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 September 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 November 1, 2009 was 36,410,409.
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 website our annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, including all
amendments to those reports. These are
available as soon as is reasonably practicable after they are filed with the
SEC. All reports mentioned above are
also available from the SECs website (www.sec.gov). The information on our
website is not part of this or any other report we file with, or furnish to,
the SEC.
Our
Board of Directors has adopted the following corporate governance documents
with respect to the Company (the Corporate Governance Documents):
·
Corporate Ethics Policy for officers, directors and employees
·
Charter for the Audit Committee of the Board of Directors
·
Charter for the Compensation Committee of the Board of Directors
·
Charter for the Nominating/Corporate Governance Committee of the Board
of Directors
·
Corporate Governance Guidelines and Principles
In
accordance with the corporate governance rules of the New York Stock
Exchange, each of the Corporate Governance Documents is available on our
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)
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
102,117
|
|
$
|
115,967
|
|
Accounts receivable, net
|
|
213,170
|
|
182,532
|
|
Inventories
|
|
315,977
|
|
290,594
|
|
Prepaid expenses and other
current assets
|
|
17,852
|
|
12,667
|
|
Deferred income taxes
|
|
10,722
|
|
9,558
|
|
Total current assets
|
|
659,838
|
|
611,318
|
|
|
|
|
|
|
|
Property, plant and
equipment, net
|
|
63,046
|
|
48,465
|
|
Deferred income taxes
|
|
10,203
|
|
11,198
|
|
Goodwill and intangibles
|
|
49,257
|
|
30,326
|
|
Other assets
|
|
1,200
|
|
837
|
|
Total assets
|
|
$
|
783,544
|
|
$
|
702,144
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current portion of
capitalized lease obligations
|
|
$
|
951
|
|
$
|
773
|
|
Short term debt
|
|
17,819
|
|
|
|
Accounts payable
|
|
302,097
|
|
284,378
|
|
Accrued expenses and other
current liabilities
|
|
82,125
|
|
73,075
|
|
Total current liabilities
|
|
402,992
|
|
358,226
|
|
|
|
|
|
|
|
Capitalized lease
obligations, net of current portion
|
|
1,233
|
|
1,411
|
|
Other liabilities
|
|
7,986
|
|
8,552
|
|
Total liabilities
|
|
412,211
|
|
368,189
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
389
|
|
389
|
|
Additional paid-in capital
|
|
180,187
|
|
179,241
|
|
Treasury stock
|
|
(29,412
|
)
|
(31,158
|
)
|
Retained earnings
|
|
220,188
|
|
192,401
|
|
Accumulated other
comprehensive loss, net of tax
|
|
(19
|
)
|
(6,918
|
)
|
Total shareholders equity
|
|
371,333
|
|
333,955
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
783,544
|
|
$
|
702,144
|
|
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
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
sales
|
|
$
|
753,880
|
|
$
|
739,479
|
|
$
|
2,227,747
|
|
$
|
2,220,251
|
|
Cost
of sales
|
|
641,117
|
|
624,060
|
|
1,900,380
|
|
1,876,329
|
|
Gross
profit
|
|
112,763
|
|
115,419
|
|
327,367
|
|
343,922
|
|
Selling,
general & administrative expenses
|
|
93,394
|
|
94,997
|
|
284,309
|
|
276,349
|
|
Operating
income
|
|
19,369
|
|
20,422
|
|
43,058
|
|
67,573
|
|
Foreign
currency exchange (gain) loss
|
|
(989
|
)
|
1,840
|
|
(389
|
)
|
402
|
|
Interest
and other income, net
|
|
(76
|
)
|
(126
|
)
|
(620
|
)
|
(1,449
|
)
|
Interest
expense
|
|
113
|
|
68
|
|
420
|
|
204
|
|
Income
before income taxes
|
|
20,321
|
|
18,640
|
|
43,647
|
|
68,416
|
|
Provision
for income taxes
|
|
7,723
|
|
7,367
|
|
15,860
|
|
25,541
|
|
Net
income
|
|
$
|
12,598
|
|
$
|
11,273
|
|
$
|
27,787
|
|
$
|
42,875
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.34
|
|
$
|
.30
|
|
$
|
.76
|
|
$
|
1.16
|
|
Diluted
|
|
$
|
.34
|
|
$
|
.30
|
|
$
|
.74
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
36,703
|
|
37,079
|
|
36,669
|
|
36,972
|
|
Diluted
|
|
37,319
|
|
37,801
|
|
37,310
|
|
37,774
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net
income
|
|
$
|
27,787
|
|
$
|
42,875
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
8,440
|
|
7,591
|
|
Provision
for deferred income taxes
|
|
(34
|
)
|
3,922
|
|
Provision
for returns and doubtful accounts
|
|
3,629
|
|
1,170
|
|
Compensation
expense related to equity compensation plans
|
|
2,261
|
|
2,778
|
|
Excess
tax benefit from exercises of stock options
|
|
(287
|
)
|
(1,377
|
)
|
Loss
on dispositions and abandonment
|
|
88
|
|
13
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
10,368
|
|
(6,016
|
)
|
Inventories
|
|
(20,130
|
)
|
(27,795
|
)
|
Prepaid
expenses and other current assets
|
|
(2,252
|
)
|
(3,171
|
)
|
Accounts
payable, accrued expenses and other current liabilities
|
|
(15,632
|
)
|
11,321
|
|
Net
cash provided by operating activities
|
|
14,238
|
|
31,311
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchase
of Circuit City assets
|
|
(14,494
|
)
|
|
|
Purchase
of WStore Europe SA, net of cash acquired
|
|
924
|
|
|
|
Purchase
of CompUSA
|
|
|
|
(30,649
|
)
|
Purchases
of property, plant and equipment
|
|
(13,724
|
)
|
(13,159
|
)
|
Proceeds
from disposals of property, plant and equipment
|
|
84
|
|
47
|
|
Net
cash used in investing activities
|
|
(27,210
|
)
|
(43,761
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Repayments
of borrowings from banks
|
|
(1,512
|
)
|
(3,989
|
)
|
Proceeds
from capital lease obligations, net
|
|
|
|
298
|
|
Dividends
paid
|
|
|
|
(37,126
|
)
|
Proceeds
from issuance of common stock, net of repurchases
|
|
742
|
|
1,125
|
|
Repurchase
of common stock
|
|
(1,174
|
)
|
(3,435
|
)
|
Excess
tax benefit from exercises of stock options
|
|
287
|
|
1,377
|
|
Net
cash used in financing activities
|
|
(1,657
|
)
|
(41,750
|
)
|
|
|
|
|
|
|
Effects
of exchange rates on cash
|
|
779
|
|
(448
|
)
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
(13,850
|
)
|
(54,648
|
)
|
Cash
and cash equivalents beginning of period
|
|
115,967
|
|
128,021
|
|
Cash
and cash equivalents end of period
|
|
$
|
102,117
|
|
$
|
73,373
|
|
Supplemental disclosures of
non-cash investing and financing activities:
|
|
|
|
|
|
Acquisitions
of equipment through capital leases
|
|
$
|
676
|
|
$
|
750
|
|
See notes to condensed consolidated financial statements.
6
Table of
Contents
Systemax Inc.
Condensed Consolidated Statement of Shareholders Equity (Unaudited)
(In thousands)
|
|
Common Stock
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Number of
|
|
|
|
Additional
|
|
Treasury
|
|
|
|
Other
|
|
|
|
|
|
Shares
|
|
|
|
Paid-in
|
|
Stock,
|
|
Retained
|
|
Comprehensive
|
|
Comprehensive
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
At Cost
|
|
Earnings
|
|
Income
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1,
2009
|
|
36,224
|
|
$
|
389
|
|
$
|
179,241
|
|
$
|
(31,158
|
)
|
$
|
192,401
|
|
$
|
(6,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
|
|
|
|
|
2,188
|
|
|
|
|
|
|
|
|
|
Issuance of restricted
stock
|
|
106
|
|
|
|
(754
|
)
|
1,183
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
147
|
|
|
|
(995
|
)
|
1,737
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
(99
|
)
|
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
Income tax benefit on
stock-based compensation
|
|
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
Change in cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
6,899
|
|
$
|
6,899
|
|
Net income
|
|
|
|
|
|
|
|
|
|
27,787
|
|
|
|
27,787
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30,
2009
|
|
36,378
|
|
$
|
389
|
|
$
|
180,187
|
|
$
|
(29,412
|
)
|
$
|
220,188
|
|
$
|
(19
|
)
|
|
|
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 September 30, 2009 and the results
of operations for the three and nine month periods ended September 30,
2009 and 2008, cash flows for the nine month periods ended September 30,
2009 and 2008 and changes in shareholders equity for the nine month period
ended September 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 nine months ended September 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 third
quarter ended on October 3, 2009.
The third quarters of both 2009 and 2008 included 13 weeks, and the nine
month periods of both 2009 and 2008 included 39 weeks.
2.
Acquisitions
On
September 18, 2009, the Company acquired WStore Europe SA and its
subsidiaries, (WStore), a European supplier of business IT products and
software solutions with operations in France and the United Kingdom. The
purchase price (after giving effect to the conversion of Euros to U.S. dollars)
was approximately $4.4 million in cash, $2.2 million of which was placed into
an escrow account for one year to secure the sellers indemnification
obligations under the purchase agreement. A preliminary allocation of the purchase
was done as of the acquisition date. A final purchase price allocation will be
done during the fourth quarter of 2009. However the Company has determined that
this is not a material acquisition for financial reporting purposes. The accounts of WStore are included in the
accompanying condensed consolidated balance sheet. The operating results of
WStore are included in the accompanying condensed consolidated statements of
operations from the date of acquisition. WStore is included in the Companys
Technology Products business segment.
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 under applicable accounting principles.
The
Company has done a preliminary purchase price allocation with respect to the
Circuit City asset acquisition 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 the 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 September 30, 2009 was as follows (in
thousands):
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Client Lists
|
|
$
|
2,928
|
|
$
|
221
|
|
|
|
|
|
|
|
|
|
8
Table
of Contents
The
aggregate amortization expense was approximately $0.2 million for third 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
nine months ended September 30, 2009 and 2008 was $2.3 million and $2.8
million, respectively.
4.
Net
Income per Common Share
In
June 2008, the Financial Accounting Standards Board (FASB) issued
authoritative guidance to clarify that instruments granted in share-based
payment transactions can be participating securities prior to the requisite
service having been rendered. The guidance applies to the calculation of
Earnings Per Share (EPS) 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 guidance became 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 is adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data). The Company adopted this
authoritative guidance in January 2009 and it did not have a material
impact on the condensed 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. 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 751,000 and 599,000 shares for
the three months ended September 30, 2009 and 2008, and 691,000 and 605,000
for the nine months ended September 30, 2009 and 2008, respectively, due
to their antidilutive effect.
5.
Comprehensive
Income
Comprehensive income
consists of net income and foreign currency translation adjustments and is
included in the condensed consolidated statement of shareholders equity. For
the three month periods ended September 30, 2009 and 2008, comprehensive
income was $13.5 million and $4.6 million, respectively. For the nine month
periods ended September 30, 2009 and 2008, comprehensive income was $34.7
million and $38.0 million, 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 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 September 30, 2009. As of September 30,
2009, eligible collateral under the agreement was $108.9 million, total
availability was $96.8 million, total outstanding letters of credit of $12.1
million and there were no outstanding advances.
9
Table
of Contents
The Companys WStore Europe SA subsidiary
(See Note 2) maintains a secured revolving credit agreement with a financial
institution in France which is secured by WStore Europe SA accounts receivable
balances. Available amounts for borrowing under this facility includes all
accounts receivable balances not over 60 days past due reduced by the greater
of 4.0 million or 10% of the eligible accounts receivable. As of September 30,
2009 there was availability under this credit facility of approximately 3.4
million ($4.9 million) and there was 11.7 million ($17.1 million) of
outstanding borrowings.
The Companys WStore UK subsidiary (See Note
2) maintains a £2 million secured revolving credit agreement with a financial
institution in the United Kingdom which is secured by WStore UKs accounts
receivable balances. Available amounts for borrowing under this facility
includes accounts receivable balances less a 30% retention. As of September 30,
2009 there was availability under this credit facility of approximately £0.8
million ($1.2 million) and approximately 0.5 million ($0.8 million) of
outstanding borrowings.
7.
Business
Exit Costs
The Company
announced plans to exit its Software Solutions segment, in
the second quarter of 2009, 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 third quarter of 2009, the Company incurred
additional severance and contractual termination costs of $0.1 million and $0.1
million, respectively. Total charges
for the first nine months of 2009 incurred for severances, estimated contractual
termination costs and other costs were $1.2 million, $1.4 million, and $0.1
million, respectively. 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
|
|
1,208
|
|
1,375
|
|
80
|
|
2,663
|
|
Paid or otherwise settled
|
|
(1,079
|
)
|
(695
|
)
|
(80
|
)
|
(1,854
|
)
|
Balance, end of period
|
|
$
|
129
|
|
$
|
680
|
|
$
|
|
|
$
|
809
|
|
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 and
is continuing 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.
The Companys Industrial
Products and Technology Products segments sell dissimilar products. Industrial
products are generally higher in price, lower in volume and higher in product
margin. Technology products are generally higher in volume, lower in price and
lower in product margin. This results in higher operating margin for the
Industrial Products segment. Each segment
10
Table of Contents
carries specifically
identifiable selling, general and administrative expenses, with the selling,
general and administrative expenses for the Industrial Products segment being
higher as a percentage of sales than those of the Technology Products segment
as a result of the Industrial Products segment having a longer selling cycle
than those of the Technology Products segment.
Financial information relating to the Companys
operations by reportable segment was as follows (in thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
701,745
|
|
$
|
676,133
|
|
$
|
2,080,021
|
|
$
|
2,037,780
|
|
Industrial Products
|
|
52,014
|
|
63,187
|
|
146,518
|
|
182,166
|
|
Software Solutions
|
|
121
|
|
159
|
|
1,208
|
|
305
|
|
Consolidated
|
|
$
|
753,880
|
|
$
|
739,479
|
|
$
|
2,227,747
|
|
$
|
2,220,251
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
20,949
|
|
$
|
22,052
|
|
$
|
58,954
|
|
$
|
75,143
|
|
Industrial Products
|
|
3,587
|
|
7,317
|
|
9,892
|
|
19,554
|
|
Software Solutions
|
|
(257
|
)
|
(4,167
|
)
|
(7,064
|
)
|
(12,379
|
)
|
Corporate and other expenses
|
|
(4,910
|
)
|
(4,780
|
)
|
(18,724
|
)
|
(14,745
|
)
|
Consolidated
|
|
$
|
19,369
|
|
$
|
20,422
|
|
$
|
43,058
|
|
$
|
67,573
|
|
Financial information relating to the Companys operations by
geographic area was as follows (in thousands):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
450,958
|
|
$
|
401,297
|
|
$
|
1,370,417
|
|
$
|
1,168,353
|
|
Industrial Products
|
|
52,014
|
|
63,187
|
|
146,518
|
|
182,166
|
|
Software Solutions
|
|
121
|
|
159
|
|
1,208
|
|
305
|
|
United States total
|
|
503,093
|
|
464,643
|
|
1,518,143
|
|
1,350,824
|
|
Other North America (Technology Products)
|
|
49,032
|
|
47,661
|
|
130,314
|
|
145,754
|
|
North America total
|
|
552,125
|
|
512,304
|
|
1,648,457
|
|
1,496,578
|
|
Europe (Technology Products)
|
|
201,755
|
|
227,175
|
|
579,290
|
|
723,673
|
|
Consolidated
|
|
$
|
753,880
|
|
$
|
739,479
|
|
$
|
2,227,747
|
|
$
|
2,220,251
|
|
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. The Company did not repurchase any shares during the
third quarter 2009. For the first nine 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.
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 alleged 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.
11
Table
of Contents
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) then amended the complaint to allege violations under the Texas consumer
protection act. In August 2009, the Court dismissed Vuksons amended
complaint with prejudice.
State of Florida, Office of
the Attorney General
On September 4, 2009 the Office of the Attorney General, Department of
Legal Affairs for the State of Florida filed a lawsuit against OnRebate.com
Inc, TigerDirect Inc. and Systemax Inc. in the Circuit Court of the Eleventh
Judicial Court for Miami-Dade County, Florida alleging deceptive and unfair
trade practices under Florida law relating to the offering and processing of
customer rebates. The lawsuit seeks injunctive
relief, damages, civil penalties and other equitable relief. The Company denies the allegations in the
lawsuit and intends to vigorously defend the case.
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
condensed consolidated financial statements.
11.
Subsequent Events
The Company has evaluated events subsequent
to the September 30, 2009 quarter end through November 12, 2009 the
date of the filing of this Form 10Q. No events have occurred which would
require disclosure in the condensed consolidated financial statements.
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
12
Table of
Contents
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 nine months ended September 30,
2009, Technology products accounted for 93% 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 7% of our net sales for the nine months ended
September 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. In our Industrial segment, we recently deployed an entirely new
ecommerce website (www.globalindustrial.com) that we believe is generationally
more advanced than the sites of many other companies in the sector.
We
announced plans to exit the Software Solutions segment during the second
quarter of 2009 and are continuing the process of winding down operations and
anticipate completing this process by the end of 2009. Software Solutions accounted for
approximately $1.2 million in sales for the nine months ended September 30,
2009. See Note 8 to the condensed 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.
Our Industrial Products and Technology Products
segments sell dissimilar products. Industrial products are generally higher in
price, lower in volume and higher in product margin. Technology products are generally
higher in volume, lower in price and lower in product margin. This results in
higher operating margin for the Industrial Products segment. Each segment
carries specifically identifiable selling, general and administrative expenses,
with the selling, general and administrative expenses for the Industrial
Products segment being higher as a percentage of sales than those of the
Technology Products segment as a result of the Industrial Products segment
having a longer selling cycle than those of the Technology Products segment.
On
September 18, 2009, we acquired WStore, a European supplier of business IT
products and software solutions with operations in France and the United
Kingdom. The purchase price (after giving effect to the conversion of Euros to
U.S. dollars) was approximately $4.4 million in cash, $2.2 million of which was
placed into an escrow account for one year to secure the sellers
indemnification obligations under the purchase agreement. A preliminary
allocation of the purchase price was done as of the acquisition date. A final
purchase price allocation will be done during the fourth quarter of 2009.
However the Company has determined that this is not a material acquisition for
financial reporting purposes. The accounts of WStore are included in the
condensed consolidated balance sheet included in Item 1 of this Form 10-Q.
The operating results of WStore are included in the condensed consolidated
statements of operations included in Item 1 of this Form 10-Q from the
date of acquisition. WStore is included in our Technology Products business
segment.
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 stock and drop-shipment fulfillment.
The
primary component of our operating expenses historically has been employee
related costs, which includes items such as wages, commissions, bonuses,
employee benefits and 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
13
Table of
Contents
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 the Companys
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.
In June 2009, the FASB issued FASB Statement No. 168, The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement No. 162. The FASB
Accounting Standards Codification (ASC) became the source of authoritative U.S.
accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the SEC. This statement is effective for financial
statements issued for interim and annual periods ending after September 15,
2009.
Effective
January 1, 2009 the Company adopted
authoritative guidance that establishes principles and
requirements for how an acquirer in a business combination (i) recognizes
and measures in its financial statements the identifiable assets acquired,
liabilities assumed, and any non-controlling interest in the acquiree, (ii) recognizes
and measures goodwill acquired in a business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to
enable users of financial statements to evaluate the nature and financial
effects of the business combination.
This guidance is applied
prospectively for all business combinations entered into after the date of adoption.
In the third quarter of 2009 the Company expensed approximately $0.8 million of
costs that would have been capitalized under previous
guidance.
In May 2009,
the FASB issued authoritative guidance related to the accounting for and
disclosures of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. This guidance
requires the Company to disclose the date through which subsequent events have
been evaluated, as well as whether that date is the date the consolidated
financial statements were issued or the date the consolidated financial
statements were available to be issued. This guidance became effective for the
Company for the period ended June 30, 2009 and did not have a significant
impact on the Companys condensed consolidated financial statements.
In
June 2008, FASB issued authoritative guidance to clarify that instruments
granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. The guidance applies to
the calculation of Earnings Per Share (EPS) 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 guidance became
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 is adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data). The Company adopted this
authoritative guidance in January 2009 and it did not have a material
impact on its condensed consolidated financial statements.
14
Table
of Contents
Results of Operations
Three and Nine Months Ended September 30, 2009 compared to the
Three and Nine Months Ended September 30, 2008
Key Performance Indicators (in thousands):
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
%
|
|
September 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
% Change
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
701,745
|
|
$
|
676,133
|
|
3.8
|
%
|
$
|
2,080,021
|
|
$
|
2,037,780
|
|
2.1
|
%
|
Industrial products
|
|
52,014
|
|
63,187
|
|
(17.7
|
)%
|
146,518
|
|
182,166
|
|
(19.6
|
)%
|
Hosted software
|
|
121
|
|
159
|
|
(23.9
|
)%
|
1,208
|
|
305
|
|
296.1
|
%
|
Total net sales
|
|
$
|
753,880
|
|
739,479
|
|
1.9
|
%
|
$
|
2,227,747
|
|
$
|
2,220,251
|
|
0.3
|
%
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
552,125
|
|
$
|
512,304
|
|
7.8
|
%
|
$
|
1,648,457
|
|
$
|
1,496,578
|
|
10.1
|
%
|
Europe
|
|
201,755
|
|
227,175
|
|
(11.2
|
)%
|
579,290
|
|
723,673
|
|
(20.0
|
)%
|
Total net sales
|
|
$
|
753,880
|
|
$
|
739,479
|
|
1.9
|
%
|
$
|
2,227,747
|
|
$
|
2,220,251
|
|
0.3
|
%
|
Gross margin
|
|
15.0
|
%
|
15.6
|
%
|
(0.6
|
)%
|
14.7
|
%
|
15.5
|
%
|
(0.8
|
)%
|
Selling, general and administrative costs
|
|
$
|
93,394
|
|
$
|
94,997
|
|
(1.7
|
)%
|
$
|
284,309
|
|
$
|
276,349
|
|
2.9
|
%
|
Selling, general and administrative costs as
a % of net sales
|
|
12.4
|
%
|
12.8
|
%
|
(0.4
|
)%
|
12.8
|
%
|
12.4
|
%
|
0.4
|
%
|
Operating income
|
|
$
|
19,369
|
|
$
|
20,422
|
|
(5.2
|
)%
|
$
|
43,058
|
|
$
|
67,573
|
|
(36.3
|
)%
|
Operating margin
|
|
2.6
|
%
|
2.8
|
%
|
(0.2
|
)%
|
1.9
|
%
|
3.0
|
%
|
(1.1
|
)%
|
Effective income tax rate
|
|
38.0
|
%
|
39.5
|
%
|
(1.5
|
)%
|
36.3
|
%
|
37.3
|
%
|
(1.0
|
)%
|
Net income
|
|
$
|
12,598
|
|
11,273
|
|
11.8
|
%
|
$
|
27,787
|
|
$
|
42,875
|
|
(35.2
|
)%
|
Net margin
|
|
1.7
|
%
|
1.5
|
%
|
0.2
|
%
|
1.3
|
%
|
1.9
|
%
|
(0.6
|
)%
|
The Technology Products
net sales increase during the third quarter of 2009 was attributable to
increased retail and internet sales in North America. In North America,
Technology Products sales increased 11.4% in the third quarter of 2009 and
14.2% in the first nine months of 2009 compared to the same periods in 2008. On
a constant currency basis (using current year results at prior year average
exchange rates), European sales declined 0.3% in the third quarter of 2009 and
4.4% for the first nine months of 2009 compared to the same periods in 2008.
Sales attributable to the WStore acquisition were $7.9 million during the third
quarter of 2009.
The movements in foreign
exchange rates accounted for $24.8 million and $112.8 million, respectively, of
the revenue decline in Europe in the third quarter and first nine months of
2009. The trend of declining sales in Europe is expected to continue until
global economic conditions improve. Growth in North America during the third
quarter and first nine 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 locations 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 third
quarter and first nine months of 2009. On a constant currency basis, North
America Technology Products sales grew 12.2% in the third quarter of 2009 and
15.8% in the first nine months of 2009 compared to the same periods in 2008.
Movements in foreign exchange rates negatively impacted the North American
sales comparison by approximately $3.7 million and $21.3 million, respectively,
in the third quarter and first nine months of 2009.
For the third quarter of
2009, worldwide consumer sales, defined as revenues from retail stores,
consumer websites, catalogs, and shopping channels, were $426.2 million
compared to $389.2 million in the same period in 2008, an increase of 9.5%. Consumer
sales growth in the third quarter of 2009 was driven primarily by growth in
computers, including laptops and netbooks and consumer electronics, including
televisions. For the third quarter of
2009 worldwide business to business sales were $327.7 million compared to
$350.3 million in the same period in 2008.
For the first nine months of 2009 worldwide consumer sales were $1.3
billion compared to $1.15 billion in the same period in 2008, an increase of
13.5%. Consumer sales growth in the first nine months of 2009 was driven
primarily by growth in computers, including laptops and netbooks, and consumer
electronics, including televisions. Worldwide business to business sales were
$327.7 million in the third quarter of 2009 compared to $350.3 million in the
same period in 2008, a 6.5% decrease, and for the first nine months of 2009
worldwide business to business sales were $917.4 million compared to $1.06
billion in the same period in 2008, a 13.9% decrease. Worldwide business to
business sales declined as the result of the global economic slowdown.
For the third quarter of
2009, Technology Products operating income declined approximately 5% compared
to the same period in 2008. The decline is attributable to the worldwide decline
in business to business sales, price promotions and freight discounts offered
in the quarter and costs related to the WStore acquisition partially offset in
the quarter by increased sales from the CircuitCity.com website. For the first
nine months of 2009 Technology Products operating margin declined approximately
21% compared to the same period in 2008. The
15
Table
of Contents
decline is attributable
to the worldwide decline in business to business sales as the result of the
global economic slowdown, price promotions and freight discounts offered in the
period and costs related to the WStore acquisition.
Industrial Products sales
are primarily business to business and declined in the third quarter and first
nine 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 third 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.
For the third quarter of
2009, Industrial Products operating income declined approximately 51% compared
to the same period in 2008. The decline is attributable to the decline in
business to business sales as a result of significant decreases in business
spending in the United States resulting from the economic slowdown and increased
spending on information technology spending in the quarter. For the first nine
months of 2009 Industrial Products operating income declined 49% compared to
the same period in 2008. The decline is attributable to the decline in business
to business sales as the result of the global economic slowdown.
The Company announced
plans to exit the Software Solutions segment during the second quarter of 2009
and is continuing the process of winding down operations and anticipates
completing this process by the end of 2009. Software Solutions accounted for
approximately $1.2 million in sales for the nine months ended September 30,
2009.
Consolidated gross margin
declined in the third quarter and the first nine months of 2009 by 60 and 80
basis points, respectively, compared to the same periods 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
decrease in selling, general and administrative expenses for the third quarter
of 2009 compared to the third quarter of 2008 was primarily the result of a
$2.8 million decrease in advertising and catalog production costs offset by a
$1.7 million increase in various operating expenses and depreciation expense.
Included in the third quarter of 2009 are costs related to the acquisition of
WStore Europe SA (WStore) of approximately $0.8 million. The Company expects
to incur significant integration costs related to the WStore acquisition in
future quarters.
The
increase in selling, general and administrative expenses for the first nine
months of 2009 as compared to the first nine months of 2008 was primarily the
result of a $6.4 million charge for severance costs, litigation and contractual
lease terminations of which approximately $2.6 million related to winding down
PCS operations, and a $1.7 million increase in various expenses. Corporate
related selling, general and administrative expenses increased approximately
$4.7 million in the first nine months of 2009 primarily related to performance
based incentive compensation and information technology spending.
The
Companys effective tax rate for the third quarter of 2009 was 38.0% compared
to 39.5% in the third quarter of 2008.
The
effective tax rate for the nine months ended September 30, 2009 was 36.3%
compared to 37.3% in 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
.
Excluding the tax reserve reversal the Companys effective tax rate was 38.7%
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 third quarter of 2009 increased 11.8% to $12.6 million compared
to $11.3 million in the third quarter of 2008. Net income for the nine months
ended September 30, 2009 declined 35.2% to $27.8 million compared to $42.9
million for the nine months ended September 30, 2008. The decline in net income for the nine months
ended September 30, 2009 year 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 nine 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
16
Table of
Contents
cash
flow to meet these needs. We believe that cash flow available from these
sources and our availability under credit facilities will be sufficient to fund
our working capital and other cash requirements for the next twelve months.
Selected
liquidity data (in thousands):
|
|
September
30, 2009
|
|
December 31,
2008
|
|
$ Change
|
|
Cash and cash equivalents
|
|
$
|
102,117
|
|
$
|
115,967
|
|
$
|
(13,850
|
)
|
Accounts receivable, net
|
|
$
|
213,170
|
|
$
|
182,532
|
|
$
|
30,638
|
|
Inventories, net
|
|
$
|
315,977
|
|
$
|
290,594
|
|
$
|
25,383
|
|
Prepaid expenses and other current assets
|
|
$
|
17,852
|
|
$
|
12,667
|
|
$
|
5,185
|
|
Accounts payable
|
|
$
|
302,097
|
|
$
|
284,378
|
|
$
|
17,719
|
|
Accrued expenses and other current liabilities
|
|
$
|
82,125
|
|
$
|
73,075
|
|
$
|
9,050
|
|
Current portion of capitalized lease obligations
|
|
$
|
951
|
|
$
|
773
|
|
$
|
178
|
|
Short term debt
|
|
$
|
17,819
|
|
$
|
|
|
$
|
17,819
|
|
Working capital
|
|
$
|
256,846
|
|
$
|
253,092
|
|
$
|
3,754
|
|
Our
working capital increased in the first nine months of 2009 primarily as the
result of the cash generated from net income for the period adjusted for non
cash charges of approximately $14.1 million offset by the purchase of WStore,
the purchase of certain CircuitCity.com assets, fixed asset purchases, and
stock repurchases. The increase in inventory is the result of additional
inventory needs as the result of the increased sales volume related to the
acquisition of the Circuit City.com assets and to the opening of additional
retail stores. The increase in accounts receivable and short term debt is
related to the acquisition of WStore in the third quarter of 2009. Our
inventory turnover remained consistent at 8.9 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 nine months of 2009
compared to the first nine months of 2008 resulted from changes in our working
capital accounts, which used $27.6 million in cash compared to $25.7 million
used 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 $41.9
million for the nine months ended September 30, 2009 compared to $57.0
million provided by these items for the nine months ended September 30,
2008, primarily as a result of a lower net income in the first nine months of
2009.
Cash
flows used in investing activities during the first nine months of 2009 were
primarily for the CircuitCity.com acquisition and for capital expenditures
relating to our information and communications systems hardware. The WStore
acquisition (See Note 2) net of cash acquired provided approximately $0.9
million of cash. 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 $1.7 million was used in financing activities for the first nine months of 2009. We repurchased $1.2 million of common stock and repaid $2.3 million of short term loans and received proceeds of $0.8 million for issuance of common stock, net of repurchases. Proceeds and excess tax benefits from stock option exercises provided approximately $1.2 million of cash. In the first nine months of 2008, we repaid $4.0 million in short-term loans, repurchased Company stock of approximately $3.4 million and paid $37.1 million for a special dividend. Proceeds from stock option exercises, net of repurchases and excess tax benefits, provided approximately $2.5 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 September 30, 2009, eligible collateral was $108.9 million and total availability was $96.8 million. There were outstanding letters of credit of $12.1 million and there were no outstanding advances as of September 30, 2009. 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 September 30, 2009.
The
Companys WStore Europe SA subsidiary (See Note 2) maintains a revolving credit
agreement with a financial institution in France which is secured by WStore
Europe SA accounts receivable balances. Available amounts for borrowing under
this facility includes all accounts receivable balances not over 60 days past
due reduced by the greater of 4.0 million or 10% of the eligible
17
Table of
Contents
accounts
receivable. As of September 30, 2009 there was availability under this
credit facility of approximately 3.4 million ($4.9 million) and there was
11.7 million ($17.1 million) of outstanding borrowings.
The Companys WStore UK subsidiary (See Note 2) maintains a £2 million
secured revolving credit agreement with a financial institution in the United
Kingdom which is secured by WStore UKs accounts receivable balances. Available
amounts for borrowing under this facility includes accounts receivable balances
less 30% retention. As of September 30, 2009 there was availability under
this credit facility of approximately £0.8 million ($1.2 million) and approximately
0.5 million ($0.8 million) of outstanding borrowings.
We
also have certain obligations with various parties that include commitments to
make future payments. Our principal commitments at September 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
earnings and cash flows are seasonal in nature, with the first and fourth
quarters of the fiscal year generating somewhat higher earnings and cash flows
than the second and third quarters. Levels of earnings and cash flows are
dependent on factors such as consolidated gross margin and selling, general and
administrative costs as a percentage of sales, product mix and relative levels
of
domestic
and foreign sales. Unusual expense items, such as one time charges and
settlements, may impact earnings and are separately disclosed. We expect that
past performance may not be indicative of future performance due to the
competitive nature of our Technology Products segment where the need to adjust
prices to gain or hold market share is prevalent.
Macroeconomic conditions,
such as business and consumer sentiment, may affect our revenues, cash flows or
financial condition. However, we do not
believe that there is a direct correlation between any specific macroeconomic
indicator and our revenues, cash flows or financial condition. We are not currently interest rate sensitive,
as we have significant cash balances and minimal debt.
We
anticipate cash needs to support our growth and expansion plans, continued
investment in upgrading and expanding our technological capabilities and
information technology infrastructure, opening of new retail stores, and in
building out and expanding our distribution center facilities and inventory
systems. These expenses and capital
expenditures will require significant levels of liquidity, which we believe can
be adequately funded from our currently available cash resources. We have
recently engaged in several opportunistic acquisitions, choosing to pay the
purchase price in cash, and may do so in the future as favorable situations
arise. However, a deep and prolonged
period of reduced consumer spending could adversely impact our cash resources
and force us to either forego future acquisition opportunities or to pay the
purchase price in shares of our common stock, which could have a dilutive
effect on the our earnings per share. In addition we anticipate cash needs for
implementation of financial and retail point of sale systems and repurchase of
our stock. 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 September 30, 2009, all of our 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 Disclosures
About Market Risk.
We are exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in currency exchange rates
(principally Pounds, Euros and Canadian dollars) as measured against the U.S.
dollar and each other.
18
Table
of Contents
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 September 30, 2009 we
had no outstanding option or forward exchange contracts.
Our exposure to market risk for changes in interest rates relates
primarily to our variable rate debt. Our variable rate debt includes short-term
borrowings under our credit facilities. As of September 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 September 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 September 30, 2009 that have
materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
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 alleged 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) then amended the complaint to allege violations
under the Texas consumer protection act. In August 2009, the Court
dismissed Vuksons amended complaint with prejudice.
State of Florida, Office of the Attorney General
On September 4, 2009 the Office of the Attorney
General, Department of Legal Affairs for the State of Florida filed a lawsuit
against OnRebate.com Inc, TigerDirect Inc. and Systemax Inc. in the Circuit
Court of the Eleventh Judicial Court for Miami-Dade County, Florida alleging
deceptive and unfair trade practices under Florida law relating to the offering
and processing of customer rebates. The
lawsuit seeks injunctive relief, damages, civil penalties and other equitable
relief. The Company denies the
allegations in the lawsuit and intends to vigorously defend the case.
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.
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:
November 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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