Systemax(GIC) - 2022 Q4 - Annual Report

Part I Business Global Industrial is a North American value-added distributor of over one million MRO products, leveraging e-commerce and relationship marketing - The company is a value-added industrial distributor of over a million industrial and MRO products in North America, marketing through e-commerce and relationship marketers[18] - The company's core strategy is "Accelerating our Customers Experience" (ACE), which aims to build customer loyalty through personalized sales, product, and service experiences[20] Products The company offers over one million industrial and MRO products, including leading brand names and its strategic, higher-margin private brand line - Offers over one million brand name and private brand products, with access to over 1.7 million products in its database[21] - Markets its own private brand products under trademarks including Global™, GlobalIndustrial.com™, Nexel™, Paramount™, and Interion™[19] Sales and Marketing The company employs a multi-faceted direct marketing system, including e-commerce and a relationship marketing sales force, targeting diverse customer segments - Operates multiple e-commerce sites, including www.globalindustrial.com and www.globalindustrial.ca, launching a new site in 2022 to enhance personalization[24] - In 2022, the company initiated its "We Can Supply That®" branding campaign and repositioned its private brand as "Global Industrial Exclusive Brands™"[28] - The relationship marketing sales force includes specialized account managers for public sector, commercial, and strategic enterprise accounts, supported by various sales experts[23] Customer Service, Order Fulfillment and Support Order fulfillment combines distribution centers and drop-shipping, with over 57% of 2022 transactions electronic, supported by enhanced customer service - Electronic orders (internet, EDI, etc.) represented over 57% of the transaction count for the year ended December 31, 2022, up from 56% in 2021[31] - The company utilizes a network of five large distribution centers in the U.S. and two distribution facilities in Canada for in-stock items[32] Competition and Other Market Factors The highly fragmented North American industrial products market presents intense competition from large MRO distributors, retailers, and direct manufacturers - The company faces competition from large diversified MRO distributors such as Uline Inc, Grainger Inc., MSC Industrial Direct Inc., Fastenal Inc., and other large retailers, including Amazon[35][36] Human Capital Resources As of December 2022, Global Industrial employed approximately 1,650 associates, primarily in North America, with a diverse workforce across key functions Employee Distribution by Function (as of Dec 31, 2022) | Function | Percentage of Associates | | :--- | :--- | | Customer Facing (Sales, Service, etc.) | ~39% | | Distribution, Logistics, Fulfillment | ~37% | | Administrative (IT, HR, Finance, etc.) | ~24% | - As of December 31, 2022, the company employed approximately 1,650 associates, with 1,420 in North America and 230 in Asia[37] - In the U.S., the workforce is 44% female and 56% male, with minorities making up 55% of the workforce[38] Seasonality Sales exhibit seasonality, with higher results in Q2 and Q3 driven by seasonal product lines and education/government customer buying cycles - Sales and operating margin tend to be moderately higher in the second and third quarters compared to the first and fourth quarters due to seasonal product lines (e.g., HVAC, snow removal) and customer buying cycles (e.g., education, government)[41] Risk Factors The company faces diverse risks including economic downturns, supply chain disruptions, tariffs, IT failures, and concentrated voting power impacting financial performance - Economic conditions, pandemics (like COVID-19), and geopolitical instability (like the Russia-Ukraine conflict) can disrupt global supply chains, particularly for products sourced from China, potentially leading to delayed or lost sales[46][47][52] - The imposition of tariffs on goods from China has increased procurement costs, which the company has sought to mitigate by raising prices and finding alternative suppliers, actions that carry their own risks[51][55][57] - The business is heavily reliant on its information systems, where a data security breach, system failure, or disruption could compromise sensitive information, disrupt operations, and lead to liability and reputational damage[72][73][78] - The Leeds family controls approximately 66.4% of the voting power, allowing them to determine the outcome of most stockholder matters and classifying the company as a "controlled company" under NYSE rules[82] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[89] Properties Global Industrial operates numerous leased facilities, including seven North American distribution centers totaling 2.7 million square feet, for its operations - All of the company's facilities, including headquarters, administrative offices, call centers, and distribution centers, are leased[90] - As of December 31, 2022, the company operates seven distribution centers in North America, aggregating approximately 2.7 million square feet[91] Legal Proceedings Legal proceedings information is detailed in Note 15, "Commitments, Contingencies and Other Matters," within the Consolidated Financial Statements - A description of the Company's legal proceedings is available in Note 15 of the Notes to Consolidated Financial Statements[95] Mine Safety Disclosures This item is not applicable to the company - Not applicable[96] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Global Industrial's common stock trades on NYSE under "GIC"; the company increased its quarterly dividend to $0.20 in 2023 and has 1.375 million shares available for repurchase 2022 Quarterly Stock Price and Dividends | Quarter | High Price | Low Price | Dividends per Share | | :--- | :--- | :--- | :--- | | First | $40.56 | $29.25 | $0.18 | | Second | $36.28 | $30.46 | $0.18 | | Third | $36.29 | $26.38 | $0.18 | | Fourth | $31.74 | $22.54 | $0.18 | - In February 2023, the Board of Directors declared a quarterly cash dividend of $0.20 per share, an increase from the $0.18 paid in 2022[100] - No shares were repurchased during 2022 and 2021, leaving approximately 1,375,000 shares available under the existing share repurchase program[104] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2022, Global Industrial achieved 9.7% sales growth to $1.17 billion and 19.5% operating income growth to $105.2 million, with gross margin improving to 36.1% Financial Highlights 2022 vs. 2021 (in millions) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $1,166.1 M | $1,063.1 M | 9.7% | | Consolidated Gross Profit | $421.2 M | $374.3 M | 12.5% | | Gross Margin | 36.1% | 35.2% | +0.9 ppt | | Consolidated Operating Income | $105.2 M | $88.0 M | 19.5% | | Operating Margin | 9.0% | 8.3% | +0.7 ppt | | Net Income from Continuing Ops | $78.1 M | $70.1 M | 11.4% | - The company's private brand offering represented approximately 50% of total sales in 2022[122] - While sales grew by double digits in the first half of 2022, growth moderated in the second half due to a softened demand environment, a trend that continued into early 2023[123] Results of Operations Fiscal 2022 net sales rose 9.7% to $1.17 billion, driven by managed sales and private brands, resulting in a 90 basis point gross margin expansion - Net sales increased 9.7% to $1.17 billion in 2022, with U.S. sales growing 10.1% and Canada sales increasing 7.7% in local currency[122] - Gross margin improved to 36.1% from 35.2% in 2021, mainly due to the normalization of freight costs and a higher mix of private brand sales[125] - SD&A expenses rose to $316.0 million, a 10.4% increase, driven by higher salary and compensation costs ($13.6 million), increased marketing investment ($7.2 million), and costs for the new Canadian distribution center ($2.2 million)[127][128] - Net income from discontinued operations was $0.7 million in 2022, a significant decrease from $33.2 million in 2021, which included large one-time benefits from the resolution of certain liabilities[129][130] Financial Condition, Liquidity and Capital Resources The company's financial condition remains solid, with working capital increasing to $172.6 million and liquidity enhanced by a $125 million credit facility Cash Flow Summary (in millions) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $50.2 | $49.8 | | Net cash used in investing activities | $(7.1) | $(3.4) | | Net cash used in financing activities | $(29.7) | $(55.0) | - In November 2022, the company amended its credit agreement, increasing its secured revolving credit facility to $125.0 million from $75.0 million[143][275] - As of December 31, 2022, the company had total excess availability of $111.7 million under its credit facility[143][275] - Anticipated capital expenditures for 2023 are projected to be between $6.0 million and $8.0 million[146] Critical Accounting Policies and Estimates Management identifies Revenue Recognition and Inventory Valuation as critical accounting policies due to significant judgments and estimates involved - Revenue is recognized when performance obligations are satisfied, generally upon shipment of goods, and is presented net of estimated sales returns and allowances[155][156] - Inventories are valued at the lower of cost (determined by FIFO method) or net realizable value, with write-downs for excess and obsolete merchandise based on historical experience and assumptions about future demand[160] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include foreign currency exchange rate fluctuations, mainly from Canadian operations, and interest rate changes on variable-rate debt - The company is exposed to currency exchange rate risk, principally with the Canadian Dollar, where a 10% change in foreign exchange rates in 2022 would have fluctuated sales by approximately $7.2 million[164] - Interest rate risk is primarily related to variable-rate debt, but with only $0.6 million outstanding as of December 31, 2022, a hypothetical 1% change in interest rates is not expected to have a material effect[165] Financial Statements and Supplementary Data This section incorporates the company's audited consolidated financial statements for fiscal year 2022 and the independent auditor's report - The information required by this item is incorporated by reference to the Consolidated Financial Statements filed with the report, as detailed in Item 15[167] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with an unqualified auditor opinion - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2022[169] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[172] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2022[173][176] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10 through 14, covering governance, compensation, security ownership, and related party transactions, is incorporated by reference from the 2023 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's Proxy Statement for the 2023 Annual Meeting of Stockholders[184][186][187] Part IV Exhibits and Financial Statement Schedules This section presents the company's consolidated financial statements, the independent auditor's report, and a comprehensive list of all exhibits filed with the Form 10-K Consolidated Financial Statements The audited financial statements present the company's financial position, results of operations, and cash flows for the fiscal years ended December 31, 2022 and 2021 Consolidated Balance Sheet Data (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Total Current Assets | $325.7 | $301.4 | | Total Assets | $455.2 | $405.0 | | Liabilities & Equity | | | | Total Current Liabilities | $153.1 | $179.9 | | Total Liabilities | $244.8 | $251.4 | | Total Shareholders' Equity | $210.4 | $153.6 | Consolidated Statement of Operations Data (in millions) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $1,166.1 | $1,063.1 | | Gross Profit | $421.2 | $374.3 | | Operating Income from Continuing Ops | $105.2 | $88.0 | | Net Income from Continuing Ops | $78.1 | $70.1 | | Net Income | $78.8 | $103.3 | Consolidated Cash Flow Data (in millions) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $50.2 | $49.8 | | Net cash used in investing activities | $(7.1) | $(3.4) | | Net cash used in financing activities | $(29.7) | $(55.0) | | Net increase (decrease) in cash | $13.1 | $(8.6) |