Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2009
or
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
COMMISSION
FILE NUMBER 1-13792
Systemax Inc.
(Exact name of
registrant as specified in its charter)
Delaware
|
|
11-3262067
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification
No.)
|
11 Harbor
Park Drive
Port
Washington, New York 11050
(Address of principal
executive offices, including zip code)
Registrants
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
x
No
o
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files). Yes
o
No
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
x
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) Yes
o
No
x
The number of
shares outstanding of the registrants Common Stock as of August 3, 2009
was 36,841,878
Table
of Contents
Available Information
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 web site 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 SECs web site (www.sec.gov). The information on our
web site 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
Company web site (www.systemax.com) or can be obtained by writing to Systemax
Inc., Attention: Board of Directors (Corporate Governance), 11 Harbor Park
Drive, Port Washington, NY 11050.
3
Table
of Contents
PART I
- FINANCIAL INFORMATION
Item
1.
Financial Statements
Systemax
Inc.
Condensed Consolidated
Balance Sheets
(In thousands)
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
87,923
|
|
$
|
115,967
|
|
Accounts receivable, net
|
|
173,629
|
|
182,532
|
|
Inventories
|
|
310,014
|
|
290,594
|
|
Prepaid expenses and other current assets
|
|
12,891
|
|
12,667
|
|
Deferred income taxes
|
|
11,588
|
|
10,423
|
|
Total current assets
|
|
596,045
|
|
612,183
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
51,493
|
|
48,465
|
|
Deferred income taxes
|
|
10,245
|
|
11,452
|
|
Goodwill and intangibles
|
|
44,505
|
|
30,326
|
|
Other assets
|
|
714
|
|
837
|
|
Total assets
|
|
$
|
703,002
|
|
$
|
703,263
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current portion of capitalized lease obligations
|
|
$
|
832
|
|
$
|
773
|
|
Accounts payable
|
|
269,714
|
|
284,378
|
|
Accrued expenses and other current liabilities
|
|
65,746
|
|
73,075
|
|
Deferred income taxes
|
|
865
|
|
865
|
|
Total current liabilities
|
|
337,157
|
|
359,091
|
|
|
|
|
|
|
|
Capitalized lease obligations, net of current portion
|
|
1,061
|
|
1,411
|
|
Deferred income taxes
|
|
253
|
|
254
|
|
Other liabilities
|
|
8,243
|
|
8,552
|
|
Total liabilities
|
|
346,714
|
|
369,308
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
389
|
|
389
|
|
Additional paid-in capital
|
|
179,931
|
|
179,241
|
|
Treasury stock
|
|
(30,719
|
)
|
(31,158
|
)
|
Retained earnings
|
|
207,590
|
|
192,401
|
|
Accumulated other comprehensive loss, net of tax
|
|
(903
|
)
|
(6,918
|
)
|
Total shareholders equity
|
|
356,288
|
|
333,955
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
703,002
|
|
$
|
703,263
|
|
See notes to
condensed consolidated financial statements.
4
Table of
Contents
Systemax Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
721,599
|
|
$
|
756,035
|
|
$
|
1,473,867
|
|
$
|
1,480,772
|
|
Cost of sales
|
|
614,545
|
|
641,281
|
|
1,259,263
|
|
1,252,269
|
|
Gross profit
|
|
107,054
|
|
114,754
|
|
214,604
|
|
228,503
|
|
Selling, general & administrative expenses
|
|
98,385
|
|
93,639
|
|
190,915
|
|
181,352
|
|
Operating income
|
|
8,669
|
|
21,115
|
|
23,689
|
|
47,151
|
|
Foreign currency exchange (gain) loss
|
|
(181
|
)
|
59
|
|
600
|
|
(1,438
|
)
|
Interest and other income, net
|
|
(259
|
)
|
(545
|
)
|
(544
|
)
|
(1,323
|
)
|
Interest expense
|
|
149
|
|
86
|
|
307
|
|
136
|
|
Income before income taxes
|
|
8,960
|
|
21,515
|
|
23,326
|
|
49,776
|
|
Provision for income taxes
|
|
2,469
|
|
7,974
|
|
8,137
|
|
18,174
|
|
Net income
|
|
$
|
6,491
|
|
$
|
13,541
|
|
$
|
15,189
|
|
$
|
31,602
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.18
|
|
$
|
.36
|
|
$
|
.41
|
|
$
|
.86
|
|
Diluted
|
|
$
|
.17
|
|
$
|
.36
|
|
$
|
.41
|
|
$
|
.84
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
36,683
|
|
37,130
|
|
36,652
|
|
36,918
|
|
Diluted
|
|
36,940
|
|
37,372
|
|
36,908
|
|
37,251
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
$
|
1.00
|
|
See notes to
condensed consolidated financial statements.
5
Table of
Contents
Systemax
Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
15,189
|
|
$
|
31,602
|
|
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
5,407
|
|
4,846
|
|
Provision for deferred income taxes
|
|
185
|
|
2,183
|
|
Provision for returns and doubtful accounts
|
|
1,551
|
|
891
|
|
Compensation expense related to equity compensation
plans
|
|
1,629
|
|
1,785
|
|
Excess tax benefit from exercises of stock options
|
|
(28
|
)
|
(1,204
|
)
|
Loss on dispositions and abandonment
|
|
86
|
|
13
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
11,828
|
|
(8,385
|
)
|
Inventories
|
|
(17,325
|
)
|
(45,295
|
)
|
Prepaid expenses and other current assets
|
|
179
|
|
5,929
|
|
Accounts payable, accrued expenses and other current
liabilities
|
|
(26,404
|
)
|
26,170
|
|
Net cash (used in) provided by operating activities
|
|
(7,703
|
)
|
18,535
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of Circuit City assets
|
|
(14,494
|
)
|
|
|
Purchase of CompUSA
|
|
|
|
(30,649
|
)
|
Purchases of property, plant and equipment
|
|
(6,207
|
)
|
(10,729
|
)
|
Proceeds from disposals of property, plant and
equipment
|
|
84
|
|
58
|
|
Net cash used in investing activities
|
|
(20,617
|
)
|
(41,320
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Repayments of borrowings from banks
|
|
|
|
(2,969
|
)
|
Proceeds from (repayments of) capital lease
obligations, net
|
|
(291
|
)
|
329
|
|
Dividends paid
|
|
|
|
(37,126
|
)
|
Proceeds from issuance of common stock, net of
repurchases
|
|
181
|
|
908
|
|
Repurchase of common stock
|
|
(1,174
|
)
|
|
|
Excess tax benefit from exercises of stock options
|
|
28
|
|
1,204
|
|
Net cash used in financing activities
|
|
(1,256
|
)
|
(37,654
|
)
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
1,532
|
|
(807
|
)
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(28,044
|
)
|
(61,246
|
)
|
Cash and cash equivalents beginning of period
|
|
115,967
|
|
128,021
|
|
Cash and cash equivalents end of period
|
|
$
|
87,923
|
|
$
|
66,775
|
|
Supplemental disclosures of non-cash investing and
financing activities:
|
|
|
|
|
|
Acquisitions of equipment through capital leases
|
|
$
|
152
|
|
$
|
653
|
|
See notes to condensed consolidated financial
statements.
6
Table
of Contents
Systemax Inc.
Condensed Consolidated Statement of Shareholders Equity (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Number of
|
|
|
|
Additional
|
|
Treasury
|
|
|
|
Comprehensive
|
|
|
|
|
|
Shares
|
|
|
|
Paid-in
|
|
Stock,
|
|
Retained
|
|
Income,
|
|
Comprehensive
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
At Cost
|
|
Earnings
|
|
Net of Tax
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2009
|
|
36,224
|
|
$
|
389
|
|
$
|
179,241
|
|
$
|
(31,158
|
)
|
$
|
192,401
|
|
$
|
(6,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock
|
|
106
|
|
|
|
(754
|
)
|
1,183
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
36
|
|
|
|
(249
|
)
|
430
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
(99
|
)
|
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
Income
tax benefit on stock-based compensation
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
6,015
|
|
$
|
6,015
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
15,189
|
|
|
|
15,189
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
June 30, 2009
|
|
36,267
|
|
$
|
389
|
|
$
|
179,931
|
|
$
|
(30,719
|
)
|
$
|
207,590
|
|
$
|
(903
|
)
|
|
|
See notes to condensed
consolidated financial statements.
7
Table of Contents
Systemax Inc.
Notes to Condensed
Consolidated Financial Statements (Unaudited)
1.
Basis of Presentation
The accompanying
condensed consolidated financial statements of the Company and its wholly-owned
subsidiaries 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. Certain prior year amounts have been
reclassified to conform to current year presentation.
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, 2009 and the results of
operations for the three and six month periods ended June 30, 2009 and
2008, cash flows for the six month periods ended June 30, 2009 and 2008
and changes in shareholders equity for the six month period ended June 30,
2009. The December 31, 2008
condensed consolidated balance sheet has been derived from the audited
consolidated financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
These condensed
consolidated financial statements should be read in conjunction with the Companys
audited consolidated financial statements as of December 31, 2008 and for
the year then ended included in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2008. The results for the three and six months
ended June 30, 2009 are not necessarily indicative of the results for an
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 July 4, 2009. The second quarters of both 2009 and 2008
included 13 weeks, and the six month periods of both 2009 and 2008 included 26
weeks.
2.
Acquisitions
On
April 5, 2009, the Company entered into an Asset Purchase Agreement with
Circuit City Stores, Inc. and Circuit City Stores West Coast, Inc.
(the Sellers). Pursuant to the Asset Purchase Agreement, on May 19, 2009
the Company acquired certain intellectual property and ecommerce assets owned
by the Sellers for $14.0 million in cash. In addition, the Company will pay the
Sellers a royalty based on a percentage of sales over a thirty month period
dependent upon levels of sales achieved from the acquired assets, with a
minimum payment of $3.0 million. The Company capitalized legal and other fees
incurred of approximately $0.5 million. The acquisition has been accounted for
as an asset purchase rather than a business combination as the acquisition does
not meet the definition of a business as defined in Financial Accounting
Standards Board Statement No. 141R, Business Combinations.
The Company has done a
preliminary purchase price allocation and recorded assets of approximately $4.8
million for Trademarks and Trade Names, $6.8 million for Domain Names and $2.9
million for Client Lists. These assets were recorded in the Companys
Technology Products business segment. The Company expects to amortize its
Client Lists over a 5 year period. All
other assets have indefinite lives. The
gross carrying amount and accumulated amortization for amortizable intangible
assets related to this acquisition at June 30, 2009 was as follows (in
thousands):
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Client
Lists
|
|
$
|
2,928
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
8
Table
of Contents
The
aggregate amortization expense was approximately $73,000 for second quarter of
2009. The estimated amortization for future years ending December 31 is as
follows (in thousands):
2009
|
|
$
|
368
|
|
2010
|
|
591
|
|
2011
|
|
591
|
|
2012
|
|
591
|
|
2013
|
|
591
|
|
2014
|
|
196
|
|
Total
|
|
$
|
2,928
|
|
3.
Stock-based Compensation Plans
Pre-tax
stock-based compensation expense for the six months ended June 30, 2009
and 2008 was $1,629,000 and $1,785,000 respectively.
4.
Net Income per Common Share
In June 2008, the
FASB issued FASB Staff Position No. EITF 03-6-1 Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (EITF 03-6-1). This FSP was issued to clarify that instruments
granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. The guidance in this FSP
applies to the calculation of Earnings Per Share (EPS) under Statement 128
for share-based payment awards with rights to dividends or dividend
equivalents. Unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of EPS pursuant to the two-class method. This FSP
is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period EPS data
presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of this FSP. The Company adopted EITF 03-6-1 in January 2009.
The Companys adoption of EITF 03-6-1 did not have a material impact on its
consolidated financial statements.
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 in accordance with EITF 03-6-1. 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 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
excluded from the computation of diluted earnings per share was 632,000 and
597,000 shares for the three months ended June 30, 2009 and 2008, and
661,000 and 603,000 for the six months ended June 30, 2009 and 2008, respectively,
due to their antidilutive effect.
5.
Comprehensive Income
Comprehensive income
consists of net income and foreign currency translation adjustments, net of
tax, and is included in the condensed consolidated statement of shareholders
equity. For the three month periods ended June 30, 2009 and 2008,
comprehensive income was $13,149,000 and $13,598,000, respectively. For the six
month periods ended June 30, 2009 and 2008, comprehensive income was
$21,204,000 and $33,417,000, respectively.
6.
Credit Facilities
The Company maintains a
$120.0 million (which may be increased by up to $30.0 million, subject to
certain conditions) secured revolving credit agreement with a group of
financial institutions which provides for borrowings in the United States and
United Kingdom. The borrowings are secured by all of the Companys domestic and
United Kingdom accounts receivable, the domestic inventories of the Company,
general intangibles and the Companys shares of stock in its domestic
subsidiaries and the Companys United Kingdom headquarters building. The credit
facility expires and the outstanding
9
Table
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borrowings thereunder are
due on October 26, 2010. The revolving credit agreement contains certain
financial and other covenants, including maintaining a minimum level of
availability and restrictions on capital expenditures, acquisitions and
payments of dividends. The Company was in compliance with all of the covenants
as of June 30, 2009. As of June 30, 2009, eligible collateral under
the agreement was $114.0 million, total availability was $101.9 million and
there were outstanding letters of credit of $12.1 million and there were no
outstanding advances.
7.
Business Exit Costs
During the second quarter of 2009 the Company
announced plans to exit its Software Solutions segment as
the result of economic conditions and difficulties in marketing the segments
products successfully. The Company expects to incur charges related to this
exit activity of approximately $4.0 to $5.0 million during 2009. In the second
quarter of 2009 the Company incurred approximately $2.4 million of these
charges including $1.1 million in severances, $1.2 million in estimated
contractual termination costs and $0.1 million in other costs. These costs were recorded in selling, general & administrative
expenses and interest and other income, net in the accompanying
condensed consolidated statement of operations.
The following table reconciles the associated
liabilities incurred (in thousands):
|
|
Severance
and
Personnel
Costs
|
|
Contract
Termination
Costs
|
|
Other Exit Costs
|
|
Total
|
|
Balance,
beginning of period
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Charged
to expense
|
|
1,064
|
|
1,262
|
|
80
|
|
2,406
|
|
Paid
or otherwise settled
|
|
(372
|
)
|
(567
|
)
|
(80
|
)
|
(1,019
|
)
|
Balance,
end of period
|
|
$
|
692
|
|
$
|
695
|
|
$
|
|
|
$
|
1,387
|
|
8.
Segment Information
Systemax is primarily a
direct marketer of brand name and private label products. Our operations are
organized in three reportable business segments Technology Products,
Industrial Products and Software Solutions. Our Technology Products segment
sells computers, computer supplies and consumer electronics which are marketed
in North America and Europe. Except for
certain personal computer (PC) products that we assemble ourselves and sell
under the trademarks
Systemax
and
Ultra,
substantially all of our products are manufactured
by other companies. We also sell certain
computer-related products manufactured for us to our own design under the
trademark
Systemax and Ultra
.
Our Industrial Products
segment sells a wide array of material handling equipment, storage equipment
and consumable industrial items which are marketed in North America.
Substantially all of these products are manufactured by other companies. Some products are manufactured for us to our
own design and marketed under the trademarks
Global
,
GlobalIndustrial.com
and
Nexel.
The Company announced plans to exit the Software Solutions segment
during the second quarter ended June 30, 2009. The Company is in the process of winding down
operations and anticipates completing this process by the end of 2009 (See Note
7).
The Companys chief operating decision-maker is the Companys Chief
Executive Officer. The Company evaluates segment performance based on operating
income, before net interest, foreign exchange gains and losses, internal management
fees and income taxes. Corporate costs not identified with the disclosed
segments are grouped as Corporate and other expenses. The chief operating
decision-maker reviews assets and makes capital expenditure decisions for the
Company on a consolidated basis only. The accounting policies of the segments
are the same as those of the Company.
10
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Financial information relating to the Companys operations by
reportable segment was as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30
|
|
June 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
672,004
|
|
$
|
694,350
|
|
$
|
1,378,276
|
|
$
|
1,361,647
|
|
Industrial Products
|
|
48,848
|
|
61,617
|
|
94,504
|
|
118,979
|
|
Software Solutions
|
|
747
|
|
68
|
|
1,087
|
|
146
|
|
Consolidated
|
|
$
|
721,599
|
|
$
|
756,035
|
|
$
|
1,473,867
|
|
$
|
1,480,772
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
15,972
|
|
$
|
23,665
|
|
$
|
38,005
|
|
$
|
53,091
|
|
Industrial Products
|
|
4,043
|
|
6,737
|
|
6,305
|
|
12,237
|
|
Software Solutions
|
|
(4,080
|
)
|
(4,268
|
)
|
(6,807
|
)
|
(8,212
|
)
|
Corporate and other expenses
|
|
(7,266
|
)
|
(5,019
|
)
|
(13,814
|
)
|
(9,965
|
)
|
Consolidated
|
|
$
|
8,669
|
|
$
|
21,115
|
|
$
|
23,689
|
|
$
|
47,151
|
|
Financial information relating to the Companys operations by
geographic area was as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30
|
|
June 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
457,351
|
|
$
|
401,139
|
|
$
|
919,459
|
|
$
|
767,056
|
|
Industrial Products
|
|
48,848
|
|
61,617
|
|
94,504
|
|
118,979
|
|
Software Solutions
|
|
747
|
|
68
|
|
1,087
|
|
146
|
|
United States total
|
|
506,946
|
|
462,824
|
|
1,015,050
|
|
886,181
|
|
Other North America (Technology Products)
|
|
40,994
|
|
49,094
|
|
81,282
|
|
98,093
|
|
North America total
|
|
547,940
|
|
511,918
|
|
1,096,332
|
|
984,274
|
|
Europe (Technology Products)
|
|
173,659
|
|
244,117
|
|
377,535
|
|
496,498
|
|
Consolidated
|
|
$
|
721,599
|
|
$
|
756,035
|
|
$
|
1,473,867
|
|
$
|
1,480,772
|
|
Revenues are
attributed to countries based on the location of the selling subsidiary.
9.
Stock Repurchase
On May 12, 2008 the Companys Board of Directors
authorized the repurchase of up to two million shares of Company stock. During
the second quarter of 2009, the Company repurchased 66,490 shares for
approximately $0.8 million. For the first six months of 2009 the Company
repurchased 98,934 shares for approximately $1.2 million. Total repurchases
made under this authorization since inception are 574,235 shares. These shares
are included in treasury stock at cost in the Companys condensed consolidated
balance sheet.
10.
Subsequent Events
The company has evaluated
events subsequent to the June 30, 2009 quarter end through August 12,
2009 the date of the filing of this Form 10Q.
On August 3, 2009
the Company announced it had signed a definitive agreement to acquire WStore
Europe, SA a European supplier of business IT products with operations in
France and the United Kingdom subject to certain closing conditions,
11
Table
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including approval by the
Competition Authority in France. The transaction is anticipated to close in the
third quarter of 2009 and is not anticipated to have a material effect on 2009
operations.
Item 2.
Managements 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. Forward looking statements may include, but
are not limited to, projections of revenue, income or loss and capital
expenditures, statements regarding future operations, financing needs,
compliance with financial covenants in loan agreements, plans for acquisition
or sale of assets or businesses and consolidation of operations of newly
acquired businesses, and plans relating to products or services of the Company,
assessments of materiality, predictions of future events and the effects of
pending and possible litigation, as well as 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.
Forward-looking
statements in this report are based on the Companys 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 Companys 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. Managements Discussion and
Analysis of Financial Condition and Results of Operations and the Notes to
Condensed Consolidated Financial Statements, 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 is primarily a
direct marketer of brand name and private label products. Our operations are
organized in three reportable business segments Technology Products,
Industrial Products and Software Solutions. Our Technology Products segment
sells computers, computer supplies and consumer electronics which are marketed
in North America and Europe. Except for
certain personal computer (PC) products that we assemble ourselves and sell
under the trademarks
Systemax
and
Ultra,
substantially all of our products are manufactured
by other companies. We also sell certain
computer-related products manufactured for us to our own design under the
trademark
Systemax and Ultra
. For the six months
ended June 30, 2009, Technology products accounted for 94% of our net
sales.
Our Industrial Products
segment sells a wide array of material handling equipment, storage equipment
and consumable industrial items which are marketed in North America. Substantially all of these products are
manufactured by other companies. Some
products are manufactured for us to our own design and marketed under the
trademarks Global, GlobalIndustrial.com and Nexel. Industrial products
accounted for 6% of our net sales for the six months ended June 30,
2009. In both of our Technology Products
and Industrial Products segments, we offer our customers a broad selection of
products, prompt order fulfillment and extensive customer service.
The Company announced
plans to exit the Software Solutions segment during the second quarter of 2009.
The Company is in the process of winding down operations and anticipates
completing this process by the end of 2009.
Software Solutions accounted for approximately $1.1 million in sales for
the six months ended June 30, 2009. See Note 8 to the consolidated
financial statements included in Item 1 of this Form 10-Q for additional
financial information about our business segments as well as information about
our geographic operations.
12
Table
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The market for computer
products and consumer electronics is subject to intense price competition and
is characterized by narrow gross profit margins. The North American industrial
products market is highly fragmented and we compete against multiple
distribution channels. 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 stocking 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 stock
option expenses. We continually assess
our operations to ensure that they are efficient, aligned with market conditions
and responsive to customer needs.
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,
2008 and the other information provided in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008.
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 Companys 2008 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 managements 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, inventories, goodwill
and intangible assets, long-lived assets, accruals, income taxes and
restructuring charges. The application of each of these critical accounting
policies and estimates was discussed in Item 7 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2008. There have been no
significant changes in the application of critical accounting policies or
estimates during 2009. 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 managements
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 its financial condition or results of operations.
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 Companys
current or reasonably foreseeable operating structure. Below are the new
authoritative pronouncements that management believes are relevant to Companys
current operations.
Effective January 1,
2009 the Company adopted Statement on Financial Accounting Standards (SFAS) No. 141R,
Business Combinations, which replaces FASB Statement 141. SFAS No. 141R
retains the requirement that the acquisition method of accounting be used for
business combinations. The objective of SFAS No. 141R is to improve the
relevance, representational faithfulness and comparability that reporting
entities provide in their financial reports about business combinations and
their effects. SFAS 141R establishes principles and requirements for how an
acquirer 1) recognizes and measures identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree, 2)
recognizes and measures the goodwill acquired in the combination or a gain from
a bargain purchase and 3) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS No. 141R is applied prospectively for
all business combinations entered into after the date of adoption. There were
no business combinations during the six months period ending June 30,
2009.
13
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In May 2009,
the FASB issued SFAS No. 165, Subsequent Events was issued which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued
or available to be issued. SFAS No. 165 should not result in significant
changes in the subsequent events that are reported, but rather requires
disclosure of the date through which the Company evaluates whether subsequent
events have occurred. This pronouncement
was effective for the period ended June 30, 2009 and did not have a
significant impact on the Companys consolidated financial statements.
In June 2008, the
FASB issued FASB Staff Position No. EITF 03-6-1 Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (EITF 03-6-1). This FSP was issued to clarify that instruments
granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. The guidance in this FSP
applies to the calculation of Earnings Per Share (EPS) under Statement 128
for share-based payment awards with rights to dividends or dividend equivalents.
Unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of EPS pursuant to the
two-class method. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those years. All prior-period EPS data presented shall be adjusted
retrospectively (including interim financial statements, summaries of earnings,
and selected financial data) to conform with the provisions of this FSP. The
Company adopted EITF 03-6-1 in January 2009. The Companys adoption of
EITF 03-6-1 did not have a material impact on its consolidated financial
statements.
Results
of Operations
Three and
Six Months Ended June 30, 2009 compared to the Three and Six Months Ended June 30,
2008
Key Performance
Indicators (in thousands):
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
% Change
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
672,004
|
|
$
|
694,350
|
|
(3.2
|
)%
|
$
|
1,378,276
|
|
$
|
1,361,647
|
|
1.2
|
%
|
Industrial
products
|
|
48,848
|
|
61,617
|
|
(20.7
|
)%
|
94,504
|
|
118,979
|
|
(20.6
|
)%
|
Hosted
software
|
|
747
|
|
68
|
|
998.5
|
%
|
1,087
|
|
146
|
|
644.5
|
%
|
Total
net sales
|
|
$
|
721,599
|
|
756,035
|
|
(4.6
|
)%
|
$
|
1,473,867
|
|
$
|
1,480,772
|
|
(.5
|
)%
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
547,940
|
|
$
|
511,918
|
|
7.0
|
%
|
$
|
1,096,332
|
|
$
|
984,274
|
|
11.4
|
%
|
Europe
|
|
173,659
|
|
244,117
|
|
(28.9
|
)%
|
377,535
|
|
496,498
|
|
(24.0
|
)%
|
Total
net sales
|
|
$
|
721,599
|
|
$
|
756,035
|
|
(4.6
|
)%
|
$
|
1,473,867
|
|
$
|
1,480,772
|
|
(.5
|
)%
|
Gross margin
|
|
14.8
|
%
|
15.2
|
%
|
(.4
|
)%
|
14.6
|
%
|
15.4
|
%
|
(.8
|
)%
|
Selling,
general and administrative costs
|
|
$
|
98,385
|
|
$
|
93,639
|
|
5.1
|
%
|
$
|
190,915
|
|
$
|
181,352
|
|
5.3
|
%
|
Selling, general and administrative costs as a % of
net sales
|
|
13.6
|
%
|
12.4
|
%
|
1.2
|
%
|
13.0
|
%
|
12.2
|
%
|
.8
|
%
|
Operating
income
|
|
$
|
8,669
|
|
$
|
21,115
|
|
(58.9
|
)%
|
$
|
23,689
|
|
$
|
47,151
|
|
(49.8
|
)%
|
Operating margin
|
|
1.2
|
%
|
2.8
|
%
|
(1.6
|
)%
|
1.6
|
%
|
3.2
|
%
|
(1.6
|
)%
|
Effective
income tax rate
|
|
27.6
|
%
|
37.1
|
%
|
(9.5
|
)%
|
34.9
|
%
|
36.5
|
%
|
(1.6
|
)%
|
Net
income
|
|
$
|
6,491
|
|
13,541
|
|
(52.1
|
)%
|
$
|
15,189
|
|
$
|
31,602
|
|
(51.9
|
)%
|
Net margin
|
|
.9
|
%
|
1.8
|
%
|
(.9
|
)%
|
1.0
|
%
|
2.1
|
%
|
(1.1
|
)%
|
The
Technology Products net sales decrease during the second quarter of 2009 was attributable
to significant declines in business to business revenues in Europe resulting
from the global slowdown in economic activity. On a constant currency basis
European sales declined 13.5% in the second quarter of 2009 and 6.2% for the
first six months of 2009 compared to the same periods in 2008. The movements in
foreign exchange rates accounted for $37.6 million and $87.9 million,
respectively, of the revenue decline in the second quarter and first six months
of 2009. The trend of declining sales in Europe is expected to continue until
global economic conditions improve. In North America, Technology Products sales
increased 10.7% in the second quarter of 2009 and 15.7% in the first six months
of 2009 compared to the same periods in 2008. Growth in North
14
Table
of Contents
America
during the second quarter and first six months of 2009 is attributable to
increased retail and internet sales in the consumer channels. Retail sales
benefited from the acquisition of 16 retail stores from CompUSA in 2008.
Ecommerce sales were up in substantially all of the Companys U.S. based sites
in 2009. As in Europe, North America business to business sales declined in
both the second quarter and first six months of 2009. On a constant currency
basis, North America Technology Products sales grew 12.3% in the second quarter
of 2009 and 17.7% in the first six months of 2009 compared to the same periods
in 2008. Movements in foreign exchange rates negatively impacted the North
American sales comparison by approximately $7.3 million and $17.4 million,
respectively, in the second quarter and first six months of 2009.
For
the second quarter of 2009, worldwide retail and other revenues, defined as
revenues from retail stores, consumer websites, catalogs, shopping channels and
freight, were $412.5 million compared to $349.6 million in the same period in
2008, an increase of 18.0%. Retail and other sales growth in the second quarter
of 2009 was driven primarily by growth in computers, including laptops and
netbooks. For the first six months of
2009 worldwide retail and other revenues were $844.1 million compared to $710.4
million in the same period in 2008, an increase of 18.8%. Retail and other
sales growth in the first six months of 2009 was driven primarily by growth in
computers, including laptops and netbooks, and consumer electronics. Worldwide
business to business sales were $309.1 million in the second quarter of 2009
compared to $406.4 million in the same period in 2008, a 23.9% decrease, and
for the first six months of 2009 worldwide business to business sales were
$629.8 million compared to $770.4 million in the same period in 2008, an 18.3%
decrease. Worldwide business to business sales declined as the result of the
global economic slowdown.
Industrial
Products sales are primarily business to business and declined in the second
quarter and first six months of 2009 as compared to the same periods in 2008.
The sales decline is largely attributable to the slowdown in economic activity
which started in the second half of 2008 and continued through the second
quarter of 2009. The Company has implemented strategies such as adding
additional products to its catalogs and website and closely monitoring its cost
structure to mitigate some of the effects of the decline in sales.
The
Company announced plans to exit the Software Solutions segment during the
second quarter of 2009. The Company is in the process of winding down
operations and anticipates completing this process by the end of 2009. Software
Solutions accounted for approximately $1.1 million in sales for the six months
ended June 30, 2009.
Consolidated
gross margin declined in the second quarter and first six months of 2009 by 40
and 80 basis points, respectively, compared to the same period in 2008. The
Company has lowered certain product prices and offered freight incentives in
order to both maintain and grow market share and to respond to competitive
pricing pressures that started during 2008. The Company has continued to offer
such selective incentives to maintain and grow market share in anticipation of
future gross margin expansion. Additionally, consolidated gross margin has been
impacted by a shift in mix, as higher margin Industrial Products accounted for
a smaller portion of consolidated revenues than in prior quarters. Gross margin is dependent on variables such
as product mix, vendor price protection and other sales incentives, competition,
pricing strategy, cooperative advertising funds required to be classified as a
reduction to cost of sales, freight discounting and other variables, any or all
of which may result in fluctuations in gross margin.
The increase in selling,
general and administrative expenses for the second quarter of 2009 compared to
the second quarter of 2008 was primarily the result of a $6.2 million charge
for severance costs, litigation and contractual lease terminations, of which
$2.3 million resulting from the winding down of our Software Solutions segment,
offset by savings in other selling, general and administrative expenses due to
favorable movements in exchange rates.
The increase in selling,
general and administrative expenses for the first six months of 2009 as
compared to the first six months of 2008 was primarily the result of a $6.2
million charge for severance costs, litigation and contractual lease
terminations, mentioned above, a $1.6 million increase in bad debt expense, and
$2.3 million of increased credit card fees.
The Companys effective
tax rate for the second quarter of 2009 was 27.6% compared to 37.1% in the
second quarter of 2008. Included in the 2009 rate is a reversal
of
tax reserves of approximately $1.0 million as the result of statute expirations
, and included in the 2008 rate is a
reversal of a tax reserve of approximately $0.4 million.
The
effective tax rate for the six months ended June 30, 2009 was 34.9%
compared to 36.5% in 2008, taking into account the reversal of tax reserves.
Excluding the tax reserve reversal the Companys effective tax rate was 39.3%
in 2009. The higher rate in 2009 is primarily the result of a higher percentage
of taxable income in the U.S. where corporate income taxes are typically
higher.
Net income in the second
quarter of 2009 declined 52.1% to $6.5 million compared to $13.5 million in the
second quarter of 2008. Net income for the six months ended June 30, 2009
declined 51.9% to $15.2 million compared to $31.6 million for the six months ended
June 30, 2008. The decline in net
income is the result of a slowdown in economic activity in all of the Companys
segments and geographies and the charges incurred, including the costs of
winding down our Software Solutions segment. The Company has adjusted its cost
structure and reduced headcount during the first six months of 2009 and has
implemented selected hiring freezes in certain business units as the result of
general economic uncertainty worldwide. The Company will continue to monitor
economic conditions and make further adjustments if necessary.
Financial
Condition, Liquidity and Capital Resources
Our primary liquidity
needs are to support working capital requirements in our business, fund capital
expenditures, repurchase Company stock, fund special dividends declared by our
Board of Directors and fund acquisitions. We rely principally upon operating
cash flow to meet these needs. We believe that cash flow available from these
sources will be sufficient to fund our working capital and other cash
requirements for the next twelve months and thereafter.
15
Table
of Contents
Selected liquidity data
(in thousands):
|
|
June 30, 2009
|
|
December 31,
2008
|
|
$ Change
|
|
Cash and cash equivalents
|
|
$
|
87,923
|
|
$
|
115,967
|
|
$
|
(28,044
|
)
|
Accounts receivable, net
|
|
$
|
173,629
|
|
$
|
182,532
|
|
$
|
(8,903
|
)
|
Inventories, net
|
|
$
|
310,014
|
|
$
|
290,594
|
|
$
|
19,420
|
|
Prepaid expenses and other current assets
|
|
$
|
12,891
|
|
$
|
12,667
|
|
$
|
224
|
|
Accounts payable
|
|
$
|
269,714
|
|
$
|
284,378
|
|
$
|
(14,664
|
)
|
Accrued expenses and other current liabilities
|
|
$
|
65,746
|
|
$
|
73,075
|
|
$
|
(7,329
|
)
|
Current portion of capitalized lease obligations
|
|
$
|
832
|
|
$
|
773
|
|
$
|
59
|
|
Working capital
|
|
$
|
258,888
|
|
$
|
253,092
|
|
$
|
5,796
|
|
Our working capital
increased in the first six months of 2009 primarily as the result of the cash
generated from net income for the period adjusted for non cash charges of
approximately $24.0 million offset by the purchase of certain CircuitCity.com
assets, fixed asset purchases, and stock repurchases. The increase in inventory
is primarily the result of strategic quarter end purchases. Our inventory turnover decreased from 9.0
times to 8.0 times on an annual basis. Future accounts receivable and inventory
balances will continue to fluctuate with changes in sales volume and the mix of
our net sales between consumer and business customers.
The decrease in cash
provided by operations in the first six months of 2009 compared to the first
six months of 2008 resulted from changes in our working capital accounts, which
used $31.7 million in cash compared to $21.6 million generated in 2008,
primarily the result of an increase in inventories and a decrease in accounts
payable, accrued expenses and other current liabilities. Cash generated from
net income adjusted by other non-cash items provided $24.0 million for the six
months ended June 30, 2009 compared to $40.1 million provided by these
items for the six months ended June 30, 2008, primarily as a result of a
lower net income in the first six months of 2009.
Cash flows used in
investing activities during the first six months of 2009 were primarily for the
CircuitCity.com acquisition and for capital expenditures relating to our
information and communications systems hardware. Cash flows used in investing
activities during 2008 consisted primarily of funds used for the CompUSA
acquisition and for expenditures in retail stores and information technology.
Net cash of $1.3 million was used in financing activities for the first six months of 2009. We repurchased $1.2 million of common stock and repaid $0.3 million of capital lease obligations. Proceeds and excess tax benefits from stock option exercises provided approximately $0.2 million of cash. In the first six months of 2008, we repaid $3.0 million in short-term loans and paid $37.1 million for a special dividend. Proceeds from stock option exercises, net of repurchases and excess tax benefits, provided approximately $2.1 million of cash.
Under our $120.0 million (which may be increased up to $150.0 million, subject to certain conditions) secured revolving credit agreement for borrowings in the United States and United Kingdom, as of June 30, 2009, eligible collateral was $114.0 million and total availability was $101.9 million. There were outstanding letters of credit of $12.1 million and there were no outstanding advances as of June 30, 2009. The borrowings are secured by all of the domestic and United Kingdom accounts receivable, the domestic inventories of the Company; the Companys shares of stock in its domestic subsidiaries and the Companys United Kingdom headquarters building. The credit facility expires and the outstanding borrowings thereunder are due on October 26, 2010. The revolving credit agreement contains certain financial and other covenants, including maintaining a minimum level of availability and restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants under this facility as of June 30, 2009.
We also have certain
obligations with various parties that include commitments to make future
payments. Our principal commitments at June 30, 2009 consisted of payments
under operating leases for certain of our real property and equipment, payments
under capital leases for equipment, and payments under employment and other
service agreements.
Our current and
anticipated needs for cash include funding growth in working capital, capital
expenditures necessary for future growth in sales, implementation of financial
and retail point of sale systems, repurchase of Company stock and potential expansion
through acquisitions. We believe that our cash balances 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 primarily in money market funds or their equivalent. As of June 30,
2009, all of our
16
Table of Contents
investments had maturities
of less than three months. Accordingly,
we do not believe that our investments have significant exposure to interest
rate risk.
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 Companys
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 Companys liquidity or the
availability of capital resources.
Item 3.
Quantitative and Qualitative Disclosure
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 Pounds, Euros and
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 sales, gross margins, operating expenses and retained earnings 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, 2009 we had no outstanding forward
exchange contracts.
Our exposure to
market risk for changes in interest rates relates primarily to our variable
rate debt. Our variable rate debt includes short-term borrowings under our
credit facilities. As of June 30, 2009, 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.
Item 4.
Controls and Procedures
Under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer,
the Company carried out an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of June 30,
2009. Based upon this evaluation, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that the Companys disclosure controls
and procedures are effective.
Changes
in Internal Control Over Financial Reporting
There have been no
changes in the Companys internal controls over financial reporting during the
quarterly period ended June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
17
Table of Contents
PART II
- OTHER INFORMATION
Item
1.
Legal Proceedings
Kevin Vukson v. TigerDirect, Inc., OnRebate.com Inc.
and Systemax Inc.
On October 18, 2007, Kevin Vukson filed a national
class action complaint in U.S. District Court against TigerDirect, Inc.,
OnRebate.com Inc. and Systemax Inc. on behalf of himself and all TigerDirect
customers whose rebates were denied or delayed. (OnRebate.com Inc. is a rebate
processing company owned by Systemax.). Vuksons complaint (as amended)
alleges that since 2004 Systemax, TigerDirect and OnRebate engaged in a
conspiracy to engage in deceptive and unfair rebate practices. Vukson
alleged counts for violation of state consumer protection statutes, conspiracy,
and unfair rebate practices. In February 2009 the Court dismissed Vuksons
complaint with leave to amend but ordered that any amended complaint not
include a request for punitive damages. Vukson then filed an amended complaint
with no request for punitive damages, as ordered by the Court. In June 2009
the Court dismissed three of Vuksons four remaining claims with prejudice
including claims under the Florida Deceptive and Unfair Trade Practices Act.
Vukson (a resident of Texas) is now seeking to amend the complaint to allege
violations under the Texas consumer protection act which would effectively
reduce the representative class from a nationwide class of TigerDirect rebate
applicants to only those TigerDirect rebate applicants residing in Texas. The
Company intends to file a motion for summary judgment and will continue to
vigorously defend this case.
State of Florida, Office of the Attorney General Subpoena
On January 2, 2008 the Company received a subpoena
for documents from the Florida Attorney Generals Office relating to the
payment and processing of rebates by the Company. The Company received
subpoenas for additional documents on January 30, 2008 and on August 25,
2008. The Company is cooperating with the Florida Attorney Generals
investigation and has provided a substantial number of documents in response to
the subpoenas. In July 2009 the Company filed a Complaint for Declaratory
Relief and Motion for Protective Order in Florida state court seeking to
protect certain confidential trade secret information as well personal customer
and employee information from disclosure to third parties.
Other Matters
Systemax is a party to various pending legal proceedings
and disputes arising in the normal course of business, including those
involving commercial, employment, tax and intellectual property related claims,
none of which, in managements opinion, is anticipated to have a material
adverse effect on our consolidated financial statements.
Item
2.
Unregistered Sales of Equity
Securities and Use of Proceeds
The following table sets
forth repurchases by the Company of its outstanding shares of common stock
during the six months ended June 30, 2009:
Period
|
|
Total Number
of Shares
Purchased
|
|
Average
Price
Paid Per
Share
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
Maximum Number of Shares (or
Approximate Dollar Value) that
May Yet Be Purchased Under the
Plans or Programs
|
|
March
|
|
32,444
|
|
$
|
11.63
|
|
32,444
|
|
1,492,255
|
|
May
|
|
29,200
|
|
$
|
12.02
|
|
61,644
|
|
1,463,055
|
|
June
|
|
37,290
|
|
$
|
11.97
|
|
98,934
|
|
1,425,765
|
|
Total
|
|
98,934
|
|
$
|
11.87
|
|
|
|
|
|
18
Table
of Contents
Item
4.
Submission of Matters to a Vote of Security Holders
The 2009 annual meeting
of the stockholders of the Company was held on June 12, 2009. Each of the
eight candidates for the position of director (Richard Leeds, Bruce Leeds,
Robert Leeds, Gilbert Fiorentino, Robert D. Rosenthal, Stacy S. Dick, Lawrence
P. Reinhold and Marie Adler-Kravecas) was elected.
The matters voted upon at the meeting and the number of votes cast for,
against or withheld (including abstentions) as to each matter, including
nominees for office, are as follows:
1. Director election:
Richard Leeds
|
|
For:
|
31,386,990
|
|
|
Withheld:
|
4,057,001
|
|
|
|
|
Robert Leeds
|
|
For:
|
31,225,527
|
|
|
Withheld :
|
4,218,464
|
|
|
|
|
Bruce Leeds
|
|
For:
|
31,225,527
|
|
|
Withheld :
|
4,218,464
|
|
|
|
|
Gilbert
Fiorentino
|
|
For:
|
32,048,930
|
|
|
Withheld:
|
3,395,061
|
|
|
|
|
Robert D.
Rosenthal
|
|
For:
|
34,329,873
|
|
|
Withheld:
|
1,114,118
|
|
|
|
|
Stacy S. Dick
|
|
For:
|
34,334,730
|
|
|
Withheld:
|
1,109,261
|
|
|
|
|
Lawrence P.
Reinhold
|
|
For:
|
31,165,920
|
|
|
Withheld:
|
4,278,071
|
|
|
|
|
Marie
Adler-Kravecas
|
|
For:
|
34,335,304
|
|
|
Withheld :
|
1,108,687
|
2. Ratification
of Ernst & Young as the Companys Independent Registered Accountants
for 2009:
|
|
For:
|
35,416,741
|
|
|
Against
:
|
20,517
|
|
|
Abstain:
|
6,733
|
19
Table
of Contents
Item 6.
Exhibits
|
31.1
|
Certification of
the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
31.2
|
Certification of
the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.1
|
Certification of
the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.2
|
Certification of
the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
20
Table of
Contents
SIGNATURES
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.
|
SYSTEMAX INC.
|
|
|
|
|
Date:
August 12, 2009
|
By:
|
/s/ Richard
Leeds
|
|
|
|
|
Richard Leeds
|
|
Chairman and
Chief Executive Officer
|
|
|
|
|
|
|
|
By:
|
/s/ Lawrence P.
Reinhold
|
|
|
|
|
Lawrence P. Reinhold
|
|
Executive Vice
President and Chief Financial Officer
|
21
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