Systemax(GIC) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Global Industrial Company's unaudited condensed consolidated financial statements and detailed notes on key accounting areas Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric | Sep 30, 2023 (Millions $) | Dec 31, 2022 (Millions $) | | :-------------------------------- | :------------------------ | :------------------------ | | ASSETS: | | | | Cash and cash equivalents | 34.3 | 28.5 | | Accounts receivable, net | 136.8 | 108.0 | | Inventories | 153.8 | 179.4 | | Total current assets | 337.9 | 325.7 | | Goodwill and intangible assets | 70.7 | 6.6 | | Total assets | 527.8 | 455.2 | | LIABILITIES AND SHAREHOLDERS' EQUITY: | | | | Accounts payable | 125.8 | 96.9 | | Accrued expenses and other current liabilities | 55.3 | 43.2 | | Total current liabilities | 195.0 | 153.1 | | Total liabilities | 281.6 | 244.8 | | Total shareholders' equity | 246.2 | 210.4 | | Total liabilities and shareholders' equity | 527.8 | 455.2 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations | Metric (Millions $) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | 354.6 | 298.5 | 954.2 | 905.6 | | Gross profit | 116.3 | 106.6 | 327.6 | 327.4 | | Operating income from continuing operations | 28.2 | 27.5 | 75.1 | 87.5 | | Net income from continuing operations | 20.7 | 20.3 | 55.5 | 64.7 | | Net income | 20.7 | 20.2 | 55.4 | 65.0 | | Net income per common share (Basic) | 0.54 | 0.53 | 1.45 | 1.71 | | Net income per common share (Diluted) | 0.54 | 0.53 | 1.44 | 1.70 | | Dividends declared | 0.20 | 0.18 | 0.60 | 0.54 | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income | Metric (Millions $) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | 20.7 | 20.2 | 55.4 | 65.0 | | Foreign currency translation | (0.3) | (0.8) | 0.0 | (1.1) | | Total comprehensive income | 20.4 | 19.4 | 55.4 | 63.9 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Metric (Millions $) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | 103.7 | 23.4 | | Net cash used in investing activities | (75.6) | (4.9) | | Net cash used in financing activities | (22.3) | (13.6) | | Net increase in cash | 5.8 | 4.6 | | Cash and cash equivalents – end of period | 34.3 | 20.0 | Condensed Consolidated Statement of Shareholders' Equity Condensed Consolidated Statement of Shareholders' Equity | Metric (Millions $) | Balances, Jan 1, 2023 | Balances, Sep 30, 2023 | | :-------------------------------- | :-------------------- | :--------------------- | | Common Stock Amount | 0.4 | 0.4 | | Additional Paid-in Capital | 201.2 | 203.9 | | Treasury Stock | (19.5) | (18.8) | | Retained Earnings | 25.9 | 58.3 | | Accumulated Other Comprehensive Income | 2.4 | 2.4 | | Total Equity | 210.4 | 246.2 | - Total shareholders' equity increased from $210.4 million at January 1, 2023, to $246.2 million at September 30, 2023, driven by net income of $55.4 million and stock-based compensation, partially offset by dividends paid[15] Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation - Global Industrial Company is a value-added industrial distributor of over a million industrial and MRO products in North America, operating through e-commerce websites and relationship marketers[19] - On May 19, 2023, the Company acquired 100% of Indoff LLC for approximately $72.6 million in cash, expanding its presence in the North American MRO market[20] - The financial statements are unaudited and prepared in accordance with GAAP for interim financial information, with certain disclosures condensed or omitted[18] 2. Acquisition - The acquisition of Indoff LLC on May 19, 2023, for $72.6 million in cash, was accounted for as a business combination, with a preliminary fair value allocation resulting in $35.1 million in goodwill[27][29] Indoff LLC Financial Contribution (Post-Acquisition) | Period | Revenue (Millions $) | Net Income (Millions $) | | :-------------------- | :------------------- | :-------------------- | | Three Months Ended Sep 30, 2023 | 46.4 | 1.9 | | Nine Months Ended Sep 30, 2023 | 70.3 | 2.7 | Goodwill and Intangible Assets (Millions $) | Asset Type | Sep 30, 2023 | Dec 31, 2022 | | :---------------------- | :----------- | :----------- | | Goodwill | 40.6 | 5.5 | | Definite-lived intangibles | 29.4 | 0.4 | | Indefinite-lived intangibles | 0.7 | 0.7 | | Total | 70.7 | 6.6 | - The acquisition resulted in $30.3 million of acquired intangible assets, primarily customer lists ($24.1 million) and trademarks ($6.2 million), which will be amortized over ten years[29][33] 3. Revenue Net Sales by Geography (Millions $) | Geography | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | 337.2 | 282.0 | 902.5 | 849.0 | | Canada | 17.4 | 16.5 | 51.7 | 56.6 | | Consolidated | 354.6 | 298.5 | 954.2 | 905.6 | - The Company disaggregates revenue by geography (United States and Canada) as it best reflects the impact of economic and industry factors on revenue and cash flows[34] 4. Credit Losses - The Company estimates allowances for credit losses on trade accounts receivable based on customer financial condition, historical loss experience, and economic forecasts[36] Rollforward of Allowances for Credit Losses (Millions $) | Metric | Sep 30, 2023 | | :-------------------------- | :----------- | | Balance at beginning of period | 2.3 | | Current period provision | 2.5 | | Write-offs | (2.0) | | Balance at end of period | 2.8 | 5. Leases - The Company holds operating and finance leases for facilities and equipment, with operating lease costs of $4.3 million for Q3 2023 and $12.7 million for the nine months ended September 30, 2023[39][41] - ROU assets and related lease liabilities of $0.8 million were recorded as part of the Indoff acquisition, covering administrative offices and a distribution center[40] Lease Liabilities Maturities (Millions $) | Year Ending Dec 31 | Operating Leases | | :------------------- | :--------------- | | 2023 (remainder) | 4.7 | | 2024 | 18.9 | | 2025 | 17.7 | | 2026 | 15.5 | | 2027 | 11.8 | | 2028 | 11.9 | | Thereafter | 40.6 | | Total lease payments | 121.1 | | Less: interest | (23.1) | | Total present value of lease liabilities | 98.0 | 6. Net Income (Loss) per Common Share - Basic and diluted net income per common share are calculated using the two-class method due to outstanding restricted stock with dividend participation rights[43] Net Income Per Share from Continuing Operations | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.54 | $0.53 | $1.45 | $1.70 | | Diluted EPS | $0.54 | $0.53 | $1.44 | $1.69 | | Weighted average shares outstanding (Basic) | 38.1 | 38.0 | 38.1 | 38.0 | | Weighted average shares outstanding (Diluted) | 38.2 | 38.1 | 38.2 | 38.1 | 7. Credit Facilities and Short-term Debt - The Company maintains a $125.0 million secured revolving credit facility maturing October 19, 2026, with no outstanding borrowings as of September 30, 2023[47] - As of September 30, 2023, the Company had $108.9 million in total excess availability under its credit facility and was in compliance with all covenants[47] 8. Fair Value Measurements - The Company's financial instruments, including cash, accounts receivable, debt, and accounts payable, are considered to have fair values representative of their carrying amounts due to their short-term or variable interest rate nature[50] - Goodwill and indefinite-lived intangible assets are measured for impairment annually in the fourth quarter by comparing the Company's fair market value to its carrying value[51] 9. Legal Proceedings - The Company is involved in various lawsuits, claims, and investigations in the ordinary course of business, including commercial, employment, tax, and intellectual property matters[54] - Management does not expect the outcome of these matters to have a material adverse effect on its financial position or results of operations, and accruals are established for probable and estimable losses[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, liquidity, and future outlook, including the Indoff acquisition impact Forward-Looking Statements and Risk Factors - The report contains forward-looking statements based on management's estimates and assumptions, subject to risks and uncertainties that could significantly impact business, operating results, or financial condition[56][57] - Key risk factors include general economic conditions (inflation, interest rates), global political/economic conditions, supply chain disruptions, tariffs, freight costs, extreme weather, labor shortages, competition, e-commerce risks, data security breaches, inventory management, and litigation[58][61] Overview - Global Industrial Company is a value-added industrial distributor of over a million industrial and MRO products in North America, utilizing branded e-commerce websites and relationship marketers[60] - The Company markets its own Global Industrial Exclusive Brands, including white label and private brand products under trademarks like Global, Nexel, Paramount, Interion, and Absocold[61] - The acquisition of Indoff LLC on May 19, 2023, for $72.6 million, expanded the Company's presence in the MRO market[62] Operating Conditions - The North American industrial products market is highly fragmented and competitive, requiring significant working capital for warehousing, inventory, and distribution[64] - Primary operating expenses include employee-related costs (wages, commissions, benefits, equity-based compensation), marketing expenses (digital marketing), and occupancy charges for leased facilities[65] Business Outlook - Q3 2023 consolidated net sales increased by 18.8% to $354.6 million, including Indoff. Excluding Indoff, sales grew 3.2% due to volume improvement offsetting price deflation[67] - Gross margin in Q3 2023 declined to 32.8% (down 290 basis points YoY), with Indoff's contribution mix accounting for 170 basis points of the decline[67] - Selling, distribution & administrative expenses (SD&A) increased due to planned sales and marketing investment, but was partially offset by cost control measures and reduced variable compensation[67] Critical Accounting Policies and Estimates - Key accounting policies requiring significant management judgment include revenue recognition, inventory valuation, and valuation of intangible assets acquired through business combinations[68] - There were no material changes in the Company's significant accounting policies during the third quarter ended September 30, 2023[69] Highlights from Q3 2023 and Year to Date Q3 2023 Q3 2023 Summary | Metric | Value | Change YoY (Excl. Indoff) | | :------------------------------------------ | :---------- | :------------------------ | | Consolidated sales | $354.6 million | +3.2% | | Consolidated gross margin | 32.8% | -120 bps | | Consolidated operating income | $28.2 million | -6.5% | | Net income per diluted share | $0.54 | +1.9% | Year to Date Q3 2023 Summary | Metric | Value | Change YoY (Excl. Indoff) | | :------------------------------------------ | :---------- | :------------------------ | | Consolidated sales | $954.2 million | -2.4% | | Consolidated gross margin | 34.3% | -90 bps | | Consolidated operating income | $75.1 million | -18.3% | | Net income per diluted share | $1.44 | -14.8% | Results of Operations NET SALES - Consolidated net sales increased 18.8% in Q3 2023 to $354.6 million, driven by the full quarter impact of Indoff. Excluding Indoff, sales increased 3.2% due to volume improvement[79] - For the nine months ended September 30, 2023, consolidated net sales increased 5.4% to $954.2 million. Excluding Indoff, sales declined 2.4%[76][79] - U.S. sales increased 19.6% in Q3 2023 and 6.3% for the nine months ended September 30, 2023. Canada sales (local currency) increased 8.2% in Q3 2023 but decreased 4.2% for the nine months[79] GROSS MARGIN - Gross margin declined by 290 basis points to 32.8% in Q3 2023, primarily due to Indoff's lower gross margin profile[82] - Excluding Indoff, Q3 gross margin declined 120 basis points to 34.5%, reflecting planned proactive promotion, freight actions, and sell-through of high-cost inventory[82] - For the nine months ended September 30, 2023, gross margin was 34.3%, a 190 basis point decline YoY. Excluding Indoff, the decline was 90 basis points[82] SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES ("SD&A") - SD&A costs as a percentage of sales improved by 170 basis points in Q3 2023, driven by cost control measures and reduced variable compensation, despite increased marketing investment[83] - Q3 2023 SD&A included approximately $7.6 million related to Indoff, including $0.7 million in intangible asset amortization[83] - For the nine months ended September 30, 2023, SD&A costs as a percentage of sales remained flat, with $11.6 million related to Indoff and $6.4 million in planned marketing spend[83] OPERATING MARGIN - Operating margin for Q3 2023 declined 120 basis points YoY, primarily due to the gross margin decline, partially offset by SD&A savings[84] - Operating margin for the nine months ended September 30, 2023, declined 180 basis points YoY, attributed to sales declines in Q1/Q2, gross margin decline, and severance-related costs[85] INTEREST AND OTHER EXPENSE, NET Interest and Other Expense, Net (Millions $) | Period | 2023 | 2022 | | :------------------------------ | :--- | :--- | | Three Months Ended Sep 30 | 0.7 | 0.6 | | Nine Months Ended Sep 30 | 1.2 | 1.3 | INCOME TAXES Provision for Income Taxes (Millions $) | Period | 2023 | 2022 | | :------------------------------ | :--- | :--- | | Three Months Ended Sep 30 | 6.8 | 6.6 | | Nine Months Ended Sep 30 | 18.4 | 21.5 | Financial Condition, Liquidity and Capital Resources Selected Liquidity Data (Millions $) | Metric | Sep 30, 2023 | Dec 31, 2022 | $ Change | | :-------------------------------- | :----------- | :----------- | :------- | | Cash and cash equivalents | 34.3 | 28.5 | 5.8 | | Accounts receivable, net | 136.8 | 108.0 | 28.8 | | Inventories | 153.8 | 179.4 | (25.6) | | Accounts payable | 125.8 | 96.9 | 28.9 | | Working capital | 142.9 | 172.6 | (29.7) | Historical Cash Flows (Millions $) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | 103.7 | 23.4 | | Net cash used in investing activities | (75.6) | (4.9) | | Net cash used in financing activities | (22.3) | (13.6) | | Net increase in cash and cash equivalents | 5.8 | 4.6 | - The Company believes current cash on hand, operating cash flow, and credit facility availability will be sufficient to fund working capital and other cash requirements for at least the next twelve months[89] Operating Activities - Net cash provided by operating activities from continuing operations significantly increased to $103.8 million in 2023 from $23.5 million in 2022, primarily due to favorable changes in working capital accounts[92] Investing Activities - Net cash used in investing activities totaled $75.6 million in 2023, with $72.6 million allocated to the Indoff acquisition and $3.3 million for property, plant, and equipment[93] Financing Activities - Net cash used in financing activities was $22.3 million in 2023, primarily for $23.0 million in dividends and net repayments of short-term borrowings, partially offset by proceeds from stock issuance[94] - The Company declared regular quarterly dividends of $0.20 per common share in 2023, up from $0.18 per share in 2022[10][94] Material Cash Requirements - As of September 30, 2023, the Company had $98.0 million in non-cancelable operating and finance lease obligations, with an anticipated $4.7 million in remaining cash expenditures for 2023[101] - The Company anticipates capital expenditures in the range of $5.0 to $6.0 million for 2023[98] - The Company had over $138 million of liquidity (cash and undrawn line of credit) in the U.S. as of September 30, 2023[100] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, primarily from interest rates and foreign currency exchange rates - The Company is exposed to market risks from changes in U.S. and international interest rates and currency exchange rates (principally Canadian dollars)[103] - The Company has limited involvement with derivative financial instruments and does not use them for trading purposes; as of September 30, 2023, there were no outstanding option or forward exchange contracts[104] - As of September 30, 2023, the Company had no outstanding variable rate debt under its credit facility, and a hypothetical one percentage point change in interest rates is not expected to materially affect its financial position[105] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures, their effectiveness, and changes in internal control over financial reporting - The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2023[107] - The assessment of internal controls for Indoff LLC, which represented approximately 5% of consolidated total assets and 7% of net sales, was omitted from the evaluation due to its recent acquisition[107] - There have been no material changes in the Company's internal controls over financial reporting during the quarter ended September 30, 2023[110] Evaluation of Disclosure Controls and Procedures - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2023, concluding they are effective[107] - The assessment excluded Indoff LLC's internal controls over financial reporting due to its recent acquisition on May 19, 2023[107] Changes in Internal Control Over Financial Reporting - No material changes in internal controls over financial reporting occurred during the quarter ended September 30, 2023[110] - The Company is integrating Indoff LLC's operations into its overall system of internal control over financial reporting and will make appropriate changes as needed[110] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 9 of the Condensed Consolidated Financial Statements for a detailed description of the Company's legal proceedings - For information regarding legal proceedings, refer to Note 9, Legal Proceedings, of the Notes to Condensed Consolidated Financial Statements[112] Item 1A. Risk Factors This section indicates no material changes to the Company's risk factors and directs readers to the 2022 Annual Report on Form 10-K - There were no material changes to the Company's risk factors during the third quarter ended September 30, 2023[114] - For information regarding risk factors, refer to Item 1A. "Risk Factors" of the Company's 2022 Annual Report on Form 10-K[113] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, the Indoff LLC Securities Purchase Agreement, and XBRL documents - Exhibits include certifications from the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act) and the Securities Purchase Agreement for Indoff LLC[116] - XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents are also filed as exhibits[116] Signatures This section contains the duly authorized signatures of Global Industrial Company's President and CEO, Barry Litwin, and SVP and CFO, Thomas Clark - The report is signed by Barry Litwin, President and Chief Executive Officer, and Thomas Clark, Senior Vice President and Chief Financial Officer, on October 31, 2023[120][123]