10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934

For quarterly period ended September 30, 2012

or

¨ 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 incorporation or organization)	(I.R.S. Employer Identification No.)
8770 W. Bryn Mawr Avenue, Chicago, Illinois	60631
(Address of principal executive offices)	(Zip Code)

(773) 304-5050

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of shares outstanding of the registrant’s common stock, $1 par value, as of October 15, 2012 was 8,597,554.

“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:

• failure to retain a talented workforce including productive sales representatives;

• the inability of management to successfully implement strategic initiatives;

• failure to manage change;

• the ability to meet the covenant requirements of our line of credit;

• disruptions of the Company’s information and communication systems;

• the effect of general economic and market conditions;

• inventory obsolescence;

• work stoppages and other disruptions at transportation centers or shipping ports;

• changing customer demand and product mixes;

• increases in commodity prices;

• the influence of controlling stockholders;

• violations of environmental protection regulations;

• a negative outcome related to employment tax matters; and,

all other factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2011 and in this Quarterly Report on Form 10-Q for the period ended September 30, 2012.

The Company undertakes no obligation to update any such factors 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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TABLE OF CONTENTS

		Page #
PART I - FINANCIAL INFORMATION
Item 1	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011		4
	Condensed Consolidated Statements of Operations for the Three and Nine months Ended September 30, 2012 and 2011 (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2012 and 2011 (Unaudited)		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3	Quantitative and Qualitative Disclosures about Market Risk		20
Item 4	Controls and Procedures		20
PART II - OTHER INFORMATION
Item 1A	Risk Factors		21
Item 6	Exhibits Index		21
SIGNATURES			22

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Lawson Products, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	September 30,			December 31,
	2012			2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	774		$	2,116
Accounts receivable, less allowance for doubtful accounts		36,553			43,239
Inventories, net		54,596			55,498
Miscellaneous receivables and prepaid expenses		5,425			7,064
Deferred income taxes		—			5,716
Property held for sale		1,869			—
Discontinued operations		401			410
Total current assets		99,618			114,043
Property, plant and equipment, net		66,920			52,702
Cash value of life insurance		14,740			15,490
Deferred income taxes		40			11,864
Goodwill		—			28,148
Other assets		939			501
Total assets	$	182,257		$	222,748
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving line of credit	$	19,639		$	—
Accounts payable		16,634			22,967
Accrued expenses and other liabilities		33,765			28,231
Discontinued operations		429			681
Total current liabilities		70,467			51,879
Security bonus plan	$	19,736		$	23,310
Deferred compensation		6,055			9,279
Financing lease obligation		10,995			3,377
Other liabilities		6,096			731
		42,882			36,697
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 - 8,604,173 and 8,580,753 shares, respectively Outstanding - 8,597,554 and 8,574,291 shares, respectively		8,604			8,581
Capital in excess of par value		6,723			6,210
Retained earnings		51,042			117,371
Treasury stock – 6,619 and 6,462 shares, respectively		(132	)		(130	)
Accumulated other comprehensive income		2,671			2,140
Stockholders’ equity		68,908			134,172
Total liabilities and stockholders’ equity	$	182,257		$	222,748

See notes to condensed consolidated financial statements.

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Lawson Products, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net sales	$	71,984		$	75,366		$	222,294		$	242,099
Cost of goods sold		28,624			32,820			100,784			101,315
Gross profit		43,360			42,546			121,510			140,784
Operating expenses:
Selling, general and administrative expenses		43,311			45,335			132,777			137,026
Severance expenses		1,410			282			8,180			1,492
Gain on sale of assets		(11	)		—			(2,133	)		—
Goodwill impairment		—			—			28,306			—
		44,710			45,617			167,130			138,518
Operating income (loss)		(1,350	)		(3,071	)		(45,620	)		2,266
Other income (expense), net		23			59			(73	)		138
Interest expense		(229	)		(79	)		(453	)		(662	)
Income (loss) from continuing operations before income taxes		(1,556	)		(3,091	)		(46,146	)		1,742
Income tax (benefit) expense		(240	)		(937	)		18,095			758
Income (loss) from continuing operations		(1,316	)		(2,154	)		(64,241	)		984
Discontinued operations, net of income taxes		(2	)		(9	)		(32	)		(61	)
Net income (loss)	$	(1,318	)	$	(2,163	)	$	(64,273	)	$	923
Basic income (loss) per share of common stock:
Continuing operations	$	(0.15	)	$	(0.25	)	$	(7.49	)	$	0.12
Discontinued operations		—			—			—			(0.01	)
Net income (loss) per share	$	(0.15	)	$	(0.25	)	$	(7.49	)	$	0.11
Diluted income (loss) per share of common stock:
Continuing operations	$	(0.15	)	$	(0.25	)	$	(7.49	)	$	0.11
Discontinued operations		—			—			—			—
Net income (loss) per share	$	(0.15	)	$	(0.25	)	$	(7.49	)	$	0.11
Basic weighted average shares outstanding		8,597			8,566			8,581			8,549
Dilutive effect of stock based compensation		—			—			—			62
Diluted weighted average shares outstanding		8,597			8,566			8,581			8,611
Cash dividends declared per share of common stock	$	—		$	0.12		$	0.24		$	0.36
Net Comprehensive loss	$	(976	)	$	(3,812	)	$	(63,742	)	$	(318	)

See notes to condensed consolidated financial statements.

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Lawson Products, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
Operating activities:
Net income (loss)	$	(64,273	)	$	923
Loss from discontinued operations		32			61
Income (loss) from continuing operations		(64,241	)		984
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization		5,281			3,955
Deferred income taxes		17,538			1,328
Stock based compensation		(740	)		(406	)
Goodwill impairment		28,306			—
Gain on sale of property		(2,133	)		—
Changes in operating assets and liabilities:
Accounts receivable		5,422			(6,941	)
Inventories		1,087			2,642
Prepaid expenses and other assets		1,636			2,068
Accounts payable and other liabilities		(3,839	)		(11,957	)
Other		1,404			(120	)
Net cash used in operating activities of continuing operations	$	(10,279	)	$	(8,447	)
Investing activities:
Additions to property, plant and equipment	$	(16,492	)	$	(8,918	)
Net proceeds (outlay) related to sale of businesses		750			(192	)
Proceeds from sale of property		8,807			—
Net cash used in investing activities of continuing operations	$	(6,935	)	$	(9,110	)
Financing activities:
Net proceeds from line of credit	$	19,639		$	—
Dividends paid		(3,086	)		(3,071	)
Financing fees paid		(435	)		—
Net cash provided by (used in) financing activities of continuing operations	$	16,118		$	(3,071	)
Net cash used in operating activities of discontinued operations	$	(246	)	$	(678	)
Decrease in cash and cash equivalents		(1,342	)		(21,306	)
Cash and cash equivalents at beginning of period		2,116			40,566
Cash and cash equivalents at end of period	$	774		$	19,260

See notes to condensed consolidated financial statements.

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Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”) 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In the opinion of the Company, all normal recurring adjustments have been made, that 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported. The effect of restricted share awards and future stock option exercises equivalent to 11 thousand and 34 thousand shares for the three and nine months ended September 30, 2012, respectively and 51 thousand shares for the three months ended September 30, 2011, would have been anti-dilutive and therefore, were excluded from the computation of diluted earnings per share.

The Company has adopted Accounting Standards Update (“ASU”) No. 2011-05 and 2011-12 regarding the presentation of comprehensive income in the financial statements. No other material changes occurred in our significant accounting policies during the nine months ended September 30, 2012 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2011. The Company has determined that except for the sale of our Des Plaines, Illinois facility (See Note 11- Subsequent Event), there were no other subsequent events to recognize or disclose in these financial statements.

Note 2 — Inventories, net

The Company increased its obsolete and excess inventory reserves by $5.4 million for the nine months ended September 30, 2012 primarily as a result of the discontinuation of certain products. Components of inventories were as follows:

	(Amounts in thousands)
	September 30, 2012			December 31, 2011
Finished goods	$	61,407		$	56,985
Work in progress		2,030			1,935
Raw materials		1,626			1,624
Total		65,063			60,544
Reserve for obsolete and excess inventory		(10,467	)		(5,046	)
	$	54,596		$	55,498

Note 3 — Sale of assets and property held for sale

In the second quarter of 2012, in conjunction with the construction of a new distribution center in McCook, Illinois and the relocation of the Company’s headquarters to Chicago, Illinois, the Company sold three properties; its Addison, Illinois distribution center, its Vernon Hills, Illinois distribution center and a Des Plaines, Illinois administrative building. The Company received cash proceeds of $8.8 million for the sale of the three facilities, which were included in the MRO segment, resulting in a gain of $2.1 million. Operations currently conducted at the Addison, Illinois and Vernon Hills, Illinois distribution centers will be transferred to the new McCook, Illinois facility during the fourth quarter of 2012 and the first quarter of 2013. The Company has entered into various arrangements to lease these facilities back from the buyer for transition purposes until the second quarter of 2013.

In addition to these three property sales, the Company allowed the lease of another Des Plaines, Illinois facility to expire during the second quarter of 2012 and it was actively marketing its former Des Plaines, Illinois headquarters and packaging facility. The net book value of the former headquarters’ land and

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building of $1.9 million has been reclassified to Property held for sale in the Condensed Consolidated Balance Sheets and has not been depreciated after being classified as held for sale. This property was sold subsequent to September 30, 2012 (See Note 11 – Subsequent Event).

Note 4 — Goodwill Impairment

As a result of an acquisition in 2001, the Company had goodwill of $28.3 million, all of which related to its MRO segment. On an interim basis, the Company evaluates goodwill for potential impairment by determining if certain qualitative events have occurred or if circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value. As a result of this evaluation, the Company identified indicators of impairment during the second quarter of 2012 related to operating losses and reduced market capitalization and, therefore, performed an interim impairment test of goodwill.

The Company estimated the fair value of the MRO reporting unit using a discounted cash flow analysis based on its current internal operating forecast to determine the reporting unit’s fair value. After completing the analysis, the Company concluded that the entire amount of the goodwill was impaired and a non-cash charge of $28.3 million was recorded in the second quarter of 2012.

Goodwill activity for the nine months ended September 30, 2012 was as follows:

	Nine Months Ended September 30, 2012
Beginning balance	$	28,148
Impairment loss		(28,306	)
Translation adjustment		158
Ending balance	$	—

Note 5 — Credit Facility

In the third quarter of 2012, the Company entered into a five-year, $40.0 million credit facility (“Credit Facility”). The Credit Facility consists of a $40.0 million revolving credit facility which includes a $10.0 million sub-facility for Letters of Credit. Until the later of June 30, 2014 or when the Company achieves certain financial covenants, credit available under the Credit Facility is based upon:

a) 80% of the face amount of the Company’s eligible accounts receivables, generally less than 60 days past due, and

b) 50% of the lower of cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within 18 months or $20.0 million, whichever is less.

The applicable interest rate margins for borrowings under the Credit Facility are at the Prime rate or the LIBOR rate plus 2.75% for the first year and LIBOR plus 2.50% for the second year of the agreement. Following the second year, the interest rate will be based on the Company’s debt to EBITDA ratio and range from LIBOR plus 1.25 to 1.85 percent or Prime minus 1.00 to 0.40 percent.

The Credit Facility is secured by a first priority perfected security interest in substantially all existing assets of the Company. Dividends are restricted to $0 to $1,100,000 per quarter based on EBITDA achieved in the previous quarter compared to specified target amounts.

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In addition to other customary representations, warranties and covenants, the Credit Facility requires the Company to comply with certain financial covenants. A minimum Consolidated EBITDA level, as defined in the Credit Facility, must be achieved on a quarterly basis as detailed in the following table:

Quarter Ended	Minimum EBITDA
September 30, 2012	$	(1,000,000	)
December 31, 2012		(1,500,000	)
March 31, 2013		0
June 30, 2013		2,000,000
September 30, 2013		3,500,000
December 31, 2013		3,000,000
March 31, 2014		3,500,000
June 30, 2014		3,500,000

Upon meeting certain financial covenants, but not prior to June 30, 2014, the availability under the Credit Facility will be based upon the following covenants with a maximum borrowing level of $40.0 million:

a) Minimum Debt Service Coverage Ratio of 1.20:1.00 measured quarterly beginning June 30, 2014 and building cumulatively to a rolling four quarters.

b) Minimum Tangible Net Worth of not less than 90% of the value of shareholders’ equity less intangible assets established as of June 30, 2014, tested quarterly.

c) Minimum cash, accounts receivable and inventory to debt ratio of 2.0 to 1.0.

For the period ended September 30, 2012, EBITDA, as defined in the Credit Facility, was $0.7 million which was in compliance with the minimum EBITDA covenant of $(1.0) million for the quarter.

At September 30, 2012, the Company had an outstanding balance of $19.6 million under the revolving line of credit of its Credit Facility and additional borrowing availability of $16.8 million. The weighted average interest rate was 2.0% through the first nine months of 2012 and the outstanding balance approximates fair value.

Note 6 — Severance Reserve

During the three and nine month periods ended September 30, 2012, the Company recorded $1.4 million and $8.2 million in severance charges, respectively, related to its MRO segment. These charges consisted of $1.3 million related to the retirement of the Company’s former President and Chief Executive Officer and $6.9 million related to the elimination of corporate and distribution positions primarily as a result of a strategic restructuring plan designed to reduce the Company’s cost structure.

The table below shows the changes in the Company’s reserve for severance and related payments as of September 30, 2012 and 2011:

	(Amounts in thousands)
	Nine Months Ended September 30,
	2012			2011
Balance at beginning of period	$	1,282		$	3,062
Charged to earnings		8,180			1,492
Cash paid		(3,938	)		(2,715	)
Balance at end of the period	$	5,524		$	1,839

Accrued severance charges are included in the line items of the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 as follows:

	(Dollars in thousands)
	September 30,		December 31,
	2012		2011
Accrued expenses and other liabilities	$	3,975	$	1,187
Noncurrent other		1,549		95
Total accrued severance	$	5,524	$	1,282

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All severance accrued at September 30, 2012 will be fully paid by September 30, 2014.

Note 7 — Income Tax

Due the substantial cumulative losses that the Company recorded over the past several quarters, the Company determined that it was more likely than not that the Company will not be able to utilize its deferred tax assets to offset future taxable income. Therefore, during the nine months ended September 30, 2012, the Company increased its deferred tax valuation allowance by $33.6 million. Substantially all future taxable income will be subject to this tax valuation allowance until the Company can establish that the recoverability of its deferred tax assets is more certain.

Income tax benefit as a percentage of pre-tax loss for the three months ended September 30, 2012 was 15.4% compared to an effective tax rate of 30.3% for the three months ended September 30, 2011. Income tax as a percentage of pre-tax loss for the nine months ended September 30, 2012 was negative 39.2% compared to a tax rate of 43.5% for the nine months ended September 30, 2011. Exclusive of the effect of the increase in the tax valuation allowances, the effective income tax rate would have been 33.6%.

The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax of multiple state and foreign jurisdictions. As of September 30, 2012, the Company is subject to U.S. Federal income tax examinations for the years 2009 and 2010, and income tax examinations from various other jurisdictions for the years 2006 through 2010.

Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise would subject the Company to both U.S. Federal and state income taxes, as adjusted for tax credits and foreign withholding taxes.

Note 8 — Contingent Liability

One of the Company’s subsidiaries, Drummond American LLC (“Drummond”), is under an employment tax examination for the years 2007 and 2008 of the long-standing treatment of its sales representatives as independent contractors. In January 2012 the Company received a Notice of Proposed Adjustment in the amount of $9.5 million, including penalties, from the IRS challenging Drummond’s position that the sales representatives were independent contractors. The Company disagreed with the IRS position and filed an administrative appeal with the IRS Appeals Office.

Although the Company intends to vigorously defend its position for the treatment of its sales representatives as independent contractors, the Company established a liability of $1.2 million during 2011 as its best estimate of the cost to resolve the matter with the IRS. The notice of Proposed Adjustment was determined by applying the full statutory rates and penalties, rather than applying the reduced tax rates provided by section 3509 of the Internal Revenue Code (“IRC”). The Company believes the use of reduced tax rates is mandatory for all IRS worker classification assessments, except when the employer intentionally disregarded its employment tax obligations. Because the Company believes it fully complied with its employment tax obligations, the Company based its estimated loss at the reduced tax rates. The Company applied these reduced tax rates against only one year because any settlement resolution would likely be limited to one year as this is consistent with the IRS’s settlement practices. The Company has assessed its potential exposure for other subsidiaries and time periods and has concluded that an additional liability is not probable. No adjustment has been proposed by the IRS for any other time periods or subsidiaries of the Company.

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The case has been assigned to the Chicago Appeals Office. The first meeting with the Appeals Office will likely happen in the fourth quarter of 2012. The Company is unable to establish an estimated time frame in which the case will be resolved through the appeals process. An unfavorable outcome of this matter could have a material adverse effect on the Company’s business, financial condition and results of operations.

Note 9 — Non-Cash Items

During the nine months ended September 30, 2012, the Company recorded an $8.0 million increase in Property, plant and equipment, along with a corresponding increase in liabilities, related to the build-to-suit lease of the McCook, Illinois distribution center. These non-cash increases have been excluded from the Condensed Consolidated Statements of Cash Flows.

Note 10 — Segment Reporting

The Company has two reportable operating segments: MRO and OEM. The Company’s MRO segment is a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations marketplace. The Company’s OEM segment manufactures, sells and distributes production and specialized component parts to the original equipment marketplace. The Company’s two reportable segments are distinguished by the nature of products distributed and sold, types of customers and manner of servicing them. 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:

	(Amounts in thousands)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net sales
MRO	$	67,863		$	71,490		$	209,057		$	231,370
OEM		4,121			3,876			13,237			10,729
Consolidated total	$	71,984		$	75,366		$	222,294		$	242,099
Operating income (expense)
MRO	$	(1,710	)	$	(3,422	)	$	(20,993	)	$	1,634
OEM		349			351			1,546			632
Gain on sale of assets		11			—			2,133			—
Goodwill impairment		—			—			(28,306	)		—
Consolidated total	$	(1,350	)	$	(3,071	)	$	(45,620	)	$	2,266
Other income (expense), net		23			59			(73	)		138
Interest expense		(229	)		(79	)		(453	)		(662	)
Income (loss) from continuing operations before income taxes	$	(1,556	)	$	(3,091	)	$	(46,146	)	$	1,742

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The following table presents total assets for the Company’s reportable segments:

	(Amounts in thousands)
	September 30,		December 31,
	2012		2011
Total assets
MRO	$	170,923	$	194,422
OEM		10,893		10,336
Segment total		181,816		204,758
Corporate		40		17,580
Discontinued operations		401		410
Consolidated total	$	182,257	$	222,748

Note 11 — Subsequent Event

On October 5, 2012, the Company received cash proceeds of $3.4 million from the sale of its Des Plaines, Illinois packaging and administrative building, resulting in a gain of approximately $1.6 million. This facility was a component of the Company’s MRO segment.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The MRO business is significantly influenced by the overall strength of the manufacturing sector of the U.S. economy. One measure used to gauge the strength of the industrial products market is the Purchasing Manufacturers Index (‘PMI’) published by the Institute for Supply Management. The PMI has declined to an average of 50.3 in the third quarter of 2012 compared to 52.1 in the third quarter of 2011 indicating a slowdown in the growth rate from a year ago. The MRO industry is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors.

During the third quarter, we made significant progress in our cost control and margin improvement efforts as previously announced in June 2012. As a result, operating results improved on a sequential basis over the second quarter of 2012 primarily as a result of the reduction of approximately 100 positions and improvement of gross margin through freight recoveries, and managing net customer pricing and other product related costs. For the third quarter of 2012, operating loss was $1.35 million, which included $1.41 million of severance expense, compared to a loss of $3.1 million a year ago. Excluding the severance expenses for the quarter, operating income would have been $0.1 million.

Quarter ended September 30, 2012 compared to quarter ended September 30, 2011

The following table presents a summary of our financial performance for the three months ended September 30, 2012 and 2011:

	2012						2011
($ in thousands)	Amount			% of Net Sales			Amount			% of Net Sales
Net sales
MRO	$	67,863			94.3	%	$	71,490			94.9	%
OEM		4,121			5.7			3,876			5.1
Consolidated total	$	71,984			100.0	%	$	75,366			100.0	%
Gross profit
MRO	$	42,495			62.6	%	$	41,742			58.4	%
OEM		865			21.0			804			20.7
Consolidated total		43,360			60.2			42,546			56.5
Operating expenses:
Selling, general and administrative expenses
Selling expenses		20,336			28.3			21,235			28.2
General and administrative expense		22,975			31.9			24,100			32.0
Total SG&A		43,311			60.2			45,335			60.2
Severance expenses		1,410			1.9			282			0.4
Gain on sale of assets		(11	)		—			—			—
Total operating expenses		44,710			62.1			45,617			60.6
Operating loss		(1,350	)		(1.9	)		(3,071	)		(4.1	)
Other expense, net		(206	)		(0.3	)		(20	)		—
Loss from continuing operations before income tax expense		(1,556	)		(2.2	)		(3,091	)		(4.1	)
Income tax benefit		(240	)		(0.3	)		(937	)		(1.2	)
Loss from continuing operations	$	(1,316	)		(1.8	)%	$	(2,154	)		(2.9	)%

13

Net Sales

Net sales for the third quarter of 2012 decreased 4.5% to $72.0 million, from $75.4 million in the third quarter of 2011. Excluding the Canadian exchange rate impact, net sales decreased 4.4% for the quarter.

MRO net sales decreased 5.1% in the third quarter of 2012, to $67.9 million from $71.5 million in the prior year period. MRO average daily sales decreased to $1.077 million in the third quarter of 2012 compared to $1.117 million in the third quarter of 2011. Of the $3.6 million decrease in sales, approximately $1.9 million was due to an increase in the number of vacant sales territories from a year ago, $1.1 million was due to one less selling day in the third quarter of 2012 compared to 2011 and $0.6 million from lower freight revenue. Government sales decreased $0.7 million from the prior year quarter primarily from lower sales to state and local agencies. National accounts increased 5.0% or $0.4 million versus a year ago primarily due to additional sales to existing customers. Our automotive segment grew $0.7 million driven by growth in our larger accounts.

OEM net sales increased 6.3% in the third quarter of 2012, to $4.1 million from $3.9 million in the prior year period, driven by stronger demand from existing customers.

Gross Profit

Gross profit increased 1.9% in the third quarter of 2012, to $43.4 million from $42.5 million in the prior year period.

MRO gross profit as a percent of net MRO sales increased to 62.6% in the third quarter of 2012, compared to 58.4% in the third quarter of 2011 primarily due to an improved focus on managing net customer pricing and other product related costs, as well as managing the liquidation of discontinued products better than anticipated. We expect that our gross margin percentage will be under pressure in the future as we continue to increase the percentage of national accounts in our customer mix and due to on-going competitive pressures. However, we do not anticipate that our decision to discontinue certain inventoried products, as announced in the second quarter, will have a material negative impact on our sales or gross margins as the majority of these products will either have suitable substitute items available or be offered on a drop-ship basis with similar pricing to our customers.

OEM gross profit increased $0.1 million and increased as a percent of OEM sales to 21.0% in the third quarter of 2012 from 20.7% in the third quarter of 2011. The improvement as a percent of sales was primarily driven by cost leverage gained from a higher sales volume from existing customers.

Selling, General and Administrative Expenses

Selling Expenses

Selling expenses consist of commissions paid to our independent sales representatives, employee sales expenses and related expenses to support our sales efforts. Selling expenses decreased $0.9 million to $20.3 million in the third quarter of 2012 from $21.2 million in the prior year quarter, primarily due to lower sales. Selling expenses as a percent of sales increased slightly to 28.3% in the third quarter of 2012 compared to 28.2% in the third quarter of 2011 due to the impact of fixed selling costs on the decreased sales levels.

General and Administrative Expenses

General and administrative expenses consist of expenses to operate our distribution network and overhead expenses to manage the business. General and administrative expenses decreased $1.1 million to $23.0 million in the third quarter of 2012 from $24.1 million in the prior year quarter. An increase in depreciation and facility costs of $1.3 million was more than offset by $1.8 million of lower ERP related expenses in 2012 compared to 2011 and a net decrease of $0.6 million in other general and administrative costs as we continue to focus on controlling costs.

14

Severance Expenses

We recorded severance expense of $1.4 million in the third quarter of 2012, primarily related to the retirement of our former President and Chief Executive Officer, compared to $0.3 million of severance expense recorded in the prior year quarter.

Other Expense, net

Other expense, net of $0.2 million for the three months ended September 30, 2012 consists primarily of interest charged on the outstanding borrowings under our revolving line of credit.

Income Tax Expense

An income tax benefit of $0.2 million was recorded in the three months ended September 30, 2012 on a pre-tax loss of $1.6 million, resulting in an effective tax rate of 15.4%. For the three months ended September 30, 2011, income tax benefit was $0.9 million on pre-tax loss of $3.1 million, resulting in an effective tax rate of 30.3%.

Income (Loss) from Continuing Operations

We reported a loss from continuing operations of $1.3 million or a loss of $0.15 per diluted share in the third quarter of 2012 compared to a loss from continuing operations of $2.2 million or $0.25 per diluted share in the third quarter of 2011.

15

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

The following table presents a summary of our financial performance for the nine months ended September 30, 2012 and 2011:

	2012						2011
($ in thousands)	Amount			% of Net Sales			Amount			% of Net Sales
Net sales
MRO	$	209,057			94.0	%	$	231,370			95.6	%
OEM		13,237			6.0			10,729			4.4
Consolidated total	$	222,294			100.0	%	$	242,099			100.0	%
Gross profit
MRO	$	118,518			56.7	%	$	138,675			59.9	%
OEM		2,992			22.6			2,109			19.7
Consolidated total		121,510			54.7			140,784			58.2
Operating expenses:
Selling, general and administrative expenses
Selling expenses		62,258			28.0			66,342			27.4
General and administrative expense		70,519			31.7			70,684			29.2
Total SG&A		132,777			59.7			137,026			56.6
Severance expenses		8,180			3.7			1,492			0.7
Goodwill impairment		28,306			12.8			—			—
Gain on sale of assets		(2,133	)		(1.0	)		—			—
Total operating expenses		167,130			75.2			138,518			57.3
Operating income (loss)		(45,620	)		(20.5	)		2,266			0.9
Other expense, net		(526	)		(0.3	)		(524	)		(0.2	)
Income (loss) from continuing operations before income tax expense		(46,146	)		(20.8	)		1,742			0.7
Income tax expense		18,095			8.1			758			0.3
Income (loss) from continuing operations	$	(64,241	)		(28.9	)%	$	984			0.4	%

Net Sales

Net sales for the first nine months of 2012 decreased 8.2% to $222.3 million, from $242.1 million in the first nine months of 2011. Excluding the Canadian exchange rate impact, net sales decreased 7.9%.

MRO net sales decreased 9.6% in the first nine months of 2012, to $209.1 million from $231.4 million in the prior year period. MRO average daily sales decreased to $1.095 million in the first nine months of 2012 compared to $1.211 million in the first nine months of 2011. Of the $22.3 million decrease in sales, approximately $20.1 million was due to an increase in the number of vacant sales territories from a year ago and $2.2 million due to lower freight revenue. Government sales decreased $8.8 million in the first nine months of 2012 compared to the first nine months of 2011 primarily as a result of 2011 benefitting from troop deployments. We anticipate that growth in the government segment may be limited given our past support to troop deployments which is not expected to increase in the near future. National accounts increased $1.5 million primarily due to growth of existing relationships while our automotive business grew $1.1 million primarily due to growth in our larger accounts.

OEM net sales increased 23.4% in the first nine months of 2012, to $13.2 million from $10.7 million in the prior year period, driven by stronger demand from existing customers.

16

Gross Profit

Gross profit decreased 13.7% in the first nine months of 2012, to $121.5 million from $140.8 million in the prior year period.

MRO gross profit as a percent of net MRO sales decreased to 56.7% in the first nine months of 2012, compared to 59.9% achieved in the first nine months of 2011. This decrease was primarily due to an increase of $5.4 million of inventory reserves, a decrease of $1.0 million in outbound freight recoveries and a shift toward higher volume national customers with lower margins. These national accounts represented approximately 12.2% of MRO sales in the first nine months of 2012 compared to approximately 10.5% in the prior year period. We expect that our gross margin percentage will be under pressure in the future as we continue to increase the mix of national accounts in our customer base and continued competitive pressures.

OEM gross profit increased $0.9 million and increased as a percent of OEM sales to 22.6% in the first nine months of 2012 from 19.7% in the first nine months of 2011. The improvement as a percent of sales was primarily driven by leverage gained from a higher sales volume from existing customers.

Selling, General and Administrative Expenses

Selling Expenses

Selling expenses decreased to $62.3 million in the first nine months of 2012 from $66.3 million in the prior year nine months primarily due to lower sales. Selling expenses increased as a percent of sales to 28.0% in 2012 from 27.4% in 2011 primarily due to the impact of fixed selling costs on the decreased sales levels.

General and Administrative Expenses

General and administrative expenses decreased to $70.5 million in the first nine months of 2012 from $70.7 million in the prior year nine months. We realized savings of $4.4 million from less ERP related expenses in 2012 compared to 2011. This savings was offset by an increase in depreciation and facility costs of $2.3 million, an increase of $1.1 million in bad debt expense and an increase of $0.8 million related to other outside services.

Severance Expenses

During the nine months ended September 30, 2012, we recorded an $8.2 million severance charge of which $1.3 million related to the retirement of our former President and Chief Executive Officer and $6.9 million related to the elimination of corporate and distribution positions, primarily as a result of a strategic restructuring plan designed to reduce our cost structure.

Goodwill Impairment

Our policy is to evaluate goodwill for potential impairment if certain qualitative events have occurred or if circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value. During the second quarter of 2012, we identified indicators of potential goodwill impairment, specifically, the operating losses incurred in our MRO segment and a reduction in our market capitalization below book value. Therefore, we performed an impairment analysis of the goodwill related to our MRO segment. Based on this analysis, we determined that the full amount of the goodwill was impaired and recorded a non-cash charge of $28.3 million.

Gain on Sale of Assets

In the first nine months of 2012, in conjunction with the construction of a new distribution center in McCook, Illinois and the relocation of our headquarters to Chicago, Illinois we sold three properties: our Addison, Illinois distribution center; Vernon Hills, Illinois distribution center; and a Des Plaines, Illinois administrative building. We received cash proceeds of $8.8 million for the sale of the three facilities which resulted in a gain of $2.1 million.

17

Other Expense, net

Other expense, net of $0.5 million recorded in the nine months ended September 30, 2012 primarily relates to interest charged on the outstanding borrowings of our revolving line of credit. The $0.5 million recorded in the first nine months of 2011 primarily relates to interest assessed on unclaimed property settlements.

Income Tax (Benefit) Expense

Income tax expense of $18.1 million was recorded for the nine months ended September 30, 2012 on a pre-tax loss of $46.1 million, resulting in an effective tax rate of negative 39.2%.

Due the substantial cumulative losses that we recorded over the past several quarters, we determined that it was more likely than not that we will not be able to utilize our deferred tax assets to offset future taxable income. Therefore, during the nine months ended September 30, 2012, we increased our deferred tax valuation allowance by $33.6 million. Exclusive of the effect of the increase in the tax valuation allowance, the effective income tax rate would have been 33.6%.

For the nine months ended September 30, 2011, income tax expense was $0.8 million on pre-tax income of $1.7 million, resulting in an effective tax rate of 43.5%.

Income (Loss) from Continuing Operations

We reported a loss from continuing operations of $64.2 million or a loss of $7.49 per diluted share in the first nine months of 2012 compared to income from continuing operations of $1.0 million or $0.11 per diluted share in the first nine months of 2011. The loss for the nine months ended September 30, 2012 was negatively impacted by the impairment of goodwill, the valuation allowance on the deferred tax assets, severance expense and additional inventory reserves.

Liquidity and Capital Resources

Cash and cash equivalents were $0.8 million on September 30, 2012 compared to $2.1 million on December 31, 2011.

Net cash used in continuing operations was $10.3 million for the first nine months of 2012, primarily arising from our operating losses. Accounts receivable decreased by $5.4 million compared to December 31, 2011 due to lower sales levels and the collection of past due amounts that built up in the second half of 2011 as a result of our ERP implementation. Inventories prior to obsolescence and excess reserves increased by $4.5 million, primarily to support anticipated demand for specific sales initiatives and to expand lines for our national customers. In the first nine months of 2012, payments of $3.9 million were made for severance and $5.7 million for payouts under our accrued security bonus plan for sales representatives.

Capital expenditures were $16.5 million for the first nine months of 2012 compared to $8.9 million for the first nine months of 2011. Capital expenditures in the first nine months of 2012 were primarily for warehouse equipment to support the opening of the new leased McCook, Illinois distribution center, the build out of our new leased headquarters and expenditures related to our web-site redevelopment. Capital expenditures in the first nine months of 2011 included $6.5 million related to the ERP implementation. In the first nine months of 2012, we received cash proceeds of $8.8 million from the sale of three properties.

Net cash provided by financing activities in the first nine months 2012 included borrowings of $19.6 million, primarily to support working capital and capital expenditure investments. We paid shareholder dividends of $3.1 million in the first nine months of 2012 and 2011. In the third quarter, our Board of Directors voted to suspend our quarterly dividend to common stockholders that otherwise would have been paid in the fourth quarter of 2012. Dividends are restricted under the Credit Facility to amounts not to exceed $1.1 million per quarter subject to a formula based on EBITDA achieved in the previous quarter compared to target amounts specified in the Credit Facility.

18

Credit Facility

In the third quarter of 2012 we entered into a five-year, $40.0 million credit facility (“Credit Facility”). The Credit Facility consists of a $40.0 million revolving credit facility which includes a $10.0 million sub-facility for Letters of Credit. Until the later of June 30, 2014 or the Company achieves certain financial covenants, credit available under the Credit Facility is based upon:

a) 80% of the face amount of the Company’s eligible accounts receivables, primarily those less than 60 days past due, and

b) 50% of the lower cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within 18 months or $20.0 million, whichever is less.

Interest on borrowings under the Credit Facility are, at the Company’s option, Prime or LIBOR plus 2.75% for the first year and LIBOR plus 2.50% for the second year of the agreement. Following the second year, the interest rate will be based on the Company’s debt to EBITDA ratio and range from LIBOR plus 1.25 to 1.85 percent or Prime minus 1.00 to 0.40 percent.

The Credit Facility is secured by a first priority perfected security interest in substantially all existing assets of the Company.

In addition to other customary representations, warranties and covenants, the Credit Facility requires us to comply with certain financial covenants. A minimum Consolidated EBITDA level, as defined in the Credit Facility, must be achieved on a quarterly basis as detailed in the following table:

Quarter Ended	Minimum EBITDA
September 30, 2012	$	(1,000,000	)
December 31, 2012		(1,500,000	)
March 31, 2013		0
June 30, 2013		2,000,000
September 30, 2013		3,500,000
December 31, 2013		3,000,000
March 31, 2014		3,500,000
June 30, 2014		3,500,000

Upon meeting certain financial covenants, but not prior to June 30, 2014, the availability under the Credit Facility will be based upon the following covenants with a maximum borrowing level of $40.0 million:

a) Minimum Debt Service Coverage Ratio of 1.20:1.00 measured quarterly beginning June 30, 2014 and building cumulatively to a rolling four quarters.

b) Minimum Tangible Net Worth of not less than 90% of the value of shareholders’ equity less intangible assets established as of June 30, 2014, tested quarterly.

c) Minimum cash, accounts receivable and inventory to debt ratio of 2.0 to 1.0.

Failure to meet these covenant requirements could lead to higher financing costs, increased restrictions or reduce or eliminate our ability to borrow funds. At September 30, 2012, EBITDA, as defined in the Credit Facility, was $0.7 million which was in compliance with the minimum EBITDA covenant of $(1.0) million for the quarter.

At September 30, 2012, we had an outstanding balance of $19.6 million under the revolving line of credit of our Credit Facility and additional borrowing availability of $16.8 million. We believe cash provided by operations and the funds available under our Credit Facility are sufficient to fund our operating requirements, strategic initiatives and capital improvements throughout 2012.

19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk at September 30, 2012 from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that (i) the information relating to Lawson, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

20

PART II

OTHER INFORMATION

ITEMS 1, 2, 3, 4 and 5 of Part II are inapplicable and have been omitted from this report.

ITEM 1A. RISK FACTORS

There have been no material changes in the Company’s risk factors at September 30, 2012 from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 with the exception of the following risk factor which has been added to reflect the current risk.

Failure to adequately fund our operating and working capital needs through cash generated from operations and cash available through our credit facility could negatively impact our ability to invest in the business and maintain our capital structure.

Our business requires investment in working capital and fixed assets. In August 2012 we entered into a new five year $40.0 million credit facility based upon eligible accounts receivable and inventory which replaced the previous $55.0 million credit facility. At September 30, 2012 we had $19.6 million of borrowings on our revolving line of credit and additional borrowing availability of $16.8 million. Failure to generate sufficient cash flow from operations as well as manage our working capital under the reduced commitment from our lender could lead to insufficient investment in our business and or default under our credit facility. Adequate funds may not be available when needed or may not be available on terms favorable to us, especially given the current condition of the financial credit markets

In addition, our credit facility contains financial and other restrictive covenants. These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs. Our failure to comply with these covenants could result in events of default which, if not cured or waived, could result in us being required to repay indebtedness before its due date, and we may not have the financial resources or be able to arrange alternative financing to do so.

ITEM 6. EXHIBITS

Exhibit #
31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 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
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

21

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 October 25, 2012	/s/ Michael G. DeCata
	Michael G. DeCata
	President and Chief Executive Officer
	(principal executive officer)
Dated October 25, 2012	/s/ Ronald J. Knutson
	Ronald J. Knutson
	Executive Vice President and Chief Financial Officer
	(principal financial and accounting officer)

22

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael G. DeCata, 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 nine months (the registrant’s fourth fiscal nine months 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: October 25, 2012

/s/ Michael G. DeCata

Michael G. DeCata

President and Chief Executive Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Ronald J. Knutson, 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 nine months (the registrant’s fourth fiscal nine months 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):

(b) 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: October 25, 2012

/s/ Ronald J. Knutson

Ronald J. Knutson

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

EX-32

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 September 30, 2012 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.

October 25, 2012	/s/ Michael G. DeCata
	Michael G. DeCata
	Lawson Products, Inc.
	President and Chief Executive Officer
	(principal executive officer)
	/s/ Ronald J. Knutson
	Ronald J. Knutson
	Lawson Products, Inc.
	Executive Vice President and Chief Financial Officer
	(principal financial and accounting officer)

XML

Subsequent Event (Details Textual) (Subsequent Event [Member], USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Subsequent Event [Member]
Subsequent Event (Textual) [Abstract]
Cash Received from sale of packaging and administrative building	$ 3.4
Gain on sale of packaging and administrative building	$ 1.6

XML

Income Tax (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Income Tax (Textual) [Abstract]
Income tax benefit percentage of pre-tax loss	15.40%	30.30%	39.20%	43.50%
Increase and decrease tax valuation allowances effective income tax rate			33.60%
Tax Valuation Allowance, Net			$ 33.6

XML

Sale of assets and property held for sale (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Jun. 30, 2012 Property	Sep. 30, 2012
Sale of assets and property held for sale (Textual) [Abstract]
Cash proceeds from sale of distribution center	$ 8.8
Gain from sale of distribution center	2.1
Properties sold	3
Property held for sale		$ 1.9

XML

Segment Reporting (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Summary of total assets
Total assets	$ 182,257	$ 222,748
MRO [Member]
Summary of total assets
Total assets	170,923	194,422
OEM [Member]
Summary of total assets
Total assets	10,893	10,336
Segment total [Member]
Summary of total assets
Total assets	181,816	204,758
Corporate [Member]
Summary of total assets
Total assets	40	17,580
Discontinued operations [Member]
Summary of total assets
Total assets	$ 401	$ 410

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Goodwill Impairment

9 Months Ended

Sep. 30, 2012

Goodwill Impairment [Abstract]

Goodwill Impairment

Note 4 — Goodwill Impairment

As a result of an acquisition in 2001, the Company had goodwill of $28.3 million, all of which related to its MRO segment. On an interim basis, the Company evaluates goodwill for potential impairment by determining if certain qualitative events have occurred or if circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value. As a result of this evaluation, the Company identified indicators of impairment during the second quarter of 2012 related to operating losses and reduced market capitalization and, therefore, performed an interim impairment test of goodwill.

The Company estimated the fair value of the MRO reporting unit using a discounted cash flow analysis based on its current internal operating forecast to determine the reporting unit’s fair value. After completing the analysis, the Company concluded that the entire amount of the goodwill was impaired and a non-cash charge of $28.3 million was recorded in the second quarter of 2012.

Goodwill activity for the nine months ended September 30, 2012 was as follows:

	Nine Months Ended September 30, 2012
Beginning balance	$	28,148
Impairment loss		(28,306	)
Translation adjustment		158
Ending balance	$	—

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Credit Facility (Details Textual) (USD $)	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012
Credit Facility (Textual) [Abstract]
Balance outstanding revolving line of credit under Existing Credit Facility	$ 19,600,000	$ 19,600,000
Weighted average interest rate	2.00%	2.00%
Credit facility	40,000,000	40,000,000
Line of Credit Facility Term		5 years
Availability under the credit agreement	16,800,000	16,800,000
Eligible accounts receivables percentage		80.00%
Eligible accounts receivables past due days		60 days
Eligible inventory percentage		50.00%
Eligible inventory expected to be sold period		18 months
Maximum borrowing amount based on inventory		20,000,000
Minimum Debt Service Coverage Ratio		1.20
Date of Measurement for Minimum Debt Service Coverage Ratio	Jun. 30, 2014	Jun. 30, 2014
Minimum Tangible Net Worth		90.00%
Minimum cash, accounts receivable and inventory to debt ratio		2.0
EBITDA as defined in Credit Facility	700,000
Minimum EBITDA Covenant	(1,000,000)
Line of Credit Facility, Interest Rate Description		Prime rate or the LIBOR rate plus 2.75% for the first year and LIBOR plus 2.50% for the second year of the agreement
Maximum [Member]
Credit Facility (Textual) [Abstract]
Spread on LIBOR	1.85%	1.85%
Maximum spread on prime rate		0.0040
Dividends restricted amount		1,100,000
Minimum [Member]
Credit Facility (Textual) [Abstract]
Spread on LIBOR	1.25%	1.25%
Maximum spread on prime rate		0.0100
Dividends restricted amount		0
Letter of Credit [Member]
Credit Facility (Textual) [Abstract]
Availability under the credit agreement	10,000,000	10,000,000
First Year [Member]
Credit Facility (Textual) [Abstract]
Spread on LIBOR	2.75%	2.75%
Second Year [Member]
Credit Facility (Textual) [Abstract]
Spread on LIBOR	2.50%	2.50%
Line of Credit Facility, Interest Rate Description		LIBOR plus 1.25 to 1.85 or Prime minus 1.00 to 0.40 percent
June 30, 2014 [Member]
Credit Facility (Textual) [Abstract]
Minimum EBITDA Covenant		3,500,000
June 30, 2014 [Member] | Maximum [Member]
Credit Facility (Textual) [Abstract]
Prior line of credit maximum borrowing capacity	$ 40,000,000	$ 40,000,000

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Credit Facility (Details) (USD $)	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012 September 30, 2012 [Member]	Sep. 30, 2012 December 31, 2012 [Member]	Sep. 30, 2012 March 31, 2013 [Member]	Sep. 30, 2012 June 30, 2013 [Member]	Sep. 30, 2012 September 30, 2013 [Member]	Sep. 30, 2012 December 31, 2013 [Member]	Sep. 30, 2012 March 31, 2014 [Member]	Sep. 30, 2012 June 30, 2014 [Member]
Schedule of minimum EBITDA level achievable on quarterly basis
Minimum EBITDA	$ (1,000,000)	$ (1,000,000)	$ (1,500,000)	$ 0	$ 2,000,000	$ 3,500,000	$ 3,000,000	$ 3,500,000	$ 3,500,000

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Severance Reserve (Details) (USD $) In Thousands, unless otherwise specified			9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012 Employee Severance [Member]	Sep. 30, 2011 Employee Severance [Member]
Reserve for severance and related payments
Balance at beginning of period	$ 5,524	$ 1,282	$ 1,282	$ 3,062
Charged to earnings			8,180	1,492
Cash paid			(3,938)	(2,715)
Balance at end of the period	$ 5,524	$ 1,282	$ 5,524	$ 1,839

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Severance Reserve (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Accrued severance included in:
Accrued expenses and other liabilities	$ 3,975	$ 1,187
Noncurrent other	1,549	95
Total accrued severance	$ 5,524	$ 1,282

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Sale of assets and property held for sale

9 Months Ended

Sep. 30, 2012

Sale of assets and property held for sale [Abstract]

Sale of assets and property held for sale

Note 3 — Sale of assets and property held for sale

In the second quarter of 2012, in conjunction with the construction of a new distribution center in McCook, Illinois and the relocation of the Company’s headquarters to Chicago, Illinois, the Company sold three properties; its Addison, Illinois distribution center, its Vernon Hills, Illinois distribution center and a Des Plaines, Illinois administrative building. The Company received cash proceeds of $8.8 million for the sale of the three facilities, which were included in the MRO segment, resulting in a gain of $2.1 million. Operations currently conducted at the Addison, Illinois and Vernon Hills, Illinois distribution centers will be transferred to the new McCook, Illinois facility during the fourth quarter of 2012 and the first quarter of 2013. The Company has entered into various arrangements to lease these facilities back from the buyer for transition purposes until the second quarter of 2013.

In addition to these three property sales, the Company allowed the lease of another Des Plaines, Illinois facility to expire during the second quarter of 2012 and it was actively marketing its former Des Plaines, Illinois headquarters and packaging facility. The net book value of the former headquarters’ land and building of $1.9 million has been reclassified to Property held for sale in the Condensed Consolidated Balance Sheets and has not been depreciated after being classified as held for sale. This property was sold subsequent to September 30, 2012 (See Note 11 – Subsequent Event).

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Severance Reserve (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Severance Reserve (Textual) [Abstract]
Severance charges	$ 1,410	$ 282	$ 8,180	$ 1,492
Corporate elimination and distribution [Member]
Severance Reserve (Textual) [Abstract]
Severance charges			6,900
Former President and Chief Executive Officer [Member]
Severance Reserve (Textual) [Abstract]
Severance charges			$ 1,300

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 774	$ 2,116
Accounts receivable, less allowance for doubtful accounts	36,553	43,239
Inventories, net	54,596	55,498
Miscellaneous receivables and prepaid expenses	5,425	7,064
Deferred income taxes		5,716
Property held for sale	1,869
Discontinued operations	401	410
Total current assets	99,618	114,043
Property, plant and equipment, net	66,920	52,702
Cash value of life insurance	14,740	15,490
Deferred income taxes	40	11,864
Goodwill	0	28,148
Other assets	939	501
Total assets	182,257	222,748
Current liabilities:
Revolving line of credit	19,639
Accounts payable	16,634	22,967
Accrued expenses and other liabilities	33,765	28,231
Discontinued operations	429	681
Total current liabilities	70,467	51,879
Security bonus plan	19,736	23,310
Deferred compensation	6,055	9,279
Financing lease obligation	10,995	3,377
Other liabilities	6,096	731
Total noncurrent liabilities	42,882	36,697
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 - 8,604,173 and 8,580,753 shares, respectively Outstanding - 8,597,554 and 8,574,291 shares, respectively	8,604	8,581
Capital in excess of par value	6,723	6,210
Retained earnings	51,042	117,371
Treasury stock-6,619 and 6,462 shares, respectively	(132)	(130)
Accumulated other comprehensive income	2,671	2,140
Stockholders' equity	68,908	134,172
Total liabilities and stockholders' equity	$ 182,257	$ 222,748

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Basis of Presentation and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Basis of Presentation and Summary of Significant Accounting Policies [Abstract]

Basis of Presentation and Summary of Significant Accounting Policies

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”) 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In the opinion of the Company, all normal recurring adjustments have been made, that 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Certain reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported. The effect of restricted share awards and future stock option exercises equivalent to 11 thousand and 34 thousand shares for the three and nine months ended September 30, 2012, respectively and 51 thousand shares for the three months ended September 30, 2011, would have been anti-dilutive and therefore, were excluded from the computation of diluted earnings per share.

The Company has adopted Accounting Standards Update (“ASU”) No. 2011-05 and 2011-12 regarding the presentation of comprehensive income in the financial statements. No other material changes occurred in our significant accounting policies during the nine months ended September 30, 2012 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2011. The Company has determined that except for the sale of our Des Plaines, Illinois facility (See Note 11- Subsequent Event), there were no other subsequent events to recognize or disclose in these financial statements.

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Non-Cash Items (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Non-Cash Items (Textual) [Abstract]
Increase in Property, plant and equipment	$ 8.0

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Basis of Presentation and Summary of Significant Accounting Policies (Details) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012
Basis of Presentation and Summary of Significant Accounting Policies (Textual) [Abstract]
Anti-dilutive securities excluded from computation of earnings per share	11	51	34

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Segment Reporting (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended			9 Months Ended
	Sep. 30, 2012	Jun. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net sales
Consolidated total	$ 71,984		$ 75,366	$ 222,294	$ 242,099
Operating income (expense)
Gain on sale of assets	11			2,133
Impairment loss		(28,300)		(28,306)
Operating income (expense)	(1,350)		(3,071)	(45,620)	2,266
Other income (expense), net	23		59	(73)	138
Interest expense	(229)		(79)	(453)	(662)
Income (loss) from continuing operations before income taxes	(1,556)		(3,091)	(46,146)	1,742
MRO [Member]
Net sales
Consolidated total	67,863		71,490	209,057	231,370
Operating income (expense)
Operating income (expense)	(1,710)		(3,422)	(20,993)	1,634
OEM [Member]
Net sales
Consolidated total	4,121		3,876	13,237	10,729
Operating income (expense)
Operating income (expense)	$ 349		$ 351	$ 1,546	$ 632

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Inventories, net (Details Textual) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Inventories, net (Textual) [Abstract]
Increase in obsolete and excess inventory reserves	$ 5.4

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Inventories, net

9 Months Ended

Sep. 30, 2012

Inventories, net [Abstract]

Inventories, net

Note 2 — Inventories, net

The Company increased its obsolete and excess inventory reserves by $5.4 million for the nine months ended September 30, 2012 primarily as a result of the discontinuation of certain products. Components of inventories were as follows:

	(Amounts in thousands)
	September 30, 2012			December 31, 2011
Finished goods	$	61,407		$	56,985
Work in progress		2,030			1,935
Raw materials		1,626			1,624
Total		65,063			60,544
Reserve for obsolete and excess inventory		(10,467	)		(5,046	)
	$	54,596		$	55,498

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Condensed Consolidated Balance Sheets [Abstract]
Preferred stock, par value	$ 1	$ 1
Preferred stock, shares authorized	500,000	500,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 1	$ 1
Common stock, shares authorized	35,000,000	35,000,000
Common stock, shares issued	8,604,173	8,580,753
Common stock, shares outstanding	8,597,554	8,574,291
Treasury stock, shares	6,619	6,462

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Inventories, net (Tables)

9 Months Ended

Sep. 30, 2012

Inventories, net [Abstract]

Components of inventories

Components of inventories were as follows:

	(Amounts in thousands)
	September 30, 2012			December 31, 2011
Finished goods	$	61,407		$	56,985
Work in progress		2,030			1,935
Raw materials		1,626			1,624
Total		65,063			60,544
Reserve for obsolete and excess inventory		(10,467	)		(5,046	)
	$	54,596		$	55,498

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 15, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	LAWSON PRODUCTS INC/NEW/DE/
Entity Central Index Key	0000703604
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		8,597,554

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Goodwill Impairment (Tables)

9 Months Ended

Sep. 30, 2012

Goodwill Impairment [Abstract]

Goodwill activity

Goodwill activity for the nine months ended September 30, 2012 was as follows:

	Nine Months Ended September 30, 2012
Beginning balance	$	28,148
Impairment loss		(28,306	)
Translation adjustment		158
Ending balance	$	—

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Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net sales	$ 71,984	$ 75,366	$ 222,294	$ 242,099
Cost of goods sold	28,624	32,820	100,784	101,315
Gross profit	43,360	42,546	121,510	140,784
Operating expenses:
Selling, general and administrative expenses	43,311	45,335	132,777	137,026
Severance expenses	1,410	282	8,180	1,492
Gain on sale of assets	(11)		(2,133)
Goodwill impairment			28,306
Operating expenses, Total	44,710	45,617	167,130	138,518
Operating income (loss)	(1,350)	(3,071)	(45,620)	2,266
Other income (expense), net	23	59	(73)	138
Interest expense	(229)	(79)	(453)	(662)
Income (loss) from continuing operations before income taxes	(1,556)	(3,091)	(46,146)	1,742
Income tax (benefit) expense	(240)	(937)	18,095	758
Income (loss) from continuing operations	(1,316)	(2,154)	(64,241)	984
Discontinued operations, net of income taxes	(2)	(9)	(32)	(61)
Net income (loss)	(1,318)	(2,163)	(64,273)	923
Basic income (loss) per share of common stock:
Continuing operations	$ (0.15)	$ (0.25)	$ (7.49)	$ 0.12
Discontinued operations				$ (0.01)
Net income (loss) per share	$ (0.15)	$ (0.25)	$ (7.49)	$ 0.11
Diluted income (loss) per share of common stock:
Continuing operations	$ (0.15)	$ (0.25)	$ (7.49)	$ 0.11
Discontinued operations
Net income (loss) per share	$ (0.15)	$ (0.25)	$ (7.49)	$ 0.11
Basic weighted average shares outstanding	8,597	8,566	8,581	8,549
Dilutive effect of stock based compensation				62
Diluted weighted average shares outstanding	8,597	8,566	8,581	8,611
Cash dividends declared per share of common stock		$ 0.12	$ 0.24	$ 0.36
Net Comprehensive loss	$ (976)	$ (3,812)	$ (63,742)	$ (318)

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Income Tax

9 Months Ended

Sep. 30, 2012

Income Tax [Abstract]

Income Tax

Note 7 — Income Tax

Due the substantial cumulative losses that the Company recorded over the past several quarters, the Company determined that it was more likely than not that the Company will not be able to utilize its deferred tax assets to offset future taxable income. Therefore, during the nine months ended September 30, 2012, the Company increased its deferred tax valuation allowance by $33.6 million. Substantially all future taxable income will be subject to this tax valuation allowance until the Company can establish that the recoverability of its deferred tax assets is more certain.

Income tax benefit as a percentage of pre-tax loss for the three months ended September 30, 2012 was 15.4% compared to an effective tax rate of 30.3% for the three months ended September 30, 2011. Income tax as a percentage of pre-tax loss for the nine months ended September 30, 2012 was negative 39.2% compared to a tax rate of 43.5% for the nine months ended September 30, 2011. Exclusive of the effect of the increase in the tax valuation allowances, the effective income tax rate would have been 33.6%.

The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax of multiple state and foreign jurisdictions. As of September 30, 2012, the Company is subject to U.S. Federal income tax examinations for the years 2009 and 2010, and income tax examinations from various other jurisdictions for the years 2006 through 2010.

Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise would subject the Company to both U.S. Federal and state income taxes, as adjusted for tax credits and foreign withholding taxes.

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Severance Reserve

9 Months Ended

Sep. 30, 2012

Severance Reserve [Abstract]

Severance Reserve

Note 6 — Severance Reserve

During the three and nine month periods ended September 30, 2012, the Company recorded $1.4 million and $8.2 million in severance charges, respectively, related to its MRO segment. These charges consisted of $1.3 million related to the retirement of the Company’s former President and Chief Executive Officer and $6.9 million related to the elimination of corporate and distribution positions primarily as a result of a strategic restructuring plan designed to reduce the Company’s cost structure.

The table below shows the changes in the Company’s reserve for severance and related payments as of September 30, 2012 and 2011:

	(Amounts in thousands)
	Nine Months Ended September 30,
	2012			2011
Balance at beginning of period	$	1,282		$	3,062
Charged to earnings		8,180			1,492
Cash paid		(3,938	)		(2,715	)
Balance at end of the period	$	5,524		$	1,839

Accrued severance charges are included in the line items of the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 as follows:

	(Dollars in thousands)
	September 30,		December 31,
	2012		2011
Accrued expenses and other liabilities	$	3,975	$	1,187
Noncurrent other		1,549		95
Total accrued severance	$	5,524	$	1,282

All severance accrued at September 30, 2012 will be fully paid by September 30, 2014.

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Inventories, net (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Components of inventories
Finished goods	$ 61,407	$ 56,985
Work in progress	2,030	1,935
Raw materials	1,626	1,624
Total	65,063	60,544
Reserve for obsolete and excess inventory	(10,467)	(5,046)
Inventories, net	$ 54,596	$ 55,498

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Credit Facility (Tables)

9 Months Ended

Sep. 30, 2012

Credit Facility [Abstract]

Schedule of minimum EBITDA level achievable on quarterly basis

A minimum Consolidated EBITDA level, as defined in the Credit Facility, must be achieved on a quarterly basis as detailed in the following table:

Quarter Ended	Minimum EBITDA
September 30, 2012	$	(1,000,000	)
December 31, 2012		(1,500,000	)
March 31, 2013		0
June 30, 2013		2,000,000
September 30, 2013		3,500,000
December 31, 2013		3,000,000
March 31, 2014		3,500,000
June 30, 2014		3,500,000

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Segment Reporting

9 Months Ended

Sep. 30, 2012

Segment Reporting [Abstract]

Segment Reporting

Note 10 — Segment Reporting

The Company has two reportable operating segments: MRO and OEM. The Company’s MRO segment is a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations marketplace. The Company’s OEM segment manufactures, sells and distributes production and specialized component parts to the original equipment marketplace. The Company’s two reportable segments are distinguished by the nature of products distributed and sold, types of customers and manner of servicing them. 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:

	(Amounts in thousands)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net sales
MRO	$	67,863		$	71,490		$	209,057		$	231,370
OEM		4,121			3,876			13,237			10,729
Consolidated total	$	71,984		$	75,366		$	222,294		$	242,099
Operating income (expense)
MRO	$	(1,710	)	$	(3,422	)	$	(20,993	)	$	1,634
OEM		349			351			1,546			632
Gain on sale of assets		11			—			2,133			—
Goodwill impairment		—			—			(28,306	)		—
Consolidated total	$	(1,350	)	$	(3,071	)	$	(45,620	)	$	2,266
Other income (expense), net		23			59			(73	)		138
Interest expense		(229	)		(79	)		(453	)		(662	)
Income (loss) from continuing operations before income taxes	$	(1,556	)	$	(3,091	)	$	(46,146	)	$	1,742

The following table presents total assets for the Company’s reportable segments:

	(Amounts in thousands)
	September 30,		December 31,
	2012		2011
Total assets
MRO	$	170,923	$	194,422
OEM		10,893		10,336
Segment total		181,816		204,758
Corporate		40		17,580
Discontinued operations		401		410
Consolidated total	$	182,257	$	222,748

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Contingent Liability

9 Months Ended

Sep. 30, 2012

Contingent Liability [Abstract]

Contingent Liability

Note 8 — Contingent Liability

One of the Company’s subsidiaries, Drummond American LLC (“Drummond”), is under an employment tax examination for the years 2007 and 2008 of the long-standing treatment of its sales representatives as independent contractors. In January 2012 the Company received a Notice of Proposed Adjustment in the amount of $9.5 million, including penalties, from the IRS challenging Drummond’s position that the sales representatives were independent contractors. The Company disagreed with the IRS position and filed an administrative appeal with the IRS Appeals Office.

Although the Company intends to vigorously defend its position for the treatment of its sales representatives as independent contractors, the Company established a liability of $1.2 million during 2011 as its best estimate of the cost to resolve the matter with the IRS. The notice of Proposed Adjustment was determined by applying the full statutory rates and penalties, rather than applying the reduced tax rates provided by section 3509 of the Internal Revenue Code (“IRC”). The Company believes the use of reduced tax rates is mandatory for all IRS worker classification assessments, except when the employer intentionally disregarded its employment tax obligations. Because the Company believes it fully complied with its employment tax obligations, the Company based its estimated loss at the reduced tax rates. The Company applied these reduced tax rates against only one year because any settlement resolution would likely be limited to one year as this is consistent with the IRS’s settlement practices. The Company has assessed its potential exposure for other subsidiaries and time periods and has concluded that an additional liability is not probable. No adjustment has been proposed by the IRS for any other time periods or subsidiaries of the Company.

The case has been assigned to the Chicago Appeals Office. The first meeting with the Appeals Office will likely happen in the fourth quarter of 2012. The Company is unable to establish an estimated time frame in which the case will be resolved through the appeals process. An unfavorable outcome of this matter could have a material adverse effect on the Company’s business, financial condition and results of operations.

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Non-Cash Items

9 Months Ended

Sep. 30, 2012

Non-Cash Items [Abstract]

Non-Cash Items

Note 9 — Non-Cash Items

During the nine months ended September 30, 2012, the Company recorded an $8.0 million increase in Property, plant and equipment, along with a corresponding increase in liabilities, related to the build-to-suit lease of the McCook, Illinois distribution center. These non-cash increases have been excluded from the Condensed Consolidated Statements of Cash Flows.

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Subsequent Event

9 Months Ended

Sep. 30, 2012

Subsequent Events [Abstract]

Subsequent Event

Note 11 — Subsequent Event

On October 5, 2012, the Company received cash proceeds of $3.4 million from the sale of its Des Plaines, Illinois packaging and administrative building, resulting in a gain of approximately $1.6 million. This facility was a component of the Company’s MRO segment.

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Contingent Liability (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended
	Jan. 31, 2012	Dec. 31, 2011
Contingent Liability (Textual) [Abstract]
Tax Penalties	$ 9.5
Liability related to tax positions		$ 1.2

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Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2012

Segment Reporting [Abstract]

Summary financial information

The following table presents summary financial information for the Company’s reportable segments:

	(Amounts in thousands)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net sales
MRO	$	67,863		$	71,490		$	209,057		$	231,370
OEM		4,121			3,876			13,237			10,729
Consolidated total	$	71,984		$	75,366		$	222,294		$	242,099
Operating income (expense)
MRO	$	(1,710	)	$	(3,422	)	$	(20,993	)	$	1,634
OEM		349			351			1,546			632
Gain on sale of assets		11			—			2,133			—
Goodwill impairment		—			—			(28,306	)		—
Consolidated total	$	(1,350	)	$	(3,071	)	$	(45,620	)	$	2,266
Other income (expense), net		23			59			(73	)		138
Interest expense		(229	)		(79	)		(453	)		(662	)
Income (loss) from continuing operations before income taxes	$	(1,556	)	$	(3,091	)	$	(46,146	)	$	1,742

Summary of total assets

The following table presents total assets for the Company’s reportable segments:

	(Amounts in thousands)
	September 30,		December 31,
	2012		2011
Total assets
MRO	$	170,923	$	194,422
OEM		10,893		10,336
Segment total		181,816		204,758
Corporate		40		17,580
Discontinued operations		401		410
Consolidated total	$	182,257	$	222,748

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Goodwill Impairment (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Jun. 30, 2012	Sep. 30, 2012
Goodwill activity
Beginning balance		$ 28,148
Impairment loss	(28,300)	(28,306)
Translation adjustment		158
Ending balance		$ 0

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Operating activities:
Net income (loss)	$ (64,273)	$ 923
Loss from discontinued operations	32	61
Income (loss) from continuing operations	(64,241)	984
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization	5,281	3,955
Deferred income taxes	17,538	1,328
Stock based compensation	(740)	(406)
Goodwill impairment	28,306
Gain on sale of assets	(2,133)
Changes in operating assets and liabilities:
Accounts receivable	5,422	(6,941)
Inventories	1,087	2,642
Prepaid expenses and other assets	1,636	2,068
Accounts payable and other liabilities	(3,839)	(11,957)
Other	1,404	(120)
Net cash used in operating activities of continuing operations	(10,279)	(8,447)
Investing activities:
Additions to property, plant and equipment	(16,492)	(8,918)
Net proceeds (outlay) related to sale of businesses	750	(192)
Proceeds from sale of property	8,807
Net cash used in investing activities of continuing operations	(6,935)	(9,110)
Financing activities:
Net proceeds from line of credit	19,639
Dividends paid	(3,086)	(3,071)
Financing fees paid	(435)
Net cash provided by (used in) financing activities of continuing operations	16,118	(3,071)
Net cash used in operating activities of discontinued operations	(246)	(678)
Decrease in cash and cash equivalents	(1,342)	(21,306)
Cash and cash equivalents at beginning of period	2,116	40,566
Cash and cash equivalents at end of period	$ 774	$ 19,260

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Credit Facility

9 Months Ended

Sep. 30, 2012

Credit Facility [Abstract]

Credit Facility

Note 5 — Credit Facility

In the third quarter of 2012, the Company entered into a five-year, $40.0 million credit facility (“Credit Facility”). The Credit Facility consists of a $40.0 million revolving credit facility which includes a $10.0 million sub-facility for Letters of Credit. Until the later of June 30, 2014 or when the Company achieves certain financial covenants, credit available under the Credit Facility is based upon:

a) 80% of the face amount of the Company’s eligible accounts receivables, generally less than 60 days past due, and

b) 50% of the lower of cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within 18 months or $20.0 million, whichever is less.

The applicable interest rate margins for borrowings under the Credit Facility are at the Prime rate or the LIBOR rate plus 2.75% for the first year and LIBOR plus 2.50% for the second year of the agreement. Following the second year, the interest rate will be based on the Company’s debt to EBITDA ratio and range from LIBOR plus 1.25 to 1.85 percent or Prime minus 1.00 to 0.40 percent.

The Credit Facility is secured by a first priority perfected security interest in substantially all existing assets of the Company. Dividends are restricted to $0 to $1,100,000 per quarter based on EBITDA achieved in the previous quarter compared to specified target amounts.

In addition to other customary representations, warranties and covenants, the Credit Facility requires the Company to comply with certain financial covenants. A minimum Consolidated EBITDA level, as defined in the Credit Facility, must be achieved on a quarterly basis as detailed in the following table:

Quarter Ended	Minimum EBITDA
September 30, 2012	$	(1,000,000	)
December 31, 2012		(1,500,000	)
March 31, 2013		0
June 30, 2013		2,000,000
September 30, 2013		3,500,000
December 31, 2013		3,000,000
March 31, 2014		3,500,000
June 30, 2014		3,500,000

Upon meeting certain financial covenants, but not prior to June 30, 2014, the availability under the Credit Facility will be based upon the following covenants with a maximum borrowing level of $40.0 million:

a) Minimum Debt Service Coverage Ratio of 1.20:1.00 measured quarterly beginning June 30, 2014 and building cumulatively to a rolling four quarters.

b) Minimum Tangible Net Worth of not less than 90% of the value of shareholders’ equity less intangible assets established as of June 30, 2014, tested quarterly.

c) Minimum cash, accounts receivable and inventory to debt ratio of 2.0 to 1.0.

For the period ended September 30, 2012, EBITDA, as defined in the Credit Facility, was $0.7 million which was in compliance with the minimum EBITDA covenant of $(1.0) million for the quarter.

At September 30, 2012, the Company had an outstanding balance of $19.6 million under the revolving line of credit of its Credit Facility and additional borrowing availability of $16.8 million. The weighted average interest rate was 2.0% through the first nine months of 2012 and the outstanding balance approximates fair value.

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Goodwill Impairment (Details Textual) (USD $)	3 Months Ended	9 Months Ended
	Jun. 30, 2012	Sep. 30, 2012
Goodwill Impairment (Textual) [Abstract]
Goodwill		$ 28,300,000
Goodwill impaired and non-cash charge	$ 28,300,000	$ 28,306,000

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Segment Reporting (Details Textual)	9 Months Ended
	Sep. 30, 2012 Segment
Segment Reporting (Textual) [Abstract]
Number of operating segments	2

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Severance Reserve (Tables)

9 Months Ended

Sep. 30, 2012

Severance Reserve [Abstract]

Changes in the Company's reserve for severance and related payments

The table below shows the changes in the Company’s reserve for severance and related payments as of September 30, 2012 and 2011:

	(Amounts in thousands)
	Nine Months Ended September 30,
	2012			2011
Balance at beginning of period	$	1,282		$	3,062
Charged to earnings		8,180			1,492
Cash paid		(3,938	)		(2,715	)
Balance at end of the period	$	5,524		$	1,839

Accrued severance charges included in the line items of the Condensed Consolidated Balance Sheets

Accrued severance charges are included in the line items of the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 as follows:

	(Dollars in thousands)
	September 30,		December 31,
	2012		2011
Accrued expenses and other liabilities	$	3,975	$	1,187
Noncurrent other		1,549		95
Total accrued severance	$	5,524	$	1,282