Overview

The Maintenance, Repair and Operations ("MRO") distribution industry is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly impacted by the overall strength of the manufacturing sector of the U.S. economy. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management, which is considered by many economists to be a reliable near-term economic barometer of the manufacturing sector. A measure above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 50.0 in the first quarter of 2020 compared to 55.4 in the first quarter of 2019, indicating a flat rate of growth in the U.S. manufacturing economy in the first quarter of 2020 compared to an expansion in the U.S. manufacturing economy a year ago.

Our sales are also affected by the number of sales representatives and their productivity. Our sales force increased to an average of 998 sales representatives in the first quarter of 2020 from 991 sales representatives during the first quarter of 2019. Our Lawson segment sales representative productivity, measured as sales per rep per day, decreased 3.1% to $1,268 in the first quarter of 2020 from $1,308 in the first quarter of 2019.

COVID-19 Pandemic

In March 2020, the World Health Organization declared a new strain of coronavirus ("COVID-19") a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility in financial markets. There is substantial uncertainty as to the overall effect the pandemic will have on the results of the Company for the rest of 2020 and beyond. Various events related to COVID-19 have resulted in lost revenue to our Company, limitations on our ability to source high demand products, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, slow-down of customer demand for our products and limitations of some customers to pay us on a timely basis.

In the first quarter of 2020, the government of the state of Illinois defined essential businesses, allowing Lawson to operate during the pandemic. A change in this status could result in the temporary closure of our business. Additionally the COVID-19 pandemic could result in a temporary closure of any or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance. The pandemic is negatively impacting sales and operations currently and may negatively impact future financial results, liquidity and overall performance of the Company.

Our MRO business model relies upon customer interaction as well as a consistent schedule of onsite visits by our sales reps to customer locations in order to generate sales, provide vendor managed inventory services and maintain relationships with customers. Our Bolt Supply business model relies on foot traffic in its branch locations and the ability of customers to visit these locations. The onset of the COVID-19 pandemic, as well as social distancing guidelines and government mandated shelter in place orders, have negatively impacted our business. It is unknown at this time how long these circumstances will exist, when the restrictions will be relaxed, and if these restrictions will be reintroduced at a future date. The pandemic is negatively impacting sales and operations currently and may negatively impact our future financial results, liquidity and overall operating performance.

We have undertaken a number of steps in order to mitigate the effects of COVID-19. Our MRO sales reps continue to reach out to all customers with a portion via phone, fax and internet-based communications. Some of the normal customer service provided by our sales reps has been affected by social distancing guidelines and shelter in place orders. Certain customers have also temporarily reduced business hours or shut down entirely. All 14 Bolt branches have remained open and have introduced curbside pickup for customers. Bolt also ships to customers who order product over the phone. We continue to keep in contact with our current suppliers and we have reached out to additional suppliers to ensure that orders for inventory are fulfilled in a timely manner and our supply chain will remain intact.

We are closely monitoring the Company's balance sheet and liquidity position and are taking actions to protect cash flows from operations. We remain in contact with our lending institutions to ensure that we will continue to have proper liquidity to fund working capital requirements. At March 31, 2020, the Company had $4.1 million of cash and cash equivalents and an additional $87.5 million of borrowing capacity under its committed credit facility and a similar amount available as of the date of this report. Sales reps and our finance group are working in concert to ensure that any customer liquidity issues are quickly identified and credit is carefully extended to customers who are able to pay.




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The Company has taken various actions, including, but not limited to furloughing approximately 100 employees, reducing salaries, canceling of travel and award trips, consolidating its Suwanee distribution center operations into the McCook facility, and eliminating non-critical capital expenditures. Looking ahead, we will take all necessary actions that ensure safety for our employees, customers and suppliers to meet our working capital requirements and remain in compliance with our debt covenants.



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Quarter ended March 31, 2020 compared to quarter ended March 31, 2019


                                             2020                      2019
                                                    % of                      % of
(Dollars in thousands)                Amount     Net Sales      Amount     Net Sales

Revenue                             $ 91,035       100.0  %   $ 91,343       100.0  %
Cost of goods sold                    42,114        46.3  %     42,420        46.4  %
Gross profit                          48,921        53.7  %     48,923        53.6  %

Operating expenses:
Selling expenses                      19,984        22.0  %     21,742        23.8  %
General and administrative expenses   10,299        11.3  %     21,637        23.7  %
Total operating expenses              30,283        33.3  %     43,379        47.5  %

Operating income                      18,638        20.5  %      5,544         6.1  %

Interest expense                        (115 )      (0.1 )%       (197 )      (0.2 )%
Other (expense) income, net           (1,111 )      (1.3 )%        472         0.5  %

Income before income taxes            17,412        19.1  %      5,819         6.4  %

Income tax expense                     4,879         5.3  %      1,673         1.9  %

Net income                          $ 12,533        13.8  %   $  4,146         4.5  %

Non-GAAP Financial Measure - Adjusted Operating Income

We believe that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. We believe that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

Adjusted operating income is defined by us as GAAP operating income excluding stock-based compensation and severance expense items in the period in which these items are incurred.

Operating income was $18.6 million for 2020 inclusive of a $10.7 million benefit from stock-based compensation compared to $5.5 million in 2019 which included $0.4 million of stock-based compensation expense. Excluding stock-based compensation and severance, adjusted operating income increased to $7.9 million in 2020 from $6.0 million in 2019 on improved sales margins and leveraging operating costs.

Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited)



                                                                     Three Months Ended
                                                                         March 31,
(Dollars in Thousands)                                             2020               2019

Operating income as reported per GAAP                        $       18,638       $     5,544

Stock-based compensation (1)                                        (10,700 )             408
Severance expense                                                         7                27
Adjusted non-GAAP operating Income                           $        7,945       $     5,979

(1) Expense for stock-based compensation, of which a portion varies with the Company's stock price



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