e10vq
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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 March 31, 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.
(Exact name of registrant as specified in its charter)
     
Delaware   36-2229304
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
1666 East Touhy Avenue, Des Plaines, Illinois   60018
     
(Address of principal executive offices)   (Zip Code)
(847) 827-9666
(Registrant’s telephone number, including area code)
     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 þ      No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o      No þ
     The number of shares outstanding of the registrant’s common stock, $1 par value, as of April 30, 2008 was 8,522,001.
 
 

 


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     “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 recently announced investigation by 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, 2007.
     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.

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Letter Regarding Unaudited Interim Financial Information
       
Certification
       
Certification
       
Certification
       

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PART I-FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
                 
    March 31,     December 31,  
(Amounts in thousands, except share and per share data)   2008     2007  
    (UNAUDITED)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 2,549     $ 1,671  
Accounts receivable, less allowance for doubtful accounts
    56,888       58,882  
Inventories
    97,768       96,785  
Miscellaneous receivables and prepaid expenses
    8,043       10,303  
Deferred income taxes
    3,010       3,226  
Discontinued current assets
    1,003       1,064  
 
           
Total current assets
    169,261       171,931  
 
               
Property, plant and equipment, less accumulated depreciation and amortization
    52,158       53,031  
Deferred income taxes
    20,515       21,344  
Goodwill
    27,999       27,999  
Other assets
    24,571       25,558  
 
           
 
               
Total assets
  $ 294,504     $ 299,863  
 
           
 
               
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 16,700     $ 16,266  
Revolving line of credit
    15,500       11,000  
Accrued expenses and other liabilities
    34,616       45,254  
Discontinued current liabilities
    333       322  
 
           
Total current liabilities
    67,149       72,842  
 
           
 
               
Accrued liability under security bonus plans
    25,993       25,491  
Other
    24,528       27,169  
 
           
 
    50,521       52,660  
 
           
 
               
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 - 8,522,001 shares in 2008 and 2007
    8,522       8,522  
Capital in excess of par value
    4,774       4,774  
Retained earnings
    163,270       160,606  
Accumulated other comprehensive income
    268       459  
 
           
Total stockholders’ equity
    176,834       174,361  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 294,504     $ 299,863  
 
           
See notes to condensed consolidated financial statements.

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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
                 
    For the  
    Three Months Ended  
    March 31,  
(Amounts in thousands, except per share data)   2008     2007  
Net sales
  $ 125,004     $ 129,669  
Cost of goods sold
    51,742       53,842  
 
           
Gross profit
    73,262       75,827  
 
               
Operating expenses:
               
Selling, general and administrative expenses
    64,713       65,961  
Severance and other charges
    602       1,721  
 
           
Operating income
    7,947       8,145  
 
               
Investment and other income
    108       102  
Interest expense
    (229 )     (81 )
 
           
Income from continuing operations before income taxes
    7,826       8,166  
 
               
Income tax expense
    3,302       3,440  
 
           
 
               
Income from continuing operations
    4,524       4,726  
 
               
Loss from discontinued operations, net of income taxes
    (155 )     (156 )
 
           
 
               
Net income
  $ 4,369     $ 4,570  
 
           
 
               
Basic income (loss) per share of common stock:
               
Continuing operations
  $ 0.53     $ 0.55  
Discontinued operations
    (0.02 )     (0.02 )
 
  $ 0.51     $ 0.54  
 
           
 
               
Diluted income (loss) per share of common stock:
               
Continuing operations
  $ 0.53     $ 0.55  
Discontinued operations
    (0.02 )     (0.02 )
 
  $ 0.51     $ 0.54  
 
           
 
               
Cash dividends declared per share of common stock
  $ 0.20     $ 0.20  
 
           
 
               
Weighted average shares outstanding:
               
Basic
    8,522       8,521  
 
           
Diluted
    8,523       8,524  
 
           
See notes to condensed consolidated financial statements.

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Lawson Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    For the  
    Three Months Ended  
    March 31,  
(Amounts in thousands)   2008     2007  
Operating activities:
               
Net income
  $ 4,369     $ 4,570  
Adjustments to reconcile net income to net cash used for operating activities:
               
Depreciation and amortization
    2,142       1,920  
Changes in operating assets and liabilities
    (5,006 )     (16,637 )
Other
    (2,234 )     917  
 
           
 
               
Net cash used for operating activities
    (729 )     (9,230 )
 
           
 
               
Investing activities:
               
Additions to property, plant and equipment
    (1,206 )     (3,528 )
 
           
 
               
Net cash used for investing activities
    (1,206 )     (3,528 )
 
           
 
               
Financing activities:
               
Proceeds from revolving line of credit, net of payments
    4,500       11,000  
Dividends paid
    (1,704 )     (1,704 )
 
           
 
               
Net cash provided by financing activities
    2,796       9,296  
 
           
 
               
Increase (decrease) in cash and cash equivalents
    861       (3,462 )
 
               
Cash and cash equivalents at beginning of period
    2,473       4,320  
 
           
 
               
Cash and cash equivalents at end of period
    3,334       858  
 
Cash held by discontinued operations
    (785 )     (639 )
 
           
 
               
Cash and cash equivalents held by continuing operations at end of period
  $ 2,549     $ 219  
 
           
See notes to condensed consolidated financial statements.

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Lawson Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
Note A — Basis of Presentation and Summary of Significant Accounting Policies
     The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they 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, 2007. The Condensed Consolidated Balance Sheet as of March 31, 2008, the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2008 and 2007 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-month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
     FIN 48 — We account for uncertain tax positions in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which requires that the Company recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. In addition, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. See Note I — Income Tax Expense to the Condensed Consolidated Financial Statements for additional detail on our uncertain tax positions.
     There have been no significant changes in our significant accounting policies during the three months ended March 31, 2008 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Note B — Comprehensive Income
     Comprehensive income was $4,178 and $4,629 for the first quarters of 2008 and 2007, respectively. Comprehensive income was negatively impacted by foreign currency translation adjustments of $191 in 2008 and positively impacted by foreign currency translation adjustments of $59 for the three-month period ended March 31, 2007.
     Accumulated other comprehensive income consists only of foreign currency translation adjustments, net of related income tax.
Note C — Earnings Per Share
     The calculation of dilutive weighted average shares outstanding for the three months ended March 31, 2008 and 2007 are as follows (in thousands):
                 
    Three months ended March 31
    2008   2007
Basic weighted average shares outstanding
    8,522       8,521  
Dilutive impact of options outstanding
    1       3  
 
               
Dilutive weighted average shares outstanding
    8,523       8,524  
 
               

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Note 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. At March 31, 2008, the effective rate was 3.75 percent. 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 March 31, 2008. The Company had $15.5 million of borrowings under the line of credit at March 31, 2008.
Note E — Reserve for Severance
     The table below shows the changes in the Company’s reserves for severance and related payments, included in accrued expenses and other liabilities on the balance sheet as of March 31, 2008 and 2007:
                 
    2008     2007  
Balance at beginning of year
  $ 7,058     $ 962  
Charged to earnings
    602       279  
Cash paid
    (1,315 )     (604 )
Adjustment to reserves
    (42 )     (120 )
 
           
 
               
Balance at March 31
  $ 6,303     $ 517  
 
           
     The charge to earnings in 2008 of $602 is related to severance costs associated with the departure of two executives. The charge to earnings in 2007 of $279 is related to severance costs arising from initiatives implemented in the first quarter of 2007 to improve domestic operational efficiencies. Severance costs in both years are related to the Maintenance, Repair and Operations distribution in North America (MRO) segment.

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Note F — Intangible Assets
     Intangible assets subject to amortization, included within other assets, were as follows (in thousands):
                         
    March 31, 2008  
                    Net  
    Gross     Accumulated     Carrying  
    Balance     Amortization     Amount  
Trademarks and tradenames
  $ 1,400     $ 750     $ 650  
Non-compete covenant
    1,000       450       550  
 
                 
 
  $ 2,400     $ 1,200     $ 1,200  
 
                 
                         
    December 31, 2007  
                    Net  
    Gross     Accumulated     Carrying  
    Balance     Amortization     Amount  
Trademarks and tradenames
  $ 1,400     $ 737     $ 663  
Non-compete covenant
    1,000       400       600  
 
                 
 
  $ 2,400     $ 1,137     $ 1,263  
 
                 
     Trademarks and tradenames are being amortized over 15 years. The non-compete covenant associated with the 2005 acquisition of Rutland is being amortized over 5 years. Amortization expense, all of which is included in the MRO distribution segment, for these intangible assets is expected to be $250 per year for each of the next three years and $50 per year thereafter until the trademarks and tradenames are fully amortized.
Note G — Stock-Based Compensation
     The Stock Performance Plan (the “Plan”) provides for the issuance of incentive compensation to non-employee directors, officers and key employees in the form of stock performance rights (“SPRs”).
Stock Performance Rights
     SPRs vest at 20 percent to 33 percent 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. The Company estimates the fair value of SPRs using the Black-Scholes valuation model each quarter. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The weighted-average estimated fair value of SPRs outstanding at March 31, 2008 was $6.61 per SPR with the following assumptions:
         
    March 31, 2008
Expected volatility
  38.77% to 48.65%
Risk-free interest rate
  1.57% to 2.66%
Expected term (in years)
  1.4 to 6.0
Expected dividend yield
  2.90%

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     In the first quarter of 2008 and 2007, a reduction to compensation expense for outstanding SPRs of $1.2 million and $0.7 million was recorded and included in selling, general and administrative expenses, respectively.
     The following is a summary of the activity in the Company’s SPRs during the quarter:
                 
    Average SPR        
    Exercise Price     # of SPRs  
Outstanding December 31, 2007 (1)
  $ 34.17       209,250  
Granted
    25.43       86,500  
Exercised
    27.08       (28,000 )
 
           
 
               
Outstanding March 31, 2008 (2)
  $ 32.09       267,750  
 
           
 
(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.
     The aggregate intrinsic value of SPRs outstanding as of March 31, 2008 is $(0.4) million.
     As of March 31, 2008, there was $0.8 million of unrecognized compensation cost related to non-vested SPRs, which will be recognized over a weighted average period of 1.7 years.
     Stock-based compensation expense recognized in the Condensed Consolidated Statements of Income for the first quarter of fiscal 2008 and 2007 has been reduced for estimated forfeitures. Forfeitures are 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.

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Stock Options
     The following is a summary of the activity in the Company’s stock options during the quarter:
                 
    Average Option        
    Exercise Price     # of Options  
Outstanding December 31, 2007
  $ 23.11       5,000  
Granted
           
Exercised
           
Forfeited/expired/cancelled
           
 
           
 
               
Outstanding March 31, 2008
  $ 23.11       5,000  
                 
    Weighted    
    Average    
Exercisable options at:   Price   Option Shares
December 31, 2007
  $ 23.11       5,000  
March 31, 2008
  $ 23.11       5,000  
     As of March 31, 2008, the Company had the following outstanding options:
                 
Exercise price
  $ 23.56     $ 22.44  
 
           
 
               
Options outstanding:
    3,000       2,000  
Weighted average exercise price
  $ 23.56     $ 22.44  
Weighted average remaining life (in years)
    2.1       1.4  
Options exercisable:
    3,000       2,000  
Weighted average exercise price
  $ 23.56     $ 22.44  
     As of December 31, 2007, all outstanding stock options were fully vested, and no remaining unrecognized compensation expense is to be recorded in 2008.

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Note H — Segment Reporting
     The Company has two reportable segments: Maintenance, Repair and Operations distribution in North America (MRO), and Original Equipment Manufacturer distribution and manufacturing in North America (OEM). The Company’s reportable segments are distinguished by the nature of products, types of customers, and manner of servicing customers.
     The Company’s MRO distribution segment supplies 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 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 evaluates performance and allocates resources to reportable segments primarily based on operating income.
     The following table presents summary financial information for the Company’s reportable segments:
                 
    Three Months Ended  
    March 31  
    2008     2007  
Net sales
               
MRO
  $ 104,538     $ 106,286  
OEM
    20,466       23,383  
 
           
 
               
Consolidated total
  $ 125,004     $ 129,669  
 
           
 
               
Operating income
               
MRO
  $ 7,494     $ 6,273  
OEM
    453       1,872  
 
           
 
               
Consolidated total
  $ 7,947     $ 8,145  
 
           
     The reconciliation of segment profit for continuing operations to consolidated income before income taxes consisted of the following:
                 
    Three Months Ended  
    March 31  
    2008     2007  
Total operating income from reportable segments
  $ 7,947     $ 8,145  
Investment and other income
    108       102  
Interest expense
    (229 )     (81 )
 
           
 
               
Income from continuing operations before income taxes
  $ 7,826     $ 8,166  
 
           

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     Asset information for continuing operations related to the Company’s reportable segments consisted of the following:
                 
    March 31,     December 31,  
    2008     2007  
Total assets
               
MRO
  $ 216,447     $ 221,274  
OEM
    53,529       52,955  
 
           
 
               
Total for reportable segments
    269,976       274,229  
Corporate
    23,525       24,570  
 
           
 
               
Consolidated total
  $ 293,501     $ 298,799  
 
           
     At March 31, 2008 and December 31, 2007, the carrying value of goodwill within each reportable segment was as follows (in thousands):
         
MRO
  $ 25,748  
OEM
    2,251  
 
     
Consolidated total
  $ 27,999  
 
     
Note I — Income Tax Expense
     At December 31, 2007, the Company had $923 in unrecognized tax benefits, the recognition of which would have an effect of $923 on the effective tax rate. At March 31, 2008, the Company had $923 in unrecognized tax benefits, the recognition of which would have an effect of $923 on the effective tax rate.
     Due to the uncertainty of both timing and resolution of income tax examinations, the Company is unable to determine whether any amounts included in the March 31, 2008 balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve months.
     The Company’s continuing practice is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company had $1,364 accrued for interest and penalties at both March 2008 and December 2007.
     The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and international jurisdictions. As of March 31, 2008, the Company is subject to U.S. federal income tax, non-U.S. income tax and state and local income tax examinations for the tax years 2000 through 2006.
Note J — 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. In April 2007, thirteen people, including seven former sales agents of the Company, were indicted on federal criminal charges, including mail fraud, in connection with the U.S. Attorney’s investigation. These indictments allege that, under the Company’s customer loyalty programs, sales agents would provide cash gift certificates to individuals purchasing Company merchandise on behalf of their employers as a way to increase their commissions and prices paid by customers. All of the cases involve commissioned sales agents of the Company. All seven of the indicted former sales agents have entered guilty pleas to federal criminal charges. Although the Company was not charged in connection with these indictments, the U.S. Attorney has announced that its investigation is continuing.

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     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 were 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, twenty-three independent agents have been terminated or have resigned and the Company has terminated four employees. 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.
          

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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Lawson Products, Inc.
     We have reviewed the condensed consolidated balance sheet of Lawson Products, Inc. and subsidiaries as of March 31, 2008 and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2008 and 2007. 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 the 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 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, 2007, 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, 2008, 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, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
Chicago, Illinois
April 30, 2008

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter ended March 31, 2008 compared to Quarter ended March 31, 2007
     The following table presents a summary of the Company’s financial performance for the first quarters of 2008 and 2007:
                                 
            % of             % of  
(Dollars in thousands)   2008     Net Sales     2007     Net Sales  
Net sales
  $ 125,004       100.0     $ 129,669       100.0  
Cost of goods sold
    51,742       41.4       53,842       41.5  
 
                       
Gross profit
    73,262       58.6       75,827       58.5  
Operating expenses:
                               
Selling, general and administrative expenses
    64,713       51.8       65,961       50.9  
Severance and other charges
    602       0.5       1,721       1.3  
 
                       
Operating income
    7,947       6.4       8,145       6.3  
Other, net
    (121 )     (0.1 )     21       0.0  
 
                       
Income from continuing operations before income tax expense
    7,826       6.3       8,166       6.3  
Income tax expense
    3,302       2.6       3,440       2.7  
 
                       
Income from continuing operations
    4,524       3.6       4,726       3.6  
Loss from discontinued operations
    (155 )     (0.1 )     (156 )     (0.1 )
 
                       
Net income
  $ 4,369       3.5     $ 4,570       3.5  
 
                       
Net Sales and Gross Profit
     Net sales for the three-month period ended March 31, 2008 decreased 3.6 percent to $125.0 million, from $129.7 million in the same period of 2007.
     The following table presents the Company’s net sales results for its Maintenance, Repair and Operations distribution (MRO) and Original Equipment Manufacturer (OEM) businesses for the first quarter of 2008 and 2007:
                 
(Dollars in millions)   2008     2007  
MRO
  $ 104.5     $ 106.3  
OEM
    20.5       23.4  
 
           
 
  $ 125.0     $ 129.7  
 
           
     MRO net sales decreased $1.8 million or 1.7 percent in the first quarter of 2008, to $104.5 million from $106.3 million in the prior year period. MRO net sales declined primarily as a result of lower sales in metal working products and chemicals. Order fulfillment problems encountered at the Company’s Reno, Nevada distribution center into the end of 2007 and early in 2008 resulted in customer defections. Order fulfillment rates returned to historical levels at the Reno facility at the end of the first quarter 2008, and the Company has implemented a targeted campaign to win-back lost customers.
     OEM net sales decreased $2.9 million in the first quarter of 2008, to $20.5 million from $23.4 million in the prior year period. The sales decline was primarily attributable to customers that were lost in 2007. There were no OEM customers lost in the first quarter of 2008.
     Gross profit margins for the first quarter 2008 of 58.6 percent were slightly higher compared to 58.5 percent gross profit margins in the first quarter of 2007.

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Operating Expenses and Operating Income
Selling, General and Administrative Expenses (“SG&A”)
     SG&A expenses were $64.7 million and 51.8 percent of sales for the first quarter of 2008 compared to $66.0 million and 50.9 percent of sales in the prior year period. The $1.3 million reduction in first quarter SG&A expenses primarily reflects lower variable selling costs associated with lower sales in the current quarter. In addition, compensation costs were reduced by $1.2 million in the first quarter of 2008 compared to $0.2 million of expense in the prior year quarter, in conjunction with the Company’s long-term performance based incentive plans and stock performance rights. The first quarter 2008 compensation cost reductions reflected the Company’s lower financial performance and stock price.
     The Company incurred legal expenses of $0.8 million in the first quarter of 2008 and $1.1 million in the prior year quarter in conjunction with the ongoing investigation by the U.S. Attorney’s Office for the Northern District of Illinois related to whether Company sales representatives provided improper gifts or awards to purchasing agents (including government purchasing agents) through the Company’s customer loyalty programs. This investigation is ongoing and the Company expects to incur legal costs throughout the remainder of 2008 related to this matter. See Note J to the Condensed Consolidated Financial Statements for additional information.
Severance and Other Charges
     In the first quarter of 2008, the Company recorded $0.6 million of severance costs associated with the departure of two executives. In the first quarter of 2007, the Company recorded $1.7 million of severance and other charges, including $1.4 million of compensation expense related to the retirement of its former President and Chief Operating Officer.
Operating Income
     Operating income for the three-month period ended March 31, 2008 declined to $7.9 million, from $8.1 million in the same period of 2007. This $0.2 million decrease in operating income is principally due to lower gross profit of $2.6 million, offset by $2.4 million of lower operating expenses. The factors affecting these items are discussed above.
Income Tax Expense
     The effective tax rates for the quarters ended March 31, 2008 and 2007 were comparable at 42.2% and 42.1%, respectively.
Income from Continuing Operations
     Income from continuing operations for the first quarter of 2008 decreased 4.3%, to $4.5 million compared to $4.7 million in the comparable period of 2007. This $0.2 million decrease in operating income is principally due to lower gross profit of $2.6 million, offset by $2.4 million of lower operating expenses.
Loss from Discontinued Operations
     Loss from discontinued operations of $0.2 million for the first quarter of 2008 and 2007 reflects the impact of operating losses and costs associated with the closure of the Company’s Mexico operations.

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Liquidity and Capital Resources
     Net cash used for operations was $0.7 million in the first quarter of 2008 and $9.2 million for the first quarter of 2007. The $8.5 million reduction in cash used for operations as compared to the prior period is primarily due to improvements in working capital utilization.
     Net cash used for investing activities decreased $2.3 million for the three-month period ended March 31, 2008 compared to the prior year period reflecting lower capital expenditures in the first quarter of 2008. Capital expenditures in 2008 of $1.2 million were principally related to improvement of existing facilities and the purchase of related equipment. For the 2007 period, capital expenditures of $3.5 million were principally related to the Reno, Nevada facility expansion, which was completed in 2007.
     Net cash provided by financing activities in the first quarter of 2008 was $2.8 million compared to $9.2 million the first quarter of 2007, reflecting borrowings and payments on the Company’s revolving line of credit.
     Working capital, including cash and cash equivalents, at March 31, 2008 was $102.1 million as compared to $99.1 million at December 31, 2007. At March 31, 2008 and December 31, 2007, the current ratio was 2.5 to 1 and 2.4 to 1, respectively.
     The Company announced a cash dividend of $.20 per common share in the first quarter of 2008, equal to the cash dividend of $.20 per share announced in the first quarter of 2007.
     Cash from operations and a $75 million unsecured revolving line of credit have been sufficient to fund operating requirements, cash dividends and capital expenditures. The Company had $15.5 million outstanding as of March 31, 2008 under its revolving line of credit. Cash from operations and the revolving line of credit are also expected to finance the Company’s future operations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     There have been no material changes in market risk at March 31, 2008 from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
     The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding financial disclosures. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2008 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION
ITEMS 2, 3, 4 and 5 of Part II are inapplicable and have been omitted from this report.
ITEM 1. 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. In April 2007, thirteen people, including seven former sales agents of the Company, were indicted on federal criminal charges, including mail fraud, in connection with the U.S. Attorney’s investigation. These indictments allege that, under the Company’s customer loyalty programs, sales agents would provide cash gift certificates to individuals purchasing Company merchandise on behalf of their employers as a way to increase their commissions and prices paid by customers. All of the cases involve commissioned sales agents of the Company. All seven of the indicted former sales agents have entered guilty pleas to federal criminal charges. Although the Company was not charged in connection with these indictments, the U.S. Attorney has announced that its investigation is continuing.
     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 were 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, twenty-three independent agents have been terminated or have resigned and the Company has terminated four employees. 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.
ITEM 1A. RISK FACTORS
If the Company is unable to successfully conclude the pending governmental investigation of the Company, the Company’s business, financial condition, results of operations and stock price could be adversely affected.
     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. In April 2007, thirteen people, including seven former sales agents of the Company, were indicted on federal criminal charges, including mail fraud, in connection with the U.S. Attorney’s investigation. These indictments allege that, under the Company’s customer loyalty programs, sales agents would provide cash gift certificates to individuals purchasing Company merchandise on behalf of their employers as a way to increase their commissions and prices paid by customers. All of the cases involve commissioned sales agents of the Company. All seven of the indicted former sales agents have entered guilty pleas to federal criminal charges. Although the Company was not charged in connection with these indictments, the U.S. Attorney has announced that its investigation is continuing.

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     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 were 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, twenty-three independent agents have been terminated or have resigned and the Company has terminated four employees. 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.

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ITEM 6. EXHIBITS
     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

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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)
 
 
Dated April 30, 2008  /s/ Thomas J. Neri    
  Thomas J. Neri    
  Chief Executive Officer   
 
         
     
Dated April 30, 2008  /s/ Scott F. Stephens    
  Scott F. Stephens    
  Chief Financial Officer   
 

23

exv15
 

Exhibit 15
April 30, 2008
Board of Directors
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 April 30, 2008 relating to the unaudited condensed consolidated interim financial statements of Lawson Products, Inc. and subsidiaries which are included in its Form 10-Q for the quarterly period ended March 31, 2008.
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

 

exv31w1
 

Exhibit 31.1
CERTIFICATIONS
I, Thomas J. Neri, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Lawson Products, Inc. (the “registrant”); 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 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 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: April 30, 2008
     
/s/ Thomas J. Neri
   
 
Thomas J. Neri
   
Chief Executive Officer
   

 

exv31w2
 

Exhibit 31.2
CERTIFICATIONS
I, Scott F. Stephens, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Lawson Products, Inc. (the “registrant”);
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 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 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: April 30, 2008
     
/S/ Scott F. Stephens
   
 
Scott F. Stephens
   
Chief Financial Officer
   

 

exv32
 

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 for the period ending March 31, 2008 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.
         
     
April 30, 2008  /s/ Thomas J. Neri    
  Thomas J. Neri   
  Chief Executive Officer   
 
     
  /s/ Scott F. Stephens    
  Scott F. Stephens   
  Chief Financial Officer