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Systemax(GIC) - 2019 Q4 - Annual Report

Part I Business Overview Systemax Inc. directly sells branded and private-label industrial and commercial equipment and supplies in North America, leveraging e-commerce and relationship marketing for a broad product range and efficient fulfillment Company Overview - Systemax Inc., founded in 1995 and headquartered in Port Washington, New York, primarily directly sells industrial and commercial equipment and supplies in the North American market14 Products - The company offers over one million branded and private-label products, with access to a database of over 1.7 million products, primarily in core categories like storage, material handling, cleaning and maintenance, furniture, and workstations1718 - Private-label brands include Global™, GlobalIndustrial.com™, Nexel™ Paramount™, and Interion™, offering high-quality, competitively priced alternatives1518 Sales and Marketing - The company primarily targets business customers, including for-profit enterprises, educational institutions, and government entities, utilizing a multi-channel direct sales system and customer lifecycle marketing programs19 - Marketing strategies involve relationship marketers building personal customer connections, continuous upgrades and enhancements to e-commerce websites (e.g., globalindustrial.com), and catalog mailings202124 Customer Service, Order Fulfillment and Support - In 2019, the company launched initiatives like 'Voice of the Customer' to gather feedback via phone and online surveys, enhancing customer experience25 - Orders are received through various channels, including the internet, EDI, customer punch-out catalogs, online chat, and telephone call centers26 - The company employs a procurement strategy combining inventory and vendor direct shipping, operating five large distribution centers in the US and two smaller facilities in Canada to ensure timely shipments2728 Suppliers - Company products and components are primarily sourced from large and small manufacturers and wholesale distributors, with no single supplier accounting for 10% or more of total product purchases from continuing operations in 2019, 2018, or 201730 Competition and Other Market Factors - The North American industrial products market is highly fragmented and competitive, with major rivals including large MRO distributors and retailers like Grainger Inc., MSC Industrial Direct Inc., Fastenal Inc., and Amazon31 - Customer purchasing decisions are primarily based on price, product selection, availability, service levels, credit terms, and convenience31 Employees - As of December 31, 2019, the company had approximately 1,430 employees, with 1,290 in North America and 140 in Asia32 - Employee composition: 39% in customer service and sales, 38% in distribution, logistics, and fulfillment, and 22% in administrative functions32 Environmental Matters - The company leases all its facilities and may be liable for hazardous substance removal or remediation costs under environmental laws, but has not received significant environmental liability notices to date35 Financial Information About Domestic and Foreign Operations - The vast majority of the company's product sales are to North American customers (primarily in the US and Canada), with net sales from non-US subsidiaries accounting for 4.8%, 4.7%, and 4.1% of continuing operations' net sales in 2019, 2018, and 2017, respectively36 2017-2019 Financial Information for Continuing Operations by Geographic Area (Millions of US Dollars) | Metric | North America (2019) | Europe and Asia (2019) | Total (2019) | North America (2018) | Europe and Asia (2018) | Total (2018) | North America (2017) | Europe and Asia (2017) | Total (2017) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | $946.9 | $0.0 | $946.9 | $896.9 | $0.0 | $896.9 | $791.8 | $0.0 | $791.8 | | Operating Income (Loss) | $64.8 | $1.3 | $66.1 | $61.5 | $0.2 | $61.7 | $46.1 | $(0.4) | $45.7 | | Identifiable Assets | $393.8 | $3.1 | $396.9 | $526.6 | $3.4 | $530.0 | $362.4 | $189.0 | $551.4 | Available Information - The company provides free access to SEC filings, including annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K), as well as corporate governance documents, on its website at www.systemax.com[39](index=39&type=chunk)40 - The company primarily directly sells branded and private-label industrial and commercial equipment and supplies in the North American market, utilizing e-commerce websites and relationship marketing for sales1415 - The company offers over one million products, covering core categories such as storage, material handling, cleaning and maintenance, and office furniture, while actively expanding into emerging categories like HVAC/R, safety, and outdoor maintenance1718 - The company employs a multi-channel direct sales system, including relationship marketers, e-commerce websites (e.g., globalindustrial.com), and catalog mailings, to maximize customer acquisition, retention, and sales192021 - The company operates five large distribution centers in North America and two smaller Canadian distribution facilities, leveraging vendor direct shipping to enhance service levels and product supply efficiency28 2017-2019 Financial Information for Continuing Operations by Geographic Area (Millions of US Dollars) | Metric | North America (2019) | Europe and Asia (2019) | Total (2019) | North America (2018) | Europe and Asia (2018) | Total (2018) | North America (2017) | Europe and Asia (2017) | Total (2017) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | $946.9 | $0.0 | $946.9 | $896.9 | $0.0 | $896.9 | $791.8 | $0.0 | $791.8 | | Operating Income (Loss) | $64.8 | $1.3 | $66.1 | $61.5 | $0.2 | $61.7 | $46.1 | $(0.4) | $45.7 | | Identifiable Assets | $393.8 | $3.1 | $396.9 | $526.6 | $3.4 | $530.0 | $362.4 | $189.0 | $551.4 | Risk Factors The company faces diverse risks from macroeconomic conditions, trade policies, labor markets, IT security, supply chain dependencies, and potential impairments, alongside operational and legal challenges - Macroeconomic conditions, particularly potential supply chain disruptions from the global COVID-19 pandemic, along with tariffs and trade barriers, could adversely affect the company's operations and sales424346 - Tight labor markets, increased competition from industry consolidation, changes in sales tax law interpretations potentially leading to additional tax burdens, and commodity price fluctuations impacting gross margins are economic and industry-related risks faced by the company5455 - The company's operations rely on third-party suppliers and delivery services, where disruptions or cost increases could impact sales and profits; IT system failures or data security breaches could lead to business interruptions and reputational damage62676871 - Other company-specific risks include goodwill and intangible asset impairment, political and economic risks of overseas sourcing operations, risks of excess or obsolete inventory, difficulties in integrating future acquisitions, loss of key management personnel, and litigation risks inherent to the nature of the business77798182 - The company has highly concentrated ownership (the Leeds family controls approximately 66.8% of voting power) and, as a 'controlled company,' may opt for exemptions from certain NYSE listing standards; the common stock's low trading volume may lead to higher price volatility8586 Unresolved Staff Comments As of the reporting period end, the company has no unresolved staff comments - The company has no unresolved staff comments87 Properties All company business facilities, including headquarters, call centers, and distribution centers in North America and Asia, are leased, with significant operational and subleased properties - All company business facilities are leased, including headquarters, administrative offices, call centers, and distribution centers in North America and Asia89 - As of December 31, 2019, North America had seven operational distribution centers (approximately 2.5 million square feet) and headquarters/administrative/call centers (approximately 192,000 square feet)9091 - The discontinued NATG business included two retail stores, a B2B call center, and a warehouse, totaling approximately 400,000 square feet, which are currently subleased91 - Asia leases three administrative offices totaling approximately 9,300 square feet92 Legal Proceedings The company faces various legal proceedings, including commercial, employment, and intellectual property matters, with the discontinued NATG business undergoing unclaimed property audits, but no material adverse financial impact is currently anticipated - The company is involved in legal proceedings covering commercial disputes, employment law, tax, customs trade, customer, supplier, personal injury, and intellectual property infringement94 - The discontinued NATG business is undergoing an 'unclaimed property' audit by representatives from 28 states and has received payment demands from 20 states94 - In 2019, a lawsuit with a software publisher was settled, which did not have a material impact on the company94 - The company regularly assesses the ultimate loss from litigation and potential litigation, accruing reserves when losses are probable and reasonably estimable, and currently does not anticipate any pending matters to have a material adverse effect on its financial condition or operating results95 Mine Safety Disclosures This item is not applicable - This item is not applicable96 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Systemax common stock trades on the NYSE (SYX), with the company declaring a special cash dividend of $1.00 per share and increasing its regular quarterly dividend to $0.14 per share in February 2020, following a 2018 stock repurchase program - Systemax common stock trades on the New York Stock Exchange (NYSE) under the ticker symbol 'SYX'97 - In February 2020, the company's Board of Directors declared a special cash dividend of $1.00 per share and increased the regular quarterly cash dividend to $0.14 per share99 - In 2018, the company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2 million shares of common stock, having repurchased 232,550 shares valued at approximately $9.1 million102 2018-2019 Common Stock High and Low Closing Prices and Dividends Per Share | Year | Quarter | High Price ($) | Low Price ($) | Dividend ($) | | :--- | :--- | :--- | :--- | :--- | | 2019 | Q1 | 25.19 | 20.23 | 0.12 | | 2019 | Q2 | 24.04 | 20.01 | 0.12 | | 2019 | Q3 | 23.12 | 18.71 | 0.12 | | 2019 | Q4 | 26.37 | 21.40 | 0.12 | | 2018 | Q1 | 34.52 | 27.62 | 0.11 | | 2018 | Q2 | 39.39 | 27.76 | 1.11 | | 2018 | Q3 | 46.04 | 32.60 | 0.11 | | 2018 | Q4 | 32.59 | 22.69 | 6.61 | Selected Financial Data This section presents five-year selected financial data for Systemax Inc.'s continuing operations, highlighting consistent growth in net sales and gross profit from 2017-2019, with notable special dividends in prior years 2015-2019 Selected Financial Data (Millions of US Dollars, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Income Statement Data: | | | | | | | Net Sales | $946.9 | $896.9 | $791.8 | $753.1 | $860.9 | | Gross Profit | $325.7 | $307.7 | $273.2 | $238.2 | $248.0 | | Operating Income (Loss) from Continuing Operations | $66.1 | $61.7 | $45.7 | $8.0 | $(20.0) | | Net Income (Loss) from Continuing Operations | $50.0 | $49.5 | $65.5 | $3.9 | $(32.8) | | Per Share Amounts: | | | | | | | Net Income (Loss) from Continuing Operations — Diluted | $1.32 | $1.31 | $1.74 | $0.10 | $(0.88) | | Diluted Weighted Average Common Shares | 37.7 | 37.9 | 37.6 | 37.2 | 37.1 | | Cash Dividends Declared Per Share | $0.48 | $7.94 | $1.85 | $0.10 | $0.00 | | Balance Sheet Data: | | | | | | | Working Capital | $144.5 | $117.8 | $178.3 | $186.2 | $214.2 | | Total Assets | $396.9 | $530.0 | $551.4 | $566.1 | $710.1 | | Shareholders' Equity | $175.5 | $137.7 | $211.8 | $214.4 | $253.9 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Systemax Inc.'s 2019 financial performance, highlighting 5.6% net sales growth and 7.1% operating income growth in continuing operations, stable gross margins, increased SD&A expenses, and liquidity management through operating cash flow and credit facilities Overview - Systemax Inc. primarily directly sells branded and private-label industrial and commercial equipment and supplies in North America through branded e-commerce websites and relationship marketers105 Continuing Operations - The company sells a variety of industrial and general commercial hardgoods and supplies, as well as maintenance, repair, and operations (MRO) products, primarily in the North American market106 - Some products are sold under private-label brands such as Global™, GlobalIndustrial.com™, Nexel™ Paramount™, and Interion™106 Discontinued Operations - The company's discontinued operations include the French business sold in August 2018, the SARL business sold in March 2017, and the NATG business sold in December 2015107 Net Sales from Discontinued Operations (Millions of US Dollars) | Year | Net Sales | | :--- | :--- | | 2019 | $0.0 | | 2018 | $352.0 | | 2017 | $590.6 | Operating Conditions - The North American industrial products market is highly fragmented and competitive, with the distribution business being capital-intensive, requiring significant investment in warehousing, inventory management, and personnel costs108 - The company's primary operating expenses include employee-related costs (salaries, commissions, bonuses, benefits, and equity compensation), digital marketing expenses, and occupancy costs for leased distribution and call center facilities109 Highlights from 2019 - Consolidated sales grew 5.6% to $946.9 million in 2019, with average daily sales increasing 5.7% at constant currency115 - Consolidated operating income increased 7.1% to $66.1 million, and diluted net income per share from continuing operations grew 0.8% to $1.32115 GAAP Results of Operations 2017-2019 Key Performance Indicators (Continuing Operations, Millions of US Dollars) | Metric | 2019 | 2018 | 2017 | 2019 vs. 2018 Change (%) | 2018 vs. 2017 Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $946.9 | $896.9 | $791.8 | 5.6% | 13.3% | | Consolidated Gross Profit | $325.7 | $307.7 | $273.2 | 5.8% | 12.6% | | Consolidated Gross Margin | 34.4% | 34.3% | 34.5% | 0.1% | (0.2)% | | Consolidated SD&A Costs | $260.4 | $245.2 | $227.2 | 6.2% | 7.9% | | Consolidated SD&A Costs as % of Sales | 27.5% | 27.3% | 28.7% | 0.2% | (1.4)% | | Consolidated Operating Income | $66.1 | $61.7 | $45.7 | 7.1% | 35.0% | | Consolidated Operating Margin from Continuing Operations | 7.0% | 6.9% | 5.8% | 0.1% | 1.1% | | Effective Income Tax Rate | 24.4% | 21.3% | (44.0)% | 3.1% | 65.3% | | Net Income from Continuing Operations | $50.0 | $49.5 | $65.5 | 1.0% | (24.4)% | | Net Profit Margin from Continuing Operations | 5.3% | 5.5% | 8.3% | (0.2)% | (2.8)% | | Income (Loss) from Discontinued Operations, Net of Tax | $(1.5) | $175.2 | $(25.1) | (100.9)% | 798.0% | Reconciliation of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing Operations – Unaudited 2017-2019 Reconciliation of GAAP to Non-GAAP Operating Income from Continuing Operations (Millions of US Dollars) | Metric | 2019 | 2018 | 2017 | 2019 vs. 2018 Change (%) | 2018 vs. 2017 Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | GAAP Net Sales | $946.9 | $896.9 | $791.8 | 5.6% | 13.3% | | GAAP Operating Income | $66.1 | $61.7 | $45.7 | 7.1% | 35.0% | | GAAP Operating Margin % | 7.0% | 6.9% | 5.8% | 0.1% | 1.1% | | Non-GAAP Adjustments: | | | | | | | Executive Severance and Transition Costs | 1.2 | 1.0 | 0.0 | | | | Equity Compensation | 4.7 | 0.9 | 1.6 | | | | Intangible Amortization | 0.2 | 1.0 | 1.0 | | | | German and NATG Business Results (in GAAP Continuing Operations) | (1.4) | 0.8 | 1.1 | | | | One-Time Gain from State Audit Settlement, Net of Intangible Impairment | 0.0 | (3.1) | 0.0 | | | | Non-GAAP Operating Income | $70.8 | $62.3 | $49.4 | 13.6% | 26.1% | | Non-GAAP Operating Margin % | 7.5% | 6.9% | 6.2% | 0.6% | 0.7% | NET SALES - In 2019, the company's net sales increased 5.6% year-over-year to $946.9 million, primarily driven by robust demand in key product categories despite a soft market environment127 - Canadian business sales grew approximately 7.8% (10.5% at constant currency), while US revenue increased 5.5%127 - Sales growth slowed to 2.1% in Q4 2019, impacted by a challenging trade environment and mild US winter weather, leading to soft sales in heating product categories127 GROSS MARGIN - Gross margin was 34.4% in 2019, a slight increase from 34.3% in the prior year, reflecting modest improvements in product and freight margins117129 - The stable gross margin performance was attributed to the company's proactive management of inventory, purchasing, and pricing to mitigate rising tariffs129 SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES ("SD&A"), EXCLUDING SPECIAL GAINS AND CHARGES - SD&A expenses totaled $260.4 million in 2019, representing 27.5% of sales, an increase of 20 basis points from 2018117130131 - The increase in expenses was primarily due to a $9.2 million rise in salaries and related costs (including $0.2 million in executive severance and transition costs and $3.8 million in equity compensation expenses), and $3.9 million in operating expenses for the new Texas distribution center131 - Excluding the $3.1 million net gain from a state audit settlement in 2018, SD&A expenses as a percentage of sales actually decreased by 20 basis points in 2019, reflecting improved leverage from the fixed cost structure131 CONTINUING OPERATIONS SPECIAL GAINS AND CHARGES - In Q3 2019, the company's former German subsidiary recorded a special gain of approximately $0.8 million due to changes in lease obligation estimates132 OPERATING MARGIN - Operating margin increased by 10 basis points in 2019 compared to 2018, primarily driven by net sales growth, improved leverage from the fixed cost structure, disciplined spending on marketing and general operating expenses, and the settlement gain from the former German subsidiary135 INTEREST AND OTHER (INCOME) EXPENSE, NET - Interest and other (income) expense, net, for continuing operations was $0.0 million in 2019, compared to $1.6 million in income in 2018, primarily from interest income on short-term cash investments repatriated to the US after the French business sale, offset by credit facility-related interest expenses137 INCOME TAXES - Net tax expense for continuing operations was $16.1 million in 2019, with an effective tax rate of 24.4%, primarily due to US pre-tax income and benefits from stock option exercises and dividend equivalent payments138 - Tax benefit from discontinued operations was $0.6 million, primarily attributable to pre-tax losses generated by the discontinued NATG business138 - Net tax expense for continuing operations was $13.4 million in 2018, while discontinued operations had a net tax expense of $23.0 million, primarily related to the operations and sale of the French business139 Financial Condition, Liquidity and Capital Resources The company's liquidity needs for working capital, dividends, and capital expenditures are met primarily by operating cash flow and a $75 million revolving credit facility, with working capital increasing in 2019 despite a significant cash reduction from dividend payments Historical Cash Flows 2017-2019 Historical Cash Flows (Millions of US Dollars) | Cash Flow Type | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities from Continuing Operations | $70.3 | $9.8 | $44.1 | | Net Cash (Used in) Provided by Operating Activities from Discontinued Operations | $(1.9) | $(32.1) | $1.5 | | Net Cash Used in Investing Activities from Continuing Operations | $(6.9) | $(4.5) | $(2.4) | | Net Cash Provided by (Used in) Investing Activities from Discontinued Operations | $0.0 | $249.6 | $(0.4) | | Net Cash Used in Financing Activities from Continuing Operations | $(259.6) | $(115.0) | $(11.5) | | Effect of Exchange Rate on Cash | $(0.1) | $3.1 | $3.5 | | Net (Decrease) Increase in Cash and Cash Equivalents | $(198.2) | $110.9 | $34.8 | Operating Activities - Net cash provided by operating activities from continuing operations was $70.3 million in 2019, primarily due to $9.1 million in cash provided by changes in working capital accounts and $61.2 million from adjusting net income from continuing operations for non-cash items143 - Net cash used in operating activities from discontinued operations was $1.9 million in 2019, a significant reduction from $32.1 million used in 2018144 Investing Activities - Net cash used in investing activities from continuing operations was $6.9 million in 2019, primarily for the opening of a new distribution center in Texas and other warehouse projects145 - Net cash provided by investing activities from discontinued operations was $249.6 million in 2018, primarily from approximately $250 million in cash received from the sale of the French business146 Financing Activities - Net cash used in financing activities was $259.6 million in 2019, primarily for the payment of a $243.5 million special dividend declared in December 2018 and $18.1 million in regular quarterly dividends147 - The company maintains a $75 million secured revolving credit agreement, with $72.5 million available as of December 31, 2019, no outstanding borrowings, and compliance with all covenants148 Contractual Obligations Summary of Contractual Obligations as of December 31, 2019 (Millions of US Dollars) | Contractual Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Capital Lease Obligations | $0.1 | $0.1 | $— | $— | $— | | Operating Lease Liabilities | $89.8 | $13.8 | $30.8 | $24.8 | $20.4 | | Purchase and Other Obligations | $26.7 | $4.4 | $11.2 | $11.1 | $— | | Total Contractual Obligations | $116.6 | $18.3 | $42.0 | $35.9 | $20.4 | - The company's primary liquidity needs include supporting working capital, dividend payments, capital expenditures, investments in technology capabilities and IT infrastructure, and potential acquisitions141 - The company primarily relies on operating cash flow and a $75 million revolving credit facility to meet these needs, believing existing resources are sufficient to support operations for the next 12 months141148 - Working capital increased by $26.7 million in 2019, primarily due to higher net income, increased accounts receivable and inventory balances, and increased accounts payable, offset by dividends paid in 2019 and the recording of operating lease liabilities142 - As of December 31, 2019, the company's cash balance was $97.2 million, a significant decrease from $295.4 million in 2018, primarily due to the payment of a $243.5 million special dividend declared in December 2018140147 - The company anticipates capital expenditures between $3 million and $5 million in 2020151 Discontinued Operations (MD&A Section) Discontinued operations include the French IT, SARL, and NATG businesses, with the French sale generating a $178.9 million pre-tax gain in 2018 and NATG incurring ongoing net losses with potential future liquidation costs - Discontinued operations include the French IT business sold in August 2018, the SARL business sold in March 2017, and the NATG business sold in December 2015158159160 - The sale of the French business generated an approximate $178.9 million pre-tax book gain in 2018, with net sales of $352 million in 2018 and $473.6 million in 2017158 - The sale of the SARL business generated a $23.7 million pre-tax book loss in 2017, with net sales of $117 million in 2017159 - The NATG business incurred net losses of $1.5 million in 2019, $0.8 million in 2018, and $7.5 million in 2017, with an estimated up to $1 million in additional liquidation costs in 2020 or thereafter160 Off-Balance Sheet Arrangements - The company has not established or participated in any special purpose or off-balance sheet entities to raise capital, incur debt, or operate its business, nor does it have arrangements or relationships with unconsolidated entities that could materially affect its liquidity or capital resources161 Critical Accounting Policies and Estimates The company's financial statements rely on critical accounting policies and estimates for leases, revenue, inventory, goodwill, and income taxes, requiring significant management judgment and regular assessment of recent accounting standard updates Leases - The company adopted ASU 2016-02 'Leases' on January 1, 2019, requiring the recognition of operating and finance leases meeting specific criteria as right-of-use (ROU) assets and corresponding lease liabilities163 - Adoption of the new standard resulted in the company recording approximately $54 million in ROU assets and approximately $64 million in lease liabilities on January 1, 2019165 Revenue Recognition - The company recognizes revenue from customer contracts using a five-step approach: identifying the contract, identifying performance obligations, determining the transaction price, allocating the transaction price (if needed), and recognizing revenue when performance obligations are satisfied166 - Revenue is generally recognized when goods are shipped from the company's distribution centers or direct shippers, or in some cases, upon customer receipt and acceptance166 - Provisions for sales returns and allowances are estimated based on historical data and recorded concurrently with revenue recognition167 Allowance for Doubtful Accounts Receivable - The company maintains an allowance for doubtful accounts receivable to reflect its estimated collectability, based on aging analysis, historical write-off experience, specific customer financial conditions, and macroeconomic factors171 Inventory Valuation - Inventory is valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out (FIFO) method; write-downs for excess, obsolete, or slow-moving goods are based on historical experience, future demand, and market conditions173 Goodwill and Intangible Assets - The company tests goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently if impairment indicators exist175 - As of December 31, 2019, the company's goodwill and intangible assets totaled approximately $7.2 million177 Long-lived Assets - Management's assessment of long-lived asset impairment requires judgment regarding the assets' useful lives and fair values, along with estimates of future cash flows from the related assets179 Income Taxes - The company accounts for income taxes using the liability method, determining deferred tax assets and liabilities based on future tax consequences and assessing the realizability of deferred tax assets, establishing valuation allowances when necessary182 Recent Accounting Pronouncements - The company is evaluating the impact of ASU 2019-12 (Income Tax Simplification), which is effective January 1, 2021283 - The company does not expect ASU 2018-13 (Fair Value Measurement Disclosures) or ASU 2018-15 (Implementation Costs for Cloud Service Contracts) to have a material impact on its financial condition or results of operations285286 - The company early adopted ASU 2017-04 (Simplifying the Test for Goodwill Impairment) on January 1, 2019, with no material impact287 - The company has completed its evaluation of ASU 2016-13 (Financial Instruments – Credit Losses) and expects to adopt it on January 1, 2020, with no material impact on its financial condition or results of operations288 - Key accounting policies and estimates include leases, revenue recognition, allowance for doubtful accounts, inventory valuation, goodwill and intangible assets, long-lived assets, and income taxes162 - These estimates rely on management's judgment and assumptions regarding future events, economic and political factors, and changes in the business environment162249 - In 2019, the company's continuing operations reported a 5.6% increase in consolidated net sales to $946.9 million, with operating income growing 7.1% to $66.1 million115117 - Gross margin remained stable at 34.4% in 2019, reflecting the company's proactive management of inventory, purchasing, and pricing in response to increased tariffs117129 - Selling, distribution, and administrative (SD&A) expenses as a percentage of sales slightly increased to 27.5% in 2019, primarily due to higher salaries, increased personnel, executive severance, equity compensation expenses, and operating costs for the new Texas distribution center117131 - The company primarily meets its liquidity needs for working capital, dividends, capital expenditures, and technology investments through operating cash flow, supplemented by a $75 million revolving credit facility141148 2019 Key Financial Metrics (Continuing Operations, Millions of US Dollars) | Metric | 2019 | 2018 | 2017 | 2019 vs. 2018 Change (%) | 2018 vs. 2017 Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $946.9 | $896.9 | $791.8 | 5.6% | 13.3% | | Consolidated Gross Profit | $325.7 | $307.7 | $273.2 | 5.8% | 12.6% | | Consolidated Gross Margin | 34.4% | 34.3% | 34.5% | 0.1% | (0.2)% | | Consolidated SD&A Costs | $260.4 | $245.2 | $227.2 | 6.2% | 7.9% | | Consolidated SD&A Costs as % of Sales | 27.5% | 27.3% | 28.7% | 0.2% | (1.4)% | | Consolidated Operating Income | $66.1 | $61.7 | $45.7 | 7.1% | 35.0% | | Consolidated Operating Margin from Continuing Operations | 7.0% | 6.9% | 5.8% | 0.1% | 1.1% | | Effective Income Tax Rate | 24.4% | 21.3% | (44.0)% | 3.1% | 65.3% | | Net Income from Continuing Operations | $50.0 | $49.5 | $65.5 | 1.0% | (24.4)% | | Net Profit Margin from Continuing Operations | 5.3% | 5.5% | 8.3% | (0.2)% | (2.8)% | | Income (Loss) from Discontinued Operations, Net of Tax | $(1.5) | $175.2 | $(25.1) | (100.9)% | 798.0% | Quantitative and Qualitative Disclosures About Market Risk The company's market risks primarily involve interest rate changes and Canadian dollar exchange rate fluctuations, with minimal debt limiting interest rate impact and limited derivative use for currency exposure - The company's market risks primarily include changes in US and international interest rates and foreign currency fluctuations (mainly the Canadian dollar against the US dollar)185 - Due to minimal company debt, changes in interest rates have little impact on its financial condition, operating results, or cash flows187 - Currency fluctuations may affect dollar-denominated income statements, balance sheets, and cash flows, but the company has limited involvement in derivative financial instruments and does not use them for trading purposes186 Financial Statements and Supplementary Data The information required by this item is incorporated by reference into the consolidated financial statements of this report - The information required by this item is incorporated by reference into the consolidated financial statements of this report188 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company has no changes in accountants or disagreements with accountants on accounting and financial disclosure - The company has no changes in accountants or disagreements with accountants on accounting and financial disclosure189 Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal financial reporting controls were effective as of December 31, 2019, with an unqualified opinion from Ernst & Young LLP and no significant quarterly changes Evaluation of Disclosure Controls and Procedures - Company management, including the Chief Executive Officer and Chief Financial Officer, evaluated and concluded that the company's disclosure controls and procedures were effective as of December 31, 2019190 Inherent Limitations of Internal Controls over Financial Reporting - The company's internal control over financial reporting aims to provide reasonable, not absolute, assurance regarding the reliability of financial reporting and the accurate preparation of financial statements191 - Internal control systems have inherent limitations, potentially failing to prevent or detect all errors and fraud, and their effectiveness may be affected by changes in business conditions or declining adherence to policies192 Management's Report on Internal Control Over Financial Reporting - Company management, including the Chief Executive Officer and Chief Financial Officer, evaluated and concluded that the company's internal control over financial reporting was effective as of December 31, 2019194 - The company's independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of the company's internal control over financial reporting as of December 31, 2019195 Changes in Internal Control Over Financial Reporting - No significant changes in the company's internal control over financial reporting occurred during the quarter ended December 31, 2019196 - As of December 31, 2019, the company's Chief Executive Officer and Chief Financial Officer assessed and determined that the company's disclosure controls and procedures were effective190 - Management reported that the company's internal control over financial reporting was effective and received an unqualified opinion from its independent registered public accounting firm, Ernst & Young LLP194195199 - Internal control systems have inherent limitations, providing only reasonable rather than absolute assurance, and their effectiveness may be affected by changes in business conditions or declining adherence to policies191192 - No significant changes in the company's internal control over financial reporting occurred during the quarter ended December 31, 2019196 Other Information No other information is disclosed under this item - No other information is disclosed under this item207 Part III Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders - The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders207 Executive Compensation The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders - The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders208 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders - The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders209 Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders - The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders210 Principal Accounting Fees and Services The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders - The information required by this item is incorporated by reference into the company's proxy statement for its 2020 Annual Meeting of Shareholders211 Part IV Exhibits and Financial Statement Schedules This section provides the annual report's exhibits and financial statement schedules, including the independent auditor's report, consolidated financial statements, and detailed notes on accounting policies, discontinued operations, leases, and other key financial information Reports of Ernst & Young LLP Independent Registered Public Accounting Firm - Ernst & Young LLP has issued an unqualified opinion on Systemax Inc.'s internal control over financial reporting as of December 31, 2019, and on the 2019 consolidated financial statements199200 Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Balance Sheets as of December 31, 2019 and 2018 (Millions of US Dollars, except share data) | Item | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets: | | | | Cash | $97.2 | $295.4 | | Accounts Receivable, Net | $88.2 | $84.1 | | Inventories | $112.5 | $107.3 | | Prepaid Expenses and Other Current Assets | $6.4 | $10.6 | | Total Current Assets | $304.3 | $497.4 | | Property, Plant and Equipment, Net | $17.8 | $14.9 | | Right-of-Use Assets | $59.3 | $0.0 | | Deferred Income Taxes | $7.3 | $8.9 | | Goodwill and Intangible Assets | $7.2 | $7.7 | | Other Assets | $1.0 | $1.1 | | Total Assets | $396.9 | $530.0 | | Liabilities and Shareholders' Equity: | | | | Accounts Payable | $115.9 | $101.1 | | Dividends Payable | $0.0 | $243.5 | | Accrued Expenses and Other Current Liabilities | $34.0 | $35.0 | | Operating Lease Liabilities | $9.9 | $0.0 | | Total Current Liabilities | $159.8 | $379.6 | | Deferred Income Tax Liabilities | $0.1 | $0.1 | | Other Liabilities | $2.8 | $12.6 | | Operating Lease Liabilities (Noncurrent) | $58.7 | $0.0 | | Total Liabilities | $221.4 | $392.3 | | Total Shareholders' Equity | $175.5 | $137.7 | | Total Liabilities and Shareholders' Equity | $396.9 | $530.0 | Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 (Millions of US Dollars, except per share data) | Item | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Sales | $946.9 | $896.9 | $791.8 | | Cost of Sales | $621.2 | $589.2 | $518.6 | | Gross Profit | $325.7 | $307.7 | $273.2 | | Selling, Distribution and Administrative Expenses | $260.4 | $245.2 | $227.2 | | Special (Gains) Charges, Net | $(0.8) | $0.8 | $0.3 | | Operating Income from Continuing Operations | $66.1 | $61.7 | $45.7 | | Foreign Currency Exchange Loss | $0.0 | $0.4 | $0.0 | | Interest and Other (Income) Expense, Net | $0.0 | $(1.6) | $0.2 | | Income Before Income Taxes from Continuing Operations | $66.1 | $62.9 | $45.5 | | Provision for (Benefit from) Income Taxes | $16.1 | $13.4 | $(20.0) | | Net Income from Continuing Operations | $50.0 | $49.5 | $65.5 | | (Loss) Income from Discontinued Operations, Net of Tax | $(1.5) | $175.2 | $(25.1) | | Net Income | $48.5 | $224.7 | $40.4 | | Net Income Per Share from Continuing Operations: | | | | | Basic | $1.33 | $1.34 | $1.77 | | Diluted | $1.32 | $1.31 | $1.74 | | (Loss) Income Per Share from Discontinued Operations: | | | | | Basic | $(0.04) | $4.69 | $(0.68) | | Diluted | $(0.04) | $4.62 | $(0.67) | | Net Income Per Share: | | | | | Basic | $1.29 | $6.03 | $1.09 | | Diluted | $1.28 | $5.93 | $1.07 | | Weighted Average Common and Common Equivalent Shares (Diluted) | 37.7 | 37.9 | 37.6 | | Dividends Declared | $0.48 | $7.94 | $1.85 | Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017 (Millions of US Dollars) | Item | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Income | $48.5 | $224.7 | $40.4 | | Other Comprehensive Income (Loss): | | | | | Foreign Currency Translation | $0.0 | $(3.0) | $8.2 | | Total Comprehensive Income | $48.5 | $221.7 | $48.6 | Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 (Millions of US Dollars) | Cash Flow Type | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Cash Flows from Operating Activities: | | | | | Net Income from Continuing Operations | $50.0 | $49.5 | $65.5 | | Net Cash Provided by Operating Activities from Continuing Operations | $70.3 | $9.8 | $44.1 | | Net Cash (Used in) Provided by Operating Activities from Discontinued Operations | $(1.9) | $(32.1) | $1.5 | | Net Cash Provided by (Used in) Operating Activities | $68.4 | $(22.3) | $45.6 | | Cash Flows from Investing Activities: | | | | | Net Cash Used in Investing Activities from Continuing Operations | $(6.9) | $(4.5) | $(2.4) | | Net Cash Provided by (Used in) Investing Activities from Discontinued Operations | $0.0 | $249.6 | $(0.4) | | Net Cash (Used in) Provided by Investing Activities | $(6.9) | $245.1 | $(2.8) | | Cash Flows from Financing Activities: | | | | | Net Cash Used in Financing Activities from Continuing Operations | $(259.6) | $(115.0) | $(11.5) | | Effect of Exchange Rate on Cash | $(0.1) | $3.1 | $3.5 | | Net (Decrease) Increase in Cash | $(198.2) | $110.9 | $34.8 | | Cash at Beginning of Period | $295.4 | $184.5 | $149.7 | | Cash at End of Period | $97.2 | $295.4 | $184.5 | Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2019, 2018 and 2017 (Millions of US Dollars, share data in thousands) | Item | Balance as of December 31, 2016 | Balance as of December 31, 2017 | Balance as of December 31, 2018 | Balance as of December 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Common Stock (in thousands) | 36,924 | 37,094 | 37,335 | 37,679 | | Common Stock Amount | $0.4 | $0.4 | $0.4 | $0.4 | | Additional Paid-in Capital | $185.5 | $186.5 | $187.0 | $189.7 | | Treasury Stock, at Cost | $(23.9) | $(21.8) | $(25.1) | $(20.4) | | Retained Earnings | $73.1 | $44.8 | $(27.6) | $2.8 | | Accumulated Other Comprehensive Income (Loss) | $(20.7) | $1.9 | $3.0 | $3.0 | | Total Equity | $214.4 | $211.8 | $137.7 | $175.5 | | Key Changes: | | | | | | Equity Compensation Expense | $1.6 | $2.8 | $5.4 | | | Dividends | $(68.7) | $(297.1) | $(18.1) | | | Net Income | $40.4 | $224.7 | $48.5 | | | Treasury Stock Repurchases | | $(9.1) | | | Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION - Systemax Inc. primarily directly sells industrial and commercial equipment and supplies in North America, operating within a single reportable business segment since the sale of its French IT business in August 2018239 - Discontinued operations include the French business sold in 2018 (generating a $178.9 million pre-tax gain), the SARL business sold in 2017 (generating a $23.7 million pre-tax loss), and the NATG business sold in 2015240244 Net Sales and Net Income from Discontinued Operations (Millions of US Dollars) | Business | 2018 Net Sales | 2017 Net Sales | 2018 Net Income (Loss) | 2017 Net Income (Loss) | | :--- | :--- | :--- | :--- | :--- | | French Business | $352.0 | $473.6 | $175.8 | $10.6 | | SARL Business | $0.0 | $117.0 | $0.2 | $(28.2) | | NATG Business | $0.0 | $0.0 | $(0.8) | $(7.5) | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The company's consolidated financial statements include Systemax Inc. and its wholly-owned subsidiaries, with all significant intercompany accounts and transactions eliminated246 - The company's fiscal year ends on the Saturday closest to December 31, with fiscal years 2019, 2018, and 2017 each comprising 52 weeks248 - Financial statement preparation involves significant management estimates and assumptions regarding allowance for doubtful accounts, product return liabilities, inventory reserves, carrying values of long-lived assets (including goodwill and intangible assets), and income tax provisions250 - The company adopted ASU 2016-02 'Leases' on January 1, 2019, requiring the recognition of operating and finance leases as right-of-use assets and corresponding lease liabilities253 - Revenue recognition follows a five-step approach, generally recognized upon shipment of goods; inventory is valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out (FIFO) method265252 - Goodwill and indefinite-lived intangible assets are tested for impairment at least annually; income taxes are accounted for using the liability method, with deferred tax assets assessed for realizability260262 - The company is evaluating the impact of ASU 2019-12 (Income Tax Simplification) and has early adopted ASU 2017-04 (Simplifying the Test for Goodwill Impairment), not expecting ASU 2018-13, ASU 2018-15, or ASU 2016-13 to have a material impact on its financial condition or results of operations283287288 3. LEASES - The company has operating and finance leases for office and warehouse facilities, headquarters, call centers, and certain computer and communication equipment, with lease terms extending through 2032289 - In Q2 2019, the company entered into a lease agreement for a distribution facility in Texas, approximately 490,000 square feet, with a 125-month lease term, total lease obligations of approximately $19.8 million, and recorded approximately $14.7 million in ROU assets and related lease liabilities290 - Operating lease costs for continuing operations were $12.0 million, $11.4 million, and $11.2 million in 2019, 2018, and 2017, respectively292 - As of December 31, 2019, the weighted-average remaining lease term for operating leases was 8.4 years, with a weighted-average discount rate of 5.7%294 Lease Liability Maturities (Millions of US Dollars) | Year | Operating Leases | | :--- | :--- | | 2020 | $13.8 | | 2021 | $10.9 | | 2022 | $10.0 | | 2023 | $9.9 | | 2024 | $9.7 | | Thereafter | $35.5 | | Total Lease Payments | $89.8 | | Less: Interest | $(21.2) | | Total Present Value of Lease Liabilities | $68.6 | 4. REVENUE - The company's revenue primarily derives from the sale of industrial and general commercial hardgoods and MRO products, along with related activities such as freight and services296 - Revenue recognition follows a five-step approach, with performance obligations typically satisfied upon shipment of goods from the company's distribution centers or direct shippers, or in some cases, upon customer receipt and acceptance297298 - Sales return liabilities are estimated based on historical return rates, amounting to approximately $1.9 million and $1.8 million as of December 31, 2019 and 2018, respectively302 2017-2019 Revenue from Continuing Operations by Geographic Area (Millions of US Dollars) | Net Sales | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | United States | $901.3 | $854.6 | $759.4 | | Canada | $45.6 | $42.3 | $32.4 | | Consolidated Total | $946.9 | $896.9 | $791.8 | 5. DISPOSITIONS AND SPECIAL GAINS AND CHARGES - Discontinued operations include the French business sold in August 2018 (generating a $178.9 million pre-tax gain), the SARL business sold in March 2017 (generating a $23.7 million pre-tax loss), and the NATG business sold in December 2015304305307 - Total special gains and charges from discontinued operations were $0 million in 2019, $0.6 million in 2018, and $30.6 million in 2017305 - The company anticipates additional liquidation costs for the NATG business of up to $1 million in 2020 or thereafter308 Operating Results of Discontinued Operations (Millions of US Dollars) | Item | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Sales | $0.0 | $352.0 | $590.6 | | Cost of Sales | $0.0 | $295.8 | $498.3 | | Gross Profit | $0.0 | $56.2 | $92.3 | | Selling, Distribution and Administrative Expenses | $2.1 | $36.5 | $74.7 | | Pre-Tax Book Gain on Sale of French Business | $0.0 | $(178.9) | $0.0 | | Special Charges, Net | $0.0 | $0.6 | $30.6 | | Operating (Loss) Income from Discontinued Operations | $(2.1) | $198.0 | $(13.0) | | Income (Loss) Before Income Taxes from Discontinued Operations | $(2.1) | $198.2 | $(14.1) | | Provision for (Benefit from) Income Taxes | $(0.6) | $23.0 | $11.0 | | Net Income (Loss) from Discontinued Operations | $(1.5) | $175.2 | $(25.1) | | Net Income (Loss) Per Share - Basic | $(0.04) | $4.69 | $(0.68) | | Net Income (Loss) Per Share - Diluted | $(0.04) | $4.62 | $(0.67) | 6. GOODWILL AND INTANGIBLES - As of December 31, 2019 and 2018, the carrying value of goodwill was $5.5 million314 - As of December 31, 2019 and 2018, the carrying value of indefinite-lived intangible assets was $0.7 million314 - On January 1, 2019, the company reclassified approximately $0.3 million of finite-lived intangible assets to operating lease right-of-use assets315 Finite-Lived Intangible Assets Information as of December 31, 2019 (Millions of US Dollars) | Item | Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Useful Life | | :--- | :--- | :--- | :--- | :--- | :--- | | Customer Lists | 5-10 years | $2.0 | $1.0 | $1.0 | 5.1 | | Domain Names | 5 years | $3.4 | $3.4 | $0.0 | 0.0 | | Total | | $5.4 | $4.4 | $1.0 | 5.1 | - Amortization expense for these intangible assets totaled approximately $0.2 million in 2019, with an estimated annual amortization expense of $0.2 million for future years317 7. PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipment, Net as of December 31, 2019 and 2018 (Millions of US Dollars) | Item | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Land Improvements | $0.8 | $0.8 | | Furniture and Fixtures, Office, Computer and Other Equipment and Software | $44.3 | $42.8 | | Leasehold Improvements | $13.1 | $11.7 | | Total | $58.2 | $55.3 | | Less: Accumulated Depreciation and Amortization | $40.4 | $40.4 | | Property, Plant and Equipment, Net | $17.8 | $14.9 | - Depreciation expense for property, plant, and equipment (including capital leases) from continuing operations was $3.9 million, $3.5 million, and $3.6 million in 2019, 2018, and 2017, respectively319 8. CREDIT FACILITIES - The company maintains a $75 million secured revolving credit agreement with a five-year term, maturing on October 28, 2021320 - The credit agreement contains operating, financial, and other covenants, including limitations on capital expenditure levels, availability tests for dividend payments and stock repurchases, and a fixed charge coverage test related to acquisitions320 - As of December 31, 2019, eligible collateral under the credit agreement was $75 million, with total availability of $72.5 million, no outstanding borrowings, and the company in compliance with all covenants320 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued Expenses and Other Current Liabilities as of December 31, 2019 and 2018 (Millions of US Dollars) | Item | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Salaries and Employee Benefits | $11.3 | $12.0 | | Advertising | $4.9 | $5.5 | | Sales and Use Taxes Payable | $2.6 | $2.8 | | Freight | $6.8 | $4.9 | | Restructuring Costs | $0.4 | $2.0 | | Product Return Liabilities | $1.9 | $1.8 | | Other | $6.1 | $6.0 | | Total | $34.0 | $35.0 | 10. SHAREHOLDERS' EQUITY - The company currently has one equity incentive plan, the 2010 Long-Term Equity Incentive Plan, authorizing the issuance of stock options, restricted stock, and restricted stock units, with a maximum of 7.5 million shares available for grant322 - Non-qualified stock option compensation cost for continuing operations was $3.3 million in 2019, and in Q1 2019, the company repriced approximately 0.6 million unexercised stock options, resulting in approximately $0.6 million in related compensation expense324 2017-2019 Stock Option Fair Value Estimation Assumptions | Assumption | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Expected Annual Dividend Yield | 1.9% | 1.4% | 2.4% | | Risk-Free Interest Rate | 2.65% | 2.94% | 2.26% | | Expected Volatility | 50.4% |