Distribution Solutions (DSGR) 10-Q/A 2006 Q3 Quarterly report (amended)

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 SECTION13 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