Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 392K
2: EX-10.1 Material Contract HTML 220K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 21K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 21K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 15K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 15K
13: R1 Document and Entity Information HTML 41K
14: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 100K
15: R3 Condensed Consolidated Statements of Operations HTML 100K
(Unaudited)
16: R4 Condensed Consolidated Statements of Comprehensive HTML 28K
Income (Unaudited)
17: R5 Condensed Consolidated Statements of Cash Flows HTML 100K
(Unaudited)
18: R6 Condensed Consolidated Statement of Shareholders' HTML 87K
Equity (Unaudited)
19: R7 Basis of Presentation HTML 38K
20: R8 Leases HTML 45K
21: R9 Revenue HTML 43K
22: R10 Discontinued Operations and Special Charges HTML 71K
(Gains)
23: R11 Net Income per Common Share HTML 20K
24: R12 Credit Facilities HTML 20K
25: R13 Fair Value Measurements HTML 22K
26: R14 Legal Proceedings HTML 23K
27: R15 Basis of Presentation (Policies) HTML 34K
28: R16 Leases (Tables) HTML 40K
29: R17 Revenue (Tables) HTML 33K
30: R18 Discontinued Operations and Special Charges HTML 73K
(Gains) (Tables)
31: R19 Basis of Presentation (Details) HTML 37K
32: R20 Leases (Details) HTML 31K
33: R21 Leases - Lease Expense (Details) HTML 22K
34: R22 Leases - Maturities of Lease Liabilities (Details) HTML 33K
35: R23 Revenue (Details) HTML 40K
36: R24 Discontinued Operations and Special Charges HTML 46K
(Gains) - Narrative (Details)
37: R25 Discontinued Operations and Special Charges HTML 59K
(Gains) - Reconciliation of Pretax Loss on
Discontinued Operations (Details)
38: R26 Discontinued Operations and Special Charges HTML 26K
(Gains) - Special Charges Liabilities (Details)
39: R27 Net Income per Common Share (Details) HTML 25K
40: R28 Credit Facilities (Details) HTML 39K
41: R29 Legal Proceedings (Details) HTML 17K
43: XML IDEA XML File -- Filing Summary XML 69K
42: EXCEL IDEA Workbook of Financial Reports XLSX 39K
7: EX-101.INS XBRL Instance -- syx-20190630 XML 795K
9: EX-101.CAL XBRL Calculations -- syx-20190630_cal XML 145K
10: EX-101.DEF XBRL Definitions -- syx-20190630_def XML 213K
11: EX-101.LAB XBRL Labels -- syx-20190630_lab XML 799K
12: EX-101.PRE XBRL Presentations -- syx-20190630_pre XML 424K
8: EX-101.SCH XBRL Schema -- syx-20190630 XSD 73K
44: ZIP XBRL Zipped Folder -- 0000945114-19-000047-xbrl Zip 105K
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (516) 608-7000
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging
growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
We maintain an internet web site at www.systemax.com. We file reports with the Securities and Exchange Commission (“SEC”) and make available free of charge on or through this website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including all amendments to those reports. These are available as soon as is reasonably practicable after they are filed with the SEC. All reports
mentioned above are also available from the SEC’s website (www.sec.gov). The information on our website is not part of this or any other report we file with, or furnish to, the SEC.
Our Board of Directors has adopted the following corporate governance documents with respect to the Company (the “Corporate Governance Documents”):
•
Corporate
Ethics Policy for officers, directors and employees
•
Charter for the Audit Committee of the Board of Directors
•
Charter for the Compensation Committee of the Board of Directors
•
Charter for the Nominating/Corporate Governance Committee of the Board of Directors
•
Corporate
Governance Guidelines and Principles
In accordance with the corporate governance rules of the New York Stock Exchange, each of the Corporate Governance Documents is available on our Companyweb site, www.systemax.com.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.
Basis of Presentation
The
accompanying condensed consolidated financial statements of Systemax Inc., with its subsidiaries, (the "Company") are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. All significant intercompany accounts and transactions have been eliminated in consolidation.
As previously disclosed, in August 2018 the
Company sold its France-based IT business. With the completion of the sale, Systemax operates and is internally managed in one reportable business segment, its Industrial Products Group (“IPG”), which includes its former Corporate and other segment. IPG focuses on industrial supplies and MRO (maintenance, repair and operations) markets the Company has served since 1949.
The sale of the France based IT business, which had been included in the Company's former European Technology Products segment, met the “strategic shift with major impact” criteria as defined under Accounting Standards Update ("ASU") 2014-08, "Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity". Therefore, the prior year results of the France-based IT business are included in discontinued operations in the accompanying consolidated financial statements. For the three and six month periods ended June 30, 2019, there were no net sales or net income/loss of the France business included in discontinued operations. For the three and six month periods ended June 30, 2018, net sales of the France business included in discontinued operations totaled $131.9 million and $274.9 million, respectively, and net income of the France business included in discontinued operations totaled $4.4 million
and $9.9 million, respectively.
As previously disclosed, in March 2017 the Company sold Systemax Europe SARL and its subsidiaries (the “SARL Businesses”) which had been included in the Company's former European Technology Products segment. The sale of the SARL Businesses met the “strategic shift with major impact” criteria as described above. For the three and six month periods ended June 30, 2019, there were no net sales or net income/loss of the SARL Businesses included
in discontinued operations. For the three and six month periods ended June 30, 2018, there were no net sales of the SARL Businesses included in discontinued operations. For the three and six month periods ended June 30, 2018, net income of the SARL Businesses included in discontinued operations totaled $0.4 million and $0.2 million, respectively.
Also included in discontinued operations is the Company’s former North American Technology Group ("NATG") business, which was sold in December 2015 and is winding down its operations. The sale of the NATG business
had a major impact on the Company and therefore certain components met the strategic shift criteria as defined under ASU 2014-08. Accordingly, these components and any related results of operations are reflected in discontinued operations. For the three and six month periods ended June 30, 2019 and 2018, there were no net sales of the NATG business included in discontinued operations. Net loss from the NATG business was $0.3 million and $0.6 million, respectively, for the three and six month periods ended June 30, 2019, and net income from the NATG business was zero
for the three months ended June 30, 2018 and $0.6 million for the six months ended June 30, 2018.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2019 and the results of operations for the three and six month periods ended June 30, 2019 and 2018,
statements of comprehensive income (loss) for the three and six month periods ended June 30, 2019 and 2018, cash flows for the six month periods ended June 30, 2019 and 2018 and changes in shareholders’ equity for the three and six month periods ended June 30, 2019 and 2018. The December 31,
2018 Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2018 and for the year then ended included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The results for the six month period ended June 30, 2019 are not necessarily indicative of the results for the entire year.
Systemax manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation
herein, fiscal years and quarters are referred to as if they ended on the traditional calendar month. The actual fiscal second quarter ended on June 29, 2019 and June 30, 2018. The second quarters of both 2019 and 2018 included 13 weeks and the first six months of both 2019 and 2018 included 26 weeks.
Recent Accounting Pronouncements
Public companies in the United States are subject to the accounting and reporting requirements of various authorities, including the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). These authorities
issue numerous pronouncements, most of which are not applicable to the Company’s current or reasonably foreseeable operating structure.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted after adoption of ASU 2014-09. The Company adopted this
standard beginning January 1, 2019 and its adoption did not materially impact the Company's consolidated financial position or results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements, which eliminates, adds or modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for fiscal years beginning after December
15, 2019, including interim periods within that fiscal year, with early adoption permitted to adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company is evaluating the effect of adopting this pronouncement.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract
to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted, including adoption in any interim period. The Company is evaluating the effect of adopting this pronouncement.
In June 2016, the FASB ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as modified by subsequently issued ASU 2018-19. This ASU requires estimating credit losses for certain financial instruments, including trade receivables,
held at the reporting date based on historical experience, current conditions and reasonable forecasts. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company is evaluating the effect of adopting this pronouncement.
2. Leases
On January 1, 2019, the Company adopted ASU
2016-02, "Leases" (Topic 842). This ASU requires all companies to record their operating and finance leases that meet certain criteria under the standard as Right of Use ("ROU") assets with the corresponding lease obligations recorded as short term and long term liabilities. The Company adopted this standard utilizing the modified retrospective transition method that allows for a cumulative-effect adjustment in the period of adoption of the new leasing standard without restating prior periods. There was no cumulative-effect adjustment made to opening retained earnings upon adoption of this ASU. Additionally, the Company elected to adopt the available package of practical expedients under the transition guidance.
The
Company has operating and finance leases for office and warehouse facilities, headquarters and call centers and certain computer, communications equipment and machinery and equipment which provide the right to use the underlying assets in exchange for agreed upon lease payments, determined by the payment schedule contained in each lease. The Company determines if an arrangement is an operating or finance lease at the inception of the lease. Leases with a term of one year or less are not considered to be ROU assets. All other leases are recorded on the balance sheet, with ROU assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments
arising from the lease. The Company’s lease portfolio consists primarily of operating leases which expire at various dates through 2032.
The ROU assets and corresponding lease liabilities are recorded based upon the net present value of the remaining lease payments, discounted using interest rates determined by utilizing such factors as the Company's current credit facility terms, the length of the remaining term of the lease, the Company's expected debt credit rating and comparable company term loan yields. Adoption of the new standard resulted
in the Company recording ROU assets and lease liabilities of approximately $54 million and $64 million, respectively, at January 1, 2019. Certain leases may include options to extend the lease, however the Company is not including any impact of such options in the valuation of its ROU assets or liabilities as they are not currently probable of being extended. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. The Company has sublease agreements for
unused space we lease in the United States and Germany. For the three and six month periods ended June 30, 2019, the Company recorded $0.4 million and $1.0 million, respectively, of sublease income in continuing and discontinued operations.
In April 2019, the Company entered into a lease agreement for a portion of a distribution facility located in Texas for approximately 490,000 square feet and a lease term of 125 months. The total lease obligation is approximately $19.8
million. The Company is separately charged for real estate taxes, insurance and common area maintenance. The Company recorded an ROU asset and related lease liability of approximately $14.7 million during the second quarter of 2019.
The following table details the Company's ROU asset operating lease cost, included in continuing operations, for the three and six months ended June 30, 2019 (in millions):
The Company currently leases its headquarters office facility from an entity owned by the Company’s principal shareholders.
3.
Revenue
The
Company’s revenue generated by its operating subsidiaries is comprised of sales of MRO products as well as other industrial and business supplies that are sold by the IPG segment. IPG also has revenues from related activities, such as freight and, to a lesser extent, services.
The Company recognizes revenue when a sales arrangement with a customer exists through the Company’s invoicing or a contract, the performance obligations have been identified, the transaction price is fixed or determinable and the
Company has satisfied its performance obligations. The Company’s standard terms, provided on its invoices as well as on its websites, are included in communications with the customer and have standard payment terms of 30 days. Certain customers may have extended payment terms that have been pre-approved by the Company’s credit department, but generally none extend longer than 120 days.
The Company’s performance obligation is primarily a single obligation to deliver products. The
Company’s performance obligations are satisfied when products are transferred to a customer in accordance with agreed upon shipping terms. Certain sales may include product and/or services that are distinct and accounted for as separate performance obligations. The Company’s performance obligations for services are satisfied when the services are rendered. The Company’s total service revenue is immaterial as it accounted for less than 1% of total revenue for the second quarter and six months ended June 30, 2019 and 2018, respectively.
The
Company’s revenue is shown as “Net sales” in the accompanying Condensed Consolidated Statements of Operations and is measured as the determined transaction price, net of any variable consideration consisting primarily of rights to return product. The Company has elected to treat shipping and handling revenues as activities to fulfill its performance obligation. Billings for freight and shipping and handling are recorded in net sales and costs of freight and shipping and handling are recorded in cost of sales in the accompanying Condensed Consolidated Statements of Operations.
The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates its sales returns liability quarterly, based upon
its historical returns rates, as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately $2.1 million and $1.8 million at June 30, 2019 and December 31, 2018, respectively, and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
IPG serves customers in diverse geographies, which are subject to different economic and industry factors. The Company's presentation of revenue by geography most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and industry factors. Revenue is attributed to countries based on the location of the selling subsidiary.
The following table presents the Company's revenue by geography for the three and six months ended June 30, 2019 and 2018
(in millions):
MRO products and industrial supplies-United States
$
236.7
$
220.4
$
457.5
$
422.4
MRO
products and industrial supplies-Canada
11.9
10.8
23.3
21.0
Consolidated
$
248.6
$
231.2
$
480.8
$
443.4
4.
Discontinued
Operations and Special Charges (Gains)
The Company’s discontinued operations include the results of the France business sold in August 2018, the SARL Businesses sold in March 2017 and the NATG business sold in December 2015 (See Note 1).
In the second quarter ended June 30, 2019, the Company's NATG discontinued operations received approximately $0.2 million in vendor settlements and for the six months ended June 30, 2019, the
Company's received approximately $0.2 million in vendor settlements and recorded approximately $0.1 million of professional fees. The Company expects that total additional charges related to the NATG business after this quarter will approximately $1.0 million and that these charges will be presented in discontinued operations.
In the second quarter ended June 30, 2018, the Company recorded, within discontinued operations, net recoveries of $0.1 million related to the wind-down
of the SARL Businesses. The Company received escrow funds of approximately $0.2 million and recorded approximately $0.1 million of accelerated depreciation on fixed assets. For the six months ended June 30, 2018, the Company recorded $0.2 million recoveries of escrow funds, $0.1 million of accelerated depreciation and $0.1 million for legal and professional fees.
In the second quarter ended June
30, 2018, the Company's NATG discontinued operations received $0.1 million in vendor settlements, recorded $0.1 million in lease reserve adjustments related to their exited leased facilities and recorded approximately $0.1 million of legal and professional fees. For the six months ended June 30, 2018, the Company received $0.7 million in restitution receipts, received $0.1 million in vendor settlements, recorded approximately $0.2 million of legal and professional fees and recorded
$0.1 million in favorable lease reserve adjustments related to their leased facilities.
Below is a summary of the impact on net sales, net income (loss) and net income (loss) per share from discontinued operations for the three and six months ended June 30, 2019 and 2018.
Pretax income (loss) of Discontinued operations to the Net Income (loss) of discontinued operations
is as follows (in millions):
On
January 1, 2019the Company reclassified approximately $3.4 million of the opening balance of the NATG exit cost liability to ROU assets and operating lease obligations.
5.
Net Income per Common Share
Net income per common share - basic was calculated based upon the
weighted average number of common shares outstanding during the respective periods presented using the two class method of computing earnings per share. The two class method was used as the Company has outstanding restricted stock with rights to dividend participation for unvested shares. Net income per common share - diluted was calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective periods, including unvested options. The dilutive effect of outstanding options and restricted stock issued by the Company is reflected in net income per share - diluted using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price
of common stock during the period exceeds the exercise price of the options.
The weighted average number of stock options outstanding included in the computation of diluted earnings per share was 0.3 million and $0.6 million shares for the three months ended June 30, 2019 and 2018, respectively, and 0.3 million shares and 0.6 million
shares for the six months ended June 30, 2019 and 2018, respectively. The weighted average number of restricted stock awards included in the computation of diluted earnings per share was 0.1 million and 0.1 million shares for the three months ended June 30, 2019 and 2018, respectively, and 0.2 million shares and 0.2 million shares for the six months ended June 30, 2019 and 2018, respectively. The weighted average number of stock options outstanding excluded from the computation of diluted earnings
per share due to their antidilutive effect was 0.2 million shares for the three and six months ended June 30, 2019 and none for the three and six months ended June 30, 2018.
6.
Credit Facilities
The Company maintains
a $75 million secured revolving credit facility with one financial institution, which has a five year term, maturing on October 28, 2021 and provides for borrowings in the United States. The credit agreement contains certain operating, financial and other covenants, including limits on annual levels of capital expenditures, availability tests related to payments of dividends and stock repurchases and fixed charge coverage tests related to acquisitions. The revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the Company will be required to maintain a fixed charge coverage ratio (as defined). The borrowings under the agreement
are subject to borrowing base limitations of up to 85% of eligible accounts receivable and the inventory advance rate computed as the lesser of 60% or 85% of the net orderly liquidation value (“NOLV”). Borrowings are secured by substantially all of the Borrower’s assets, as defined, including all accounts, accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral. The interest rate under the amended and restated facility is computed at applicable market rates based on the London interbank offered rate (“LIBOR”), the Federal Reserve Bank of New York (“NYFRB”) or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability. As of June 30,
2019, eligible collateral under the credit agreement was $75.0 million, total availability was $73.0 million, total outstanding letters of credit were $1.3 million, total excess availability was $71.7 million and there were no outstanding borrowings. The Company was in compliance with all of the covenants of the credit agreement in place as of June 30, 2019.
7. Fair
Value Measurements
Financial instruments consist primarily of investments in cash, trade accounts receivable, debt and accounts payable. The Company estimates the fair value of financial instruments based on interest rates available to the Company. At June 30, 2019 and 2018, the carrying amounts of cash, accounts receivable and accounts payable are considered to be representative of their respective fair values due to their short-term nature. Cash is classified as Level 1 within the fair value hierarchy. The
Company’s debt is considered to be representative of its fair value because of its variable interest rate.
The fair value with respect to goodwill and non-amortizing intangibles assets is measured in connection with the Company’s annual impairment testing. The Company performs a qualitative assessment of goodwill and non-amortizing intangibles to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment shows that the fair value of the reporting unit exceeds its carrying amount, the Company is not required to complete the annual two
step goodwill impairment test. If a quantitative analysis is required to be performed for goodwill, the fair value of the reporting unit to which the goodwill has been assigned is determined using a discounted cash flow model. A discounted cash flow model is also used to determine fair value of indefinite-lived intangibles using projected cash flows of the intangible. Unobservable inputs related to these discounted cash flow models include projected sales growth, gross margin percentages, new business opportunities, working capital requirements, capital expenditures and growth in selling, distribution and administrative expense. Any excess of a reporting unit's carrying amount over fair value would be charged to impairment expense.
Long-lived assets are assets used in the Company’s operations
and include definite-lived intangible assets, leasehold improvements, warehouse and similar property used to generate sales and cash flows. Long-lived assets are tested for impairment utilizing a recoverability test, whenever circumstances indicate that an impairment may have occurred. The recoverability test compares the carrying value of an asset group to the undiscounted cash flows directly attributable to the asset group over the life of the primary asset. If the undiscounted cash flows of an asset group is less than the carrying value of the asset group, the fair value of the asset group is then measured. If the fair value is also determined to be less than the carrying value of the asset group, the asset group is impaired.
The Company and its subsidiaries are from time to time involved in various lawsuits, claims, investigations and proceedings which may include commercial, employment, tax, customs and trade, customer, vendor, personal injury, creditors rights and health and safety law matters, which are handled and defended in the ordinary course of business. In addition, the
Company is from time to time subjected to various assertions, claims, proceedings and requests for damages and/or indemnification concerning sales channel practices and intellectual property matters, including patent infringement suits involving technologies that are incorporated in a broad spectrum of products the Company sells or that are incorporated in the Company’s e-commerce sales channels, as well as trademark/copyright infringement claims. The Company is also audited by (or has initiated voluntary disclosure agreements with) various U.S. Federal and state authorities, as well as Canadian authorities, concerning potential income tax, sales tax and/or "unclaimed property" liabilities. These matters
are in various stages of investigation, negotiation and/or litigation. The Company is also being audited by an entity representing 28 states seeking recovery of “unclaimed property” and has received separate demands from 20 states requesting payments of their claimed amounts. The Company is complying with the unclaimed property audit, is providing requested information and is corresponding with the states regarding possible further discussions. The Company intends to vigorously defend these matters and believes it has strong defenses. In September 2017 the
Company and certain subsidiaries comprising its former NATG “Tiger” consumer electronics business were sued in United States District Court, Northern District of California by a software publisher alleging that the NATG subsidiaries violated certain contractual sales channel restrictions resulting in claims of breach of contract and trademark/copyright infringement. Although Systemax Inc. has been dismissed from the case, the Company is continuing to assess the remaining claims against and the defenses available to the remaining subsidiary defendants and related possible insurance coverage; the
Company cannot predict the outcome of this matter and believes the potential damages, if any, cannot be estimated at this time.
Although the Company does not expect, based on currently available information, that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial position or results of operations, the ultimate outcome is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company regularly assesses all of its litigation
and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for its various lawsuits, claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably estimated. At June 30, 2019the Company has established accruals for certain of its various lawsuits, claims, investigations and proceedings based upon estimates of the most likely outcome in a range of loss or the minimum amounts
in a range of loss if no amount within a range is a more likely estimate. The Company does not believe that at June 30, 2019 any reasonably possible losses in excess of the amounts accrued would be material to the financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This
report contains forward looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward looking statements may be made by the Company from time to time, in filings with the Securities and Exchange Commission or otherwise. Statements contained in this report that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are based on management’s estimates, assumptions and projections and are not guarantees of future performance. Forward looking statements may include, but are not limited to, projections or estimates of revenue, income or loss, exit costs, cash flow needs and capital expenditures, fluctuations
in general economic conditions, future operations, plans relating to new distribution facilities, plans for utilizing alternative sources of supply in response to government tariff and trade actions, and plans for new products or services, plans for acquisition or sale of businesses, including expansion or restructuring plans, such as our exit from and winding down of our sold North American Technology Group ("NATG") operations and European operations, financing needs, compliance with financial covenants in loan agreements, assessments of materiality, predictions of future events and the effects of pending and possible litigation and assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates,”“believes,”“estimates,”“expects,”“intends,”“plans” and variations thereof and similar expressions are intended to identify forward looking statements.
Other factors that may affect our future results of operations and financial condition include, but are not limited to, unanticipated developments in any one or more of the following areas, as well as other factors which may be detailed from time to time in our Securities and Exchange Commission filings: general economic conditions, such as customer inventory levels, interest rates, borrowing ability and economic conditions in the manufacturing industry generally, will continue to impact our business; the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, have caused us to raise the prices on certain of our products and seek alternate sources of supply, which could negatively impact our sales or disrupt our operations in the future; increases in freight and shipping costs have from time to time impacted our margins to the extent the increases could not
be passed along to customers in a timely manner and may impact our margins again in the future, and factors affecting the shipping and distribution of products imported to the United States by us or our domestic vendors, such as global availability of shipping containers and fuel costs; our reliance on common carrier delivery services for shipping inventoried merchandise to customers; our reliance on drop ship deliveries directly to customers by our product vendors for products we do not hold in inventory; delays in the timely availability of products from our suppliers could delay receipt of needed product and result in lost sales; our ability to maintain available capacity in our distribution operations for stocked inventory and to enable on time shipment and deliveries, such as by timely implementing additional temporary or permanent distribution resources, whether in the form of additional facilities we operate or by outsourcing certain functions to third party distribution
and logistics partners; we compete with other companies for recruiting, training, integrating and retaining talented and experienced employees, particularly in markets where we and they have central distribution facilities; this aspect of competition is aggravated by the current tight labor market in the U.S.; risks involved with e-commerce, including possible loss of business and customer dissatisfaction if outages or other computer-related problems should preclude customer access to our products and services; our information systems and other technology platforms supporting our sales, procurement and other operations are critical to our operations and disruptions or delays have occurred and could occur in the future, and if not timely addressed could have a material adverse effect on us; a data security breach due to our e-commerce, data storage or other information systems being hacked by those seeking to steal Company, vendor, employee or customer information, or
due to employee error, resulting in disruption to our operations, litigation and/or loss of reputation or business; managing various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights from our vendors; meeting credit card industry compliance standards in order to maintain our ability to accept credit cards; rising interest rates, increased borrowing costs or limited credit availability, including our own ability to maintain satisfactory credit agreements and to renew credit facilities, could impact both our and our customers’ ability to fund purchases and conduct operations in the ordinary course; pending or threatened litigation and investigations, as well as anti-dumping and other government trade and customs proceedings, could adversely affect our business and results of operations; sales tax laws or government enforcement priorities may be changed which could result in e-commerce and direct
mail retailers having to collect sales taxes in states where the current laws and/or prior interpretations do not require us to do so; and extreme weather conditions could disrupt our product supply chain and our ability to ship or receive products, which would adversely impact sales.
Forward-looking statements in this report are based on the Company’s beliefs and expectations as of the date of this report and are subject to risks and uncertainties which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of the risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Statements in this report, particularly in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Condensed Consolidated Financial Statements, as well as information under the heading “Risk Factors” in our Annual Report on Form 10-K for fiscal year 2018, describe certain factors, among others, that could contribute to or cause such differences.
Readers are cautioned not to place undue reliance on any forward looking statements contained in this report, which speak only as of the date of this report. We undertake no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unexpected events.
Overview
Systemax Inc., through its operating subsidiaries, is primarily a direct marketer of brand name and private label industrial and business equipment and supplies in North America going to market through a system of branded e-commerce websites and relationship marketers. As a result of the sale of its France-based IT value added reseller business, the Company operates and is internally managed in one reportable business segment, Industrial Products Group
(“IPG”), which includes its former Corporate and other segment. IPG focuses on industrial supplies and MRO (maintenance, repair and operations) markets the Company has served since 1949.
On August 31, 2018, the Company closed on the sale of its France-based IT value added reseller business. The sale was denominated on a cash-free, debt-free basis and included normalized working capital adjustments. The France business had been included in
the Company's former European Technology Products segment. Initially, the Company was providing limited transition services to the France business for a period of up to six months, following the closing, under a transition services agreement. This transition services agreement was extended in the first quarter of 2019 for an additional six month period.
The sale of the France business and SARL Businesses met the “strategic shift with major impact” criteria as defined under Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which allows for dispositions with major impact to be presented in the financial statements as discontinued operations. Therefore, the prior year results of the France business and SARL Businesses are included in discontinued operations in the accompanying condensed consolidated financial statements. For the three months ended June
30, 2019 and 2018, net sales of the France business included in discontinued operations totaled $0 and $131.9 million, respectively, and for the six months ended June 30, 2019 and 2018, net sales totaled $0 and $274.9 million, respectively. For the three months ended June 30, 2019 and 2018, net income of the France business included in discontinued operations totaled $0 and $4.4 million, respectively, and for the six months ended June 30, 2019 and 2018, net income totaled $0 and $9.9 million. For the three and six months ended June 30, 2019, there was no activity related
to the SARL Businesses in net sales or net income (loss) in discontinued operations and for the three and six month periods ended June 30, 2018, net income of the SARL Businesses included in discontinued operations totaled $0.4 million and $0.2 million, respectively.
On December 1, 2015, the Company sold its NATG operating businesses and began the wind-down of its remaining NATG operations. The sale of the NATG business had a major impact on the Company and therefore certain components met the strategic shift criteria
as defined under ASU 2014-08. In the second quarter and six months ended June 30, 2019 and 2018, there were no net sales recorded for discontinued NATG operations within discontinued operations. In the second quarter and six months ended June 30, 2019, net loss totaled $0.3 million and $0.6 million, respectively, primarily related to operating expenses and legal and professional fees. For the three months ended June 30, 2018, there was no net income recorded for the discontinued NATG operations and for the six months ended June 30, 2018, net income of $0.6 million was recorded primarily related to restitution payments and vendor settlements received offset by legal and professional fees and operating expenses.
In
order to provide more meaningful information to investors, the Company is presenting its operating income and operating margin on a non-GAAP basis in the “Reconciliation of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing Operations" table. This non-GAAP presentation reflects the Misco Germany operations as discontinued operations for all periods presented. Additional non-GAAP adjustments for executive separation and transition costs, intangible amortization and equity compensation are made to continuing operations. Management’s Discussion and Analysis that follows will include our current and discontinued operations.
Continuing Operations
The
Company sells a wide array of industrial and general business hard goods and supplies and to a lesser extent products that would fall into the generally recognizable category of maintenance, repair and operational ("MRO") products, which are marketed in North America. Many of these products are manufactured by other companies. Some products are manufactured for us and sold under our brand as a white label product, and some are manufactured to our own design and marketed under the trademarks: GlobalTM, GlobalIndustrial.comTM, NexelTM, ParamountTM and InterionTM..
See
Note 3 to the condensed consolidated financial statements for additional financial information about our business' geographic operations.
Discontinued Operations
As disclosed above, the operating results of discontinued operations in the accompanying financial statements are primarily from the France business sold in August 2018 and the NATG business sold in 2015.
Operating Conditions
The North American industrial products market is highly fragmented and we compete against multiple distribution channels. Industrial products distribution is working capital intensive, requiring us to incur significant costs
associated with the warehousing of many products, including the costs of maintaining inventory, leasing warehouse space, inventory management systems and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stock and drop-shipment fulfillment.
The primary component of our operating expenses historically has been employee-related costs, which includes items such as wages, commissions, bonuses, employee benefits and equity based compensation, as well as marketing
expenses, primarily comprised of digital marketing spend, and occupancy related charges associated with our distribution and call center facilities. We continually assess our operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs.
In the discussion of our results of operations, constant currency refers to the adjustment of the results of our foreign operations to exclude the effects of period to period fluctuations in currency exchange rates.
The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements, the factors that we believe may affect our future results and financial condition as well as information about how certain accounting
principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the condensed consolidated financial statements included herein and in conjunction with the audited financial statements as of December 31, 2018 and the other information provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements, and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company’s 2018 Annual Report on Form 10-K.
Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations, require management’s most difficult, subjective and complex judgments, and involve uncertainties. The accounting policies that have been identified as critical to our business operations and understanding the results of operations pertain to revenue recognition; accounts receivable and allowance for doubtful accounts;
inventory valuation; right of use assets; goodwill and intangible assets; long-lived assets; income taxes; and special charges. The application of each of these critical accounting policies and estimates was discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes in the application of critical accounting policies or estimates during 2019. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the condensed consolidated financial statements of the Company accurately reflect management’s best estimate of the consolidated results of operations, financial position and cash flows of the
Company for the periods presented. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. We are not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect the Company’s financial condition or results of operations.
Public companies in the United States are subject to the accounting and reporting requirements of various authorities, including the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). These authorities issue numerous pronouncements, most of which are not applicable to the
Company’s current or reasonably foreseeable operating structure. See Note 1 of the condensed consolidated financial statements, Recent Accounting Pronouncements.
Highlights from Q2 2019 and Year to Date Q2 2019
The discussion of our results of operations and financial conditions that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the condensed consolidated financial statements included herein.
•
Consolidated
sales increased 7.5% to $248.6 million for the second quarter ended June 30, 2019 compared to $231.2 million in 2018 and increased 8.4% to $480.8 million for the six months ended June 30, 2019 compared to $443.4 million in 2018.
•
On a constant currency basis, average daily sales increased 7.8% for the second quarter ended June 30, 2019 compared to 2018 and increased 8.7% for the six months ended June 30, 2019 compared to 2018.
•
Consolidated
operating income grew 9.3% to $20.0 million for the second quarter ended June 30, 2019 compared to $18.3 million in 2018 and grew 12.9% to $33.2 million for the six months ended June 30, 2019 compared to $29.4 million in 2018.
•
Net income per diluted share from continuing operations grew 11.4% to $0.39 for the second quarter ended June 30, 2019 compared to $.35 in 2018 and grew 13.8% to $0.66 for the six months ended June 30, 2019 compared to $0.58 in 2018.
Reconciliation of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing Operations – Unaudited
(in millions)
Three
Months Ended June 30,
Change
Six Months Ended June 30,
Change
GAAP:
2019
2018
2019 vs. 2018
2019
2018
2019
vs. 2018
Net sales
$
248.6
$
231.2
7.5
%
480.8
443.4
8.4
%
Average
daily sales*
3.9
3.6
7.8
%
3.8
3.5
8.7
%
Operating
income
20.0
18.3
9.3
%
33.2
29.4
12.9
%
Operating
margin%
8.0
%
7.9
%
6.9
%
6.6
%
Non-GAAP
adjustments:
Executive separation & transition costs
0.4
0.0
1.0
0.0
Stock
based compensation
1.3
0.2
2.4
0.5
Intangible
amortization
0.1
0.2
0.1
0.5
Reverse
results of Germany included in GAAP continuing operations
0.1
0.0
0.1
0.0
Total
Non-GAAP Adjustments:
1.9
0.4
3.6
1.0
Non-GAAP
operating income
$
21.9
$
18.7
17.1
%
$
36.8
$
30.4
21.1
%
Non-GAAP
Operating Margin %
8.8
%
8.1
%
7.6
%
6.9
%
*
Average
daily sales is calculated based upon the number of selling days in each period, converted to US Dollars on a constant currency basis. In Q2 2019 and 2018 there were 64 selling days in the U.S and for the first six months of 2019 and 2018 there were 128 selling days. In Canada there were 63 selling days in Q2 2019 and 64 selling days in Q2 2018 and for the first six months of 2019 and 2018 there were 126 selling days.
1
On August 31, 2018, the
Company closed on the sale of the France operations. Results of this divested business have been classified as discontinued operations for all periods presented. On March 24, 2017, the Company closed on the sale of its European Technology Group businesses, other than its operations in France. Prior year results of these divested businesses have been classified as discontinued operations. On December 1, 2015the Company closed on the sale of certain assets of its North American Technology Group (“NATG”). Pursuant to this transaction, the Company continues to wind down the remaining operations of NATG during
2019. Costs of the wind down in the second quarter and six months ended June 30, 2019 and 2018 are included within discontinued operations.
2
In order to provide more meaningful information to investors, the Company is presenting its operating income and operating margin on a non-GAAP basis in the “Reconciliation
of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing Operations" table. This non-GAAP presentation reflects the Misco Germany operations as discontinued operations for all periods presented. Additional non-GAAP adjustments for executive separation and transition costs, intangible amortization and equity compensation are made to continuing operations.
3
Systemax
manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation, fiscal years and quarters are described as if they ended on the last day of the respective calendar month. The actual fiscal quarter ended on June 29, 2019 and June 30, 2018. The second quarters of both 2019 and 2018 included 13 weeks and the first six months of 2019 and 2018 included 26 weeks.
Management’s discussion and
analysis that follows will include current operations and discontinued operations. The discussion is based upon the GAAP Results of Operations table.
NET SALES
The Company's net sales benefited during the quarter ended June 30, 2019 from continued strong demand across the business with solid performance across sales channels, specifically managed sales, where we continue to invest in sales productivity and training initiatives. Revenue performance was broad based across product categories, with growth continuing to be led by newer product lines where we are investing in subject matter expertise, sales training and an expanding product offering. Net sales
also benefited from above market growth in our Canada business which delivered its tenth consecutive quarter of double digit growth. Canada sales were up approximately 16% in local currency on an average daily sales basis for the quarter and six months ended June 30, 2019 compared to the same period in 2018. U.S. revenue was up 7.5% in the quarter ended June 30, 2019 compared to the same period in 2018 and up 8.4% for the six months ended June 30, 2019. On a constant currency basis, average daily sales increased 7.8% for the second quarter of 2019 compared to the same period in 2018 and increased 8.7% for the six months ended June 30, 2019. In the U.S., there were 64 selling days in the second quarter of 2019 and 2018 and 128 selling days for the six months ended June
30, 2019 and 2018. In Canada there were 63 selling days in the second quarter of 2019 and 64 selling days in the second quarter of 2018 and 126 selling days for the six months ended June 30, 2019 and 2018.
GROSS MARGIN
Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, cooperative advertising funds classified as a reduction to cost of sales, free freight and freight discounting arrangements, inventory valuation and obsolescence and other variables, any or all of which may result in fluctuations in gross margin.
Gross
margin was unchanged in the second quarter of 2019 compared to the second quarter of 2018 reflecting proactive management of our inventory, purchasing and sell prices as the Company addressed the 10% tariffs, enacted in September 2018, which were levied by the U.S. on products imported from China. Gross margin increased 20 basis points for the six months ended June 30, 2019 compared to 2018. The Company is managing the latest round of tariffs which increased to 25% in June 2019 in a similar fashion to how it managed the initial tariffs. The Company continues to believe that any impact will be gradual as it monitors sell prices in the market, continues to work with
suppliers to mitigate costs, and actively reviews its supply chain.
SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (“SD&A”)
SD&A costs as a percentage of sales was 26.5% in the second quarter of 2019 compared to 26.7% for the same period in 2018. Included in the second quarter of 2019 was approximately $0.4 million of executive separation and transition expense. Excluding these expenses, SD&A improved 30 basis points as a percentage of sales compared to the prior year. This improvement was primarily the result of improved efficiencies across our operations, including marketing spend. In the second quarter of 2019, the significant cost increases were increased salary and related costs of approximately $3.0 million, of which $0.4 million related to executive separation
and transition costs previously mentioned and increased net internet advertising spend of approximately $1.0 million and increased contract services costs of approximately $0.2 million and approximately $0.4 million of costs associated with our new distribution center offset by savings in telephony and consulting fees of approximately $0.2 million. For the six months ended June 30, 2019 SD&A costs as a percentage of sales was 27.7% compared to 27.8% for the same period in 2018. Included in the first six months of 2019 was approximately $1.0 million of executive separation and transition costs and $0.6 million of equity compensation expense related to the repricing of stock options. Excluding these expenses, SD&A for the first six months of 2019 improved 40 basis points as a percentage of sales compared to the same period
in 2018. The significant cost increases for the six months ended June 30, 2019 were increased salary and related costs of approximately $6.8 million, of which $1.6 million related to executive separation and transition costs previously mentioned, increased net internet advertising spend of approximately $1.5 million, increased contract services costs of approximately $0.7 million and approximately $0.4 million of costs associated with our new distribution center.
DISCONTINUED OPERATIONS AND SPECIAL CHARGES (GAINS)
The Company’s discontinued operations include the
results of the France business sold in August 2018, the SARL Businesses sold in March 2017 and the NATG business sold in December 2015 (See Note 1).
Total special charges and gains included in discontinued operations totaled $0.2 million gain for the second quarter of 2019, $0.1 million gain for the six months ended June 30, 2019 and a $0.7 million gain for the six months ended June 30, 2018.
Operating margin for the three and six months ended June 30, 2019 increased by 10 basis points and 30 basis points, respectively, compared to the same period in 2018. The increase was driven by increased sales and freight margin, improved leverage within our fixed cost structure and good spend discipline in regards to marketing and general operating expenses.
INTEREST AND OTHER (INCOME) EXPENSE, NET
Interest and other (income) expense, net from continuing operations was $0.1 million income in the second quarter and six months ended June 30, 2019 compared to $0.0 and $0.1 million expense in
the second quarter and six months ended June 30, 2018.
INCOME TAXES
For the quarter ended June 30, 2019the Company recorded income taxes in continuing operations of approximately $5.2 million, for an effective tax rate of 25.9%. For the first six months of 2019 the Company reported income taxes in continuing operations of approximately $8.4 million, for an effective tax rate of 25.2%. Tax expense is related to the Company's U.S. and
India operations and certain U.S. states. The Company's tax expense for the first six months of 2019 was favorably impacted by tax benefits of approximately $0.3 million related to stock-based compensation.
For Canadian tax purposes, the Company continues to carry a full valuation allowance against its deferred tax assets in Canada in 2019, including its net operating losses, and no tax expense has been recorded.
Financial Condition, Liquidity and Capital Resources
The following tables present selected liquidity data and historical
cash flows (in millions):
Our primary liquidity needs are to support working capital requirements in our business, including the start up costs for our new Texas distribution center anticipated to commence operations in the third quarter of 2019, funding recently declared and any future dividends, funding capital expenditures, continued investment in upgrading and expanding our technological capabilities and information technology infrastructure and funding acquisitions. We rely principally upon operating cash flow to meet these needs. We believe that cash flow available from these sources and our availability under our credit facility will be sufficient to fund our working capital and other cash requirements for at least the next twelve months. We believe our current capital structure and cash resources are adequate for our internal growth initiatives. To the extent our growth initiatives expand, including major
acquisitions, we may seek to raise additional capital. We believe that, if needed, we can access public or private funding alternatives to raise additional capital.
Our working capital increased $7.4 million primarily related to net income in the first six months of 2019, increased accounts receivable balances offset by decreasing balances in inventory, prepaid and other current assets compared to increased balances in accounts payable and dividends paid in 2019. accrued expenses and the recording of $11.4 million of current operating lease liabilities. Accounts receivable days outstanding were 35.2 in 2019 compared to 34.0 in 2018. Inventory turns were 6.0 in 2019 and 6.3 in 2018 and accounts payable days outstanding were 64.6 in 2019 compared to 72.8 in 2018. We expect that future accounts receivable, inventory and accounts payable balances will fluctuate with net sales
and the product mix of our net sales.
Net cash provided by continuing operations was $50.1 million resulting from changes in our working capital accounts, which provided $20.2 million in cash compared to $7.3 million used in 2018, primarily the result of the changes in accounts payable balances and additional changes in inventory balances, accrued expenses and other current and non-current liabilities. Cash generated from net income adjusted by other non-cash items provided $29.9 million compared to $25.3 million provided by these items in 2018, primarily related to the net income from continuing operations and increased stock-based compensation expense in 2019. In the first quarter of 2019, the Company repriced approximately 0.6 million shares of outstanding stock options and recorded approximately
$0.6 million of related compensation expense. Net cash provided by operating activities from discontinued operations was $0.1 million for the six months ended June 30, 2019 and $1.7 million used for the six months ended June 30, 2018.
Net cash used in investing activities from continuing operations totaled $2.4 million, primarily related to the Company's new distribution center in Texas and other warehouse projects including wire decking, in-rack sprinkler systems and warehouse lighting. Net cash used in investing activities in 2018 totaled $1.1 million primarily for warehouse and information technology equipment and leasehold improvements. Net cash used in investing activities from discontinued
operations was zero and $0.3 million for the six months ended June 30, 2019 and 2018, respectively.
Net cash used in financing activities totaled $252.3 million primarily related to the payment of the special dividend declared in December 2018 of $243.5 million and the regular quarterly dividends of $4.5 million each. Proceeds from the issuance of common stock from employee stock purchase plan was $0.4 million and proceeds from stock option exercises was $0.6 million, offset by payments of payroll taxes on stock based compensation through shares withheld of $0.8 million. In 2018, cash used in financing activities totaled $101.5 million and included approximately $101.1 million for dividends paid, $0.9 million in stock option exercises offset by payments of payroll taxes on stock
based compensation through shares withheld of $1.3 million.
The Company maintains a $75.0 million secured revolving credit facility with one financial institution, which has a five year term, maturing on October 28, 2021 and provides for borrowings in the United States. The credit agreement contains certain operating, financial and other covenants, including limits on annual levels of capital expenditures, availability tests related to payments of dividends and stock repurchases and fixed charge coverage tests related to acquisitions. The revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the
Company will be required to maintain a fixed charge coverage ratio (as defined). The borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and the inventory advance rate computed as the lesser of 60% or 85% of the net orderly liquidation value (“NOLV”). Borrowings are secured by substantially all of the Borrower’s assets, including all accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral. The interest rate under the amended and restated facility is computed at applicable market rates based on the London interbank offered rate (“LIBOR”), the Federal Reserve Bank of New York (“NYFRB”) or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability. As of June 30, 2019, eligible
collateral under the credit agreement was $75.0 million, total availability was $73.0 million, total outstanding letters of credit were $1.3 million, excess availability was $71.7 million and there were no outstanding borrowings. The Company was in compliance with all of the covenants of credit agreement in place as of June 30, 2019.
We also have certain obligations with various parties that include commitments to make future payments. Our principal commitments at June 30, 2019 consisted of payments under operating leases for certain of our real property and equipment and payments under employment, product and other service agreements.
Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, distribution and administrative costs as a percentage of sales, product mix and relative levels of domestic and foreign sales. Unusual gains or expense items, such as special (gains) charges and settlements, may impact earnings and are separately disclosed. We expect that past performance may not be indicative of future performance due to the competitive nature of our business where the need to adjust prices to gain or hold market share is prevalent.
Macroeconomic conditions, such as business and consumer sentiment, may affect our revenues, cash flows or financial condition. However, we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues,
cash flows or financial condition. We are not currently interest rate sensitive, as we have minimal debt.
The expenses and capital expenditures described above will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources. In 2019 we anticipate capital expenditures in the range of $5.0 to $7.0 million, of which we are contractually committed to incur approximately $1.5 to $2.0 million of these expenditures.
Over the past several years we have engaged in opportunistic acquisitions, choosing to pay the purchase price in cash, and may do so in the future as favorable situations arise. However, a deep and prolonged period of reduced business spending could adversely impact our cash resources and force us to either forego
future acquisition opportunities or to pay the purchase price in shares of our common stock, which could have a dilutive effect on our earnings per share. We believe that cash flows from operations and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for the next twelve months.
We maintain our cash and cash equivalents in money market funds or their equivalent that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees. As of June 30, 2019, we had no investments with maturities of greater than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. At June 30, 2019 cash balances held in foreign
subsidiaries totaled approximately $4.2 million. These balances are held in local country banks. The Company intends to repatriate excess foreign cash balances when available and when it is tax efficient. The Company had in excess of $158 million of liquidity (cash and undrawn line of credit) in the U.S. as of June 30, 2019, which is sufficient to fund its U.S. operations and capital needs, including dividend payments, for the foreseeable future.
Off-balance Sheet Arrangements.
The
Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We
are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Canadian dollars) as measured against the U.S. dollar and each other.
The translation of the financial statements of our operations outside of the United States is impacted by movements in foreign currency exchange rates. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect income statement, balance sheet and cash flows as expressed in U.S. dollars. We have limited involvement with derivative financial instruments and do not use them for trading purposes. We may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency
fluctuations, but as of June 30, 2019 we had no outstanding option or forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable rate debt consists of short-term borrowings under our credit facilities. As of June 30, 2019, there were no outstanding balances under our variable rate credit facility. A hypothetical change in average interest rates of one percentage point is not expected to have a material effect on our financial position, results of operations or cash flows.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls
and procedures as of June 30, 2019. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.
The Company’s internal control over financial reporting is designed 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. The
Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the Company’s financial statements.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarterly period ended June 30,
2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The
Company and its subsidiaries are from time to time involved in various lawsuits, claims, investigations and proceedings which may include commercial, employment, tax, customs and trade, customer, vendor, personal injury, creditors rights and health and safety law matters, which are handled and defended in the ordinary course of business. In addition, the Company is from time to time subjected to various assertions, claims, proceedings and requests for damages and/or indemnification concerning sales channel practices and intellectual property matters, including patent infringement suits involving technologies that are incorporated in a broad spectrum of products the Company sells or that are incorporated in
the Company’s e-commerce sales channels as well as trademark/copyright infringement claims. The Company is also audited by (or has initiated voluntary disclosure agreements with) various U.S. Federal and state authorities, as well as Canadian authorities, concerning potential income tax, sales tax and/or "unclaimed property" liabilities. These matters are in various stages of investigation, negotiation and/or litigation. The Company is also being audited by an entity representing 28 states seeking recovery of “unclaimed property” and has received separate demands from 20 states requesting payments of their claimed
amounts. The Company is complying with the unclaimed property audit, is providing requested information and is corresponding with the states regarding possible further discussions. The Company intends to vigorously defend these matters and believes it has strong defenses. In September 2017 the Company and certain subsidiaries comprising its former NATG “Tiger” consumer electronics business were sued in United States District Court, Northern District of California by a software publisher alleging that the NATG subsidiaries violated
certain contractual sales channel restrictions resulting in claims of breach of contract and trademark/copyright infringement. Although Systemax Inc. has been dismissed from the case, the Company is continuing to assess the remaining claims against and the defenses available to the remaining subsidiary defendants and related possible insurance coverage; the Company cannot predict the outcome of this matter and believes the potential damages, if any, cannot be estimated at this time.
Although the Company does not expect, based on currently
available information, that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial position or results of operations, the ultimate outcome is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company regularly assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for
its various lawsuits, claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably estimated. At June 30, 2019the Company has established accruals for certain of its various lawsuits, claims, investigations and proceedings based upon estimates of the most likely outcome in a range of loss or the minimum amounts in a range of loss if no amount within a range is a more likely estimate. The Company does not believe that at June 30, 2019 any reasonably possible losses in excess of the amounts
accrued would be material to the financial statements.
Lease Agreement, dated April
18, 2019, by and between Global Industrial Distribution Inc. (tenant) and HLIT II CTC 3, L.P. (landlord) (DeSoto, TX facility) (exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K).
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.
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.
