a summary of the activity in the Company’s SPRs during the nine months ended September 30, 2006:

 

Average SPR

 

 

Exercise Price

# of SPRs

 

 

 

Outstanding December 31, 2005 (1)

$29.57

206,250 

Granted

 

---

Exercised

26.91

(1,000)

Forfeited

 

---

Cancelled

 

---

 



 

 

 

Outstanding March 31, 2006 (2)

$29.59

205,250 

 

 


 

 

 

Granted

44.02

35,000

Exercised

26.68

(4,050)

Forfeited

 

---

Cancelled

 

---

 

 


 

 

 

Outstanding June 30, 2006 (3)

$31.77

236,200 

 

 


 

 

 

 

 

 

Granted

 

---

Exercised

26.85

(6,800)

Forfeited

 

---

Cancelled

 

---


 


 

 

 

Outstanding September 30, 2006 (4)

$31.92

229,400 

 

 


 

 

 

(1) Includes 128,180 SPRs vested at December 31, 2005 at a weighted average exercise price of $26.98 per share.

(2) Includes 127,180 SPRs vested at March 31, 2006 at a weighted average exercise price of $27.32 per share.

(3) Includes 135,730 SPRs vested at June 30, 2006 at a weighted average exercise price of $28.40 per share.

(4) Includes 131,730 SPRs vested at September 30, 2006 at a weighted average exercise price of $28.45 per share.

 

 

 



 

 

The aggregate intrinsic value of SPRs outstanding as of September 30, 2006 is $1.7 million. Unrecognized compensation cost related to non-vested SPRs was $0.7 million at September 30, 2006, which will be recognized over a weighted average period of 1.3 years.

 

Valuation Information

The Company estimated the fair value of SPRs using the Black-Scholes valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The weighted-average estimated value of SPRs outstanding as of September 30, 2006 was $16.59 per SPR using the Black-Scholes valuation model with the following assumptions:

 

September 30, 2006

 


 

 

 

 

Expected volatility

35.67% to 37.87%

Risk-free interest rate

4.59% to 4.70%

Expected term (in years)

2.1 to 5.7

Expected dividend yield

1.91%

 

The Company based the calculation of expected volatility on the historic volatility of the Company’s stock price, adjusted to reflect the expected term of each SPR grant. The Company based the risk-free interest rate on the U.S. Treasury yield curve in effect at September 30, 2006, adjusted to reflect the expected term of each SPR grant.

H) Loss on Sale of Equipment

In the second quarter of 2006, the Company incurred a loss of $0.8 million ($0.5 million, net of tax) on the sale of equipment related to the Company’s decision to outsource the manufacturing of a product line in the Company’s OEM business. Net book value for the disposed equipment totaled $1.0 million.

I) Legal Proceedings

In December, 2005, the FBI executed a search warrant for records at the Company’s offices and informed the Company that it was conducting an investigation as to whether any of the Company’s representatives improperly provided gifts or awards to purchasing agents (including government purchasing agents) through the Company’s customer loyalty programs. The U.S. Attorney’s office for the Northern District of Illinois subsequently issued a subpoena for documents in connection with this investigation. The Company’s internal investigation regarding these matters has consisted of a review of the Company’s records and interviews with Company employees and independent agents and is not complete. In conjunction with the Company’s internal investigation, several customer loyalty programs have been terminated because the Company believes that these programs provided or had the potential of providing promotional considerations, such as gifts and awards, to purchasing agents that the Company has deemed inappropriate. The Company has modified another customer loyalty program to limit the amount and nature of customer gifts distributed under the program. In addition, the Company has terminated one sales employee and fifteen independent agents in connection with its investigation. The Company is cooperating with the ongoing investigation of the U.S. Attorney, however, the Company cannot predict when the investigation will be completed or what the outcome or the effect of the investigation will be. The outcome of the investigation could result in criminal sanctions or civil remedies against the Company, including material fines, injunctions or the loss of the Company’s ability to conduct business with governmental entities.

 

 

 

 



 

 

J) Segment Reporting

The Company has two reportable segments: Maintenance, Repair and Replacement distribution in North America (MRO), and Original Equipment Manufacturer distribution and manufacturing in North America (OEM).

The Company’s MRO distribution segment distributes a wide range of MRO parts to repair and maintenance organizations primarily through the Company’s force of independent field sales agents, as well as inside sales personnel. The MRO segment includes Rutland Tool and Supply Co. (“Rutland”) acquired by the Company in December 2005.

The Company’s OEM segment manufactures and distributes component parts to OEM manufacturers through a network of independent manufacturers’ representatives as well as internal sales personnel.

The Company’s reportable segments are distinguished by the nature of products, types of customers, and manner of servicing customers.

The Company evaluates performance and allocates resources to reportable segments primarily based on operating income.

Financial information for the Company’s reportable segments consisted of the following:

 

Three Months Ended

September 30

 

 


 

 

 

 

 

 

 

In thousands

2006

2005

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

MRO

$     106,043

$     95,849

 

OEM

23,082

21,116

 

 



 

 

 

 

 

  

 

 

 

Consolidated total

$     129,125

$   116,965

 

 



 

 

 

 

 

 

 

 

 

Operating income

 

 

 

MRO

$         4,792

$       10,167

 

OEM

828

948

 

 



 

 

 

 

 

 

 

 

 

Consolidated total

$         5,620

$      11,115

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

The reconciliation of segment profit to consolidated income from continuing operations before income taxes and cumulative effect of accounting change consisted of the following:

 

Three Months Ended

September 30

 


 

 

 

 

In thousands

2006

2005




 

 

 

 

 

 

Total operating income from continuing operations from reportable segments

$         5,620

$         11,115

Investment and other income

223

102

Interest expense

---

(1)

 



 

 

 

 

 

 

Income from continuing operations before income taxes and cumulative effect of accounting change

$         5,843

$         11,216

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

September 30

 


 

 

 

 

In thousands

2006

2005

 



 

 

 

 

 

 

Net sales

 

 

MRO

$    322,350

$    273,407

OEM

69,640

61,173

 



 

 

 

 

 

 

Consolidated total

$    391,990

$    334,580

 



 

 

 

 

 

 

Operating income

 

 

MRO

$      16,115

$      25,686

OEM

2,909

3,438

 



 

 

 

 

 

 

Consolidated total

$      19,024

$      29,124

 



 

 

 

 

 

 

 

 

 



 

 

The reconciliation of segment profit to consolidated income from continuing operations before income taxes and cumulative effect of accounting change consisted of the following:

 

Nine Months Ended

September 30

 


 

 

 

 

In thousands

2006

2005




 

 

 

 

 

 

Total operating income from continuing operations from reportable segments

$       19,024

$       29,124

Investment and other income

1,204

608

Interest expense

---

(7)

 



 

 

 

 

 

 

Income from continuing operations before income taxes and cumulative effect of accounting change

$       20,228

$       29,725

 



 

 

 

 

 

 

 

Asset information for continuing operations related to the Company’s reportable segments consisted of the following:

In thousands

September 30,

2006

December 31,

2005




 

 

 

 

 

 

Total assets

 

 

MRO

$     212,702

$     208,333

OEM

52,109

50,302

 



 

 

 

 

 

 

Total for reportable segments

264,811

258,635

Corporate

21,630

19,124

 



 

 

 

 

 

 

Consolidated total

$    286,441

$    277,759

 



 

 

 

 

 

 

 

At September 30, 2006 and December 31, 2005, the carrying value of goodwill within each reportable segment was as follows (in thousands):

MRO

$        25,748

OEM

2,251

 


 

 

 

 

Consolidated total

$       27,999

 


 

 

 

 

 



 

 

K) Subsequent Event

On October 12, 2006 the Company announced the final results of its modified “Dutch Auction” tender offer to purchase up to 1,000,000 shares of its outstanding common stock at a price not less than $37.50 and not greater than $43.00 per share, which expired at midnight, New York City time, on October 5, 2006. Based on the final count by the depositary for the tender offer, 486,493 shares of common stock, including shares that were tendered through notice of guaranteed delivery, were properly tendered and not withdrawn at or below $43.00 per share. These tendered shares represent 5.4% of the shares outstanding as of October 11, 2006. The Company accepted for purchase 486,493 shares in the tender offer at the price of $43.00 per share. The tendered shares were paid for through $13.0 million of funding from the Company’s revolving credit line and $7.9 million cash from operations. The tendered shares were retired by the Company.

 

 



 

 

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Lawson Products, Inc.

We have reviewed the condensed consolidated balance sheet of Lawson Products, Inc. and subsidiaries as of September 30, 2006 and the related condensed consolidated statements of income for the three and nine month periods ended September 30, 2006 and 2005 and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Lawson Products, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated March 10, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/

ERNST & YOUNG LLP

Chicago, Illinois

November 3, 2006

 

 

 



 

 

Safe Harbor” Statement under the Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues”, “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the impact of governmental investigations, such as the investigation by the U.S. Attorney's office for the Northern District of Illinois; excess and obsolete inventory; disruptions of the company's information systems; risks of rescheduled or cancelled orders; increases in commodity prices; the influence of controlling stockholders; competition and competitive pricing pressures; the effect of general economic conditions and market conditions in the markets and industries the company serves; the risks of war, terrorism, and similar hostilities; and, all of the factors discussed in the Company's "Risk Factors" set forth in its Annual Report on Form 10-K for the year ended December 31, 2005, as updated in the Company’s Form 10-Q for the quarter ended June 30, 2006.

 

The Company undertakes no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.

 

 



 

 

PART II – OTHER INFORMATION

 Item 6. Exhibits

 

15

Letter from Ernst & Young LLP Regarding Unaudited Interim Financial Information

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 2002

31.2

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 2002

 

32

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

 

 

 



 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

LAWSON PRODUCTS, INC.

 

 

(Registrant)

 

 

 

 

 

 

Date: November 16, 2006 

 

/s/ Robert J. Washlow

 

 


 

 

 

 

 

Robert J. Washlow

 

 

Chief Executive Officer and Chairman of the Board

 

 

 

 

 

 

Date: November 16, 2006 

 

/s/ Scott F. Stephens

 

 


 

 

 

 

 

Scott F. Stephens

 

 

Chief Financial Officer

 

 

 

 

 

 

November 16, 2006

Exhibit 15

 

 

Board of Directors and Shareholders

Lawson Products, Inc.

 

 

We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 33-17912 dated November 4, 1987) of Lawson Products, Inc. and subsidiaries of our report dated November 3, 2006 relating to the unaudited condensed consolidated interim financial statements of Lawson Products, Inc. and subsidiaries which are included in the Form 10-Q/A for the quarter ended September 30, 2006.

 

Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933.

 

/s/

ERNST & YOUNG LLP

Chicago, Illinois

 

 

 

Exhibit 31.1

 

CERTIFICATIONS

 

I, Robert J. Washlow, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q/A of Lawson Products, Inc.;

 

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.             The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.             The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: November 16, 2006

 

/s/ Robert J. Washlow

Robert J. Washlow

Chief Executive Officer

 

 

 

Exhibit 31.2

CERTIFICATIONS

 

I, Scott F. Stephens, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q/A of Lawson Products, Inc.;

 

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.             The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.             The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: November 16, 2006

 

/s/ Scott F. Stephens

Scott F. Stephens

Chief Financial Officer

 

 

 

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Lawson Products, Inc. (the "Company") on Form 10-Q/A for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

 

/s/ Robert J. Washlow

Robert J. Washlow, Chief Executive Officer

 

/s/ Scott F. Stephens

Scott F. Stephens

Chief Financial Officer

 

November 16, 2006