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, 2010
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 6, 2010 was 36,677,586.
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.
3
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Systemax Inc.
Condensed Consolidated
Balance Sheets
(In thousands)
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
32,783
|
|
$
|
58,309
|
|
Accounts receivable, net
|
|
235,646
|
|
241,860
|
|
Inventories
|
|
380,487
|
|
365,725
|
|
Prepaid expenses and other
current assets
|
|
18,998
|
|
20,066
|
|
Deferred income taxes
|
|
8,902
|
|
6,626
|
|
Total current assets
|
|
676,816
|
|
692,586
|
|
|
|
|
|
|
|
Property, plant and
equipment, net
|
|
62,622
|
|
65,598
|
|
Deferred income taxes
|
|
6,296
|
|
8,564
|
|
Goodwill and intangibles
|
|
49,836
|
|
48,127
|
|
Other assets
|
|
1,974
|
|
2,026
|
|
Total assets
|
|
$
|
797,544
|
|
$
|
816,901
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
316,954
|
|
$
|
346,362
|
|
Accrued expenses and other
current liabilities
|
|
75,245
|
|
80,945
|
|
Short term debt
|
|
12,170
|
|
14,168
|
|
Current portion of
capitalized lease obligations
|
|
882
|
|
1,029
|
|
Total current liabilities
|
|
405,251
|
|
442,504
|
|
|
|
|
|
|
|
Capitalized lease
obligations, net of current portion
|
|
793
|
|
1,194
|
|
Other liabilities
|
|
9,571
|
|
8,518
|
|
Total liabilities
|
|
415,615
|
|
452,216
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
389
|
|
389
|
|
Additional paid-in capital
|
|
180,893
|
|
180,508
|
|
Treasury stock
|
|
(25,872
|
)
|
(28,545
|
)
|
Retained earnings
|
|
232,176
|
|
210,975
|
|
Accumulated other
comprehensive (loss) income
|
|
(5,657
|
)
|
1,358
|
|
Total shareholders equity
|
|
381,929
|
|
364,685
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
797,544
|
|
$
|
816,901
|
|
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales
|
|
$
|
805,875
|
|
$
|
721,599
|
|
$
|
1,721,112
|
|
$
|
1,473,867
|
|
Cost of sales
|
|
690,653
|
|
614,545
|
|
1,479,649
|
|
1,259,263
|
|
Gross profit
|
|
115,222
|
|
107,054
|
|
241,463
|
|
214,604
|
|
Selling, general &
administrative expenses
|
|
99,238
|
|
98,385
|
|
205,103
|
|
190,915
|
|
Operating income
|
|
15,984
|
|
8,669
|
|
36,360
|
|
23,689
|
|
Foreign currency exchange
loss (gain)
|
|
858
|
|
(181
|
)
|
2,401
|
|
600
|
|
Interest and other income,
net
|
|
(129
|
)
|
(259
|
)
|
(310
|
)
|
(544
|
)
|
Interest expense
|
|
237
|
|
149
|
|
454
|
|
307
|
|
Income before income taxes
|
|
15,018
|
|
8,960
|
|
33,815
|
|
23,326
|
|
Provision for income taxes
|
|
5,568
|
|
2,469
|
|
12,614
|
|
8,137
|
|
Net income
|
|
$
|
9,450
|
|
$
|
6,491
|
|
$
|
21,201
|
|
$
|
15,189
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.26
|
|
$
|
.18
|
|
$
|
.57
|
|
$
|
.41
|
|
Diluted
|
|
$
|
.25
|
|
$
|
.17
|
|
$
|
.56
|
|
$
|
.41
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
36,967
|
|
36,683
|
|
36,876
|
|
36,652
|
|
Diluted
|
|
37,726
|
|
37,340
|
|
37,605
|
|
37,308
|
|
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
|
|
|
|
2010
|
|
2009
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net income
|
|
$
|
21,201
|
|
$
|
15,189
|
|
Adjustments to reconcile net
income to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
6,809
|
|
5,407
|
|
(Benefit) provision for
deferred income taxes
|
|
(168
|
)
|
185
|
|
Provision for returns and
doubtful accounts
|
|
1,948
|
|
1,551
|
|
Compensation expense related
to equity compensation plans
|
|
1,438
|
|
1,629
|
|
Excess tax benefit from
exercises of stock options
|
|
(752
|
)
|
(28
|
)
|
Loss on dispositions and
abandonment
|
|
19
|
|
86
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(11,404
|
)
|
11,828
|
|
Inventories
|
|
(18,972
|
)
|
(17,325
|
)
|
Prepaid expenses and other
current assets
|
|
3,089
|
|
179
|
|
Accounts payable, accrued
expenses and other current liabilities
|
|
(18,256
|
)
|
(26,404
|
)
|
Net cash used in operating
activities
|
|
(15,048
|
)
|
(7,703
|
)
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchase of Circuit City
Assets
|
|
|
|
(14,494
|
)
|
Purchases of property, plant
and equipment
|
|
(8,807
|
)
|
(6,207
|
)
|
Proceeds from disposals of
property, plant and equipment
|
|
3
|
|
84
|
|
Net cash used in investing
activities
|
|
(8,804
|
)
|
(20,617
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments of revolving
credit facilities
|
|
(292
|
)
|
|
|
Repayments of capital lease
obligations
|
|
(594
|
)
|
(291
|
)
|
Proceeds from issuance of
common stock
|
|
846
|
|
181
|
|
Repurchase of common stock
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
Excess tax benefit from exercises
of stock options
|
|
752
|
|
28
|
|
Net cash provided by (used
in) financing activities
|
|
712
|
|
(1,256
|
)
|
|
|
|
|
|
|
Effects of exchange rates on
cash
|
|
(2,386
|
)
|
1,532
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
(25,526
|
)
|
(28,044
|
)
|
Cash beginning of period
|
|
58,309
|
|
115,967
|
|
Cash end of period
|
|
$
|
32,783
|
|
$
|
87,923
|
|
Supplemental disclosures of
non-cash investing and financing activities:
|
|
|
|
|
|
Acquisitions of equipment
through capital leases
|
|
$
|
47
|
|
$
|
152
|
|
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 (Loss)
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2010
|
|
36,451
|
|
$
|
389
|
|
$
|
180,508
|
|
$
|
(28,545
|
)
|
$
|
210,975
|
|
$
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
1,318
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
106
|
|
|
|
(420
|
)
|
1,259
|
|
|
|
|
|
|
|
Restricted stock withheld for employee taxes
|
|
(36
|
)
|
|
|
(367
|
)
|
(432
|
)
|
|
|
|
|
|
|
Exercise of stock options
|
|
156
|
|
|
|
(999
|
)
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit on stock-based compensation
|
|
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(7,015
|
)
|
$
|
(7,015
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
21,201
|
|
|
|
21,201
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2010
|
|
36,677
|
|
$
|
389
|
|
$
|
180,893
|
|
$
|
(25,872
|
)
|
$
|
232,176
|
|
$
|
(5,657
|
)
|
|
|
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, 2010 and the results of
operations for the three and six month periods ended June 30, 2010 and 2009,
cash flows for the six month periods ended June 30, 2010 and 2009 and changes
in shareholders equity for the six month period ended June 30, 2010. The December 31, 2009 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 fiscal year ended December 31, 2009.
These condensed consolidated
financial statements should be read in conjunction with the Companys audited
consolidated financial statements as of December 31, 2009 and for the year
then ended included in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.
The results for the three and six months ended June 30, 2010 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 3, 2010. The
second quarters of both 2010 and 2009 included 13 weeks and the first six
months of both 2010 and 2009 included 26 weeks.
2.
Net Income
per Common Share
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. The two class method was used as the Company
has outstanding restricted stock with rights to dividend participation for
unvested shares. 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 0.1 million and
0.6 million shares for the three months ended June 30, 2010 and 2009,
respectively, and 0.5 million and 0.7 million shares for the six months ended
June 30, 2010 and 2009, respectively, due to their antidilutive effect.
3.
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 June 30, 2010 and 2009, comprehensive income was
$5.6 million and $13.1 million, respectively and for the six month periods
ended June 30, 2010 and 2009, comprehensive income was $14.2 million and $21.2
million, respectively.
4.
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, all domestic inventories, the United Kingdom headquarters building
and the Companys shares of stock in its domestic and United Kingdom
subsidiaries. The credit facility expires and the outstanding borrowings
thereunder are due on October 26, 2010. The Company expects to renew this
facility in 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, 2010. As
of June 30, 2010, eligible collateral under the
8
Table of Contents
agreement was $120.0 million, total
availability was $107.1 million, total outstanding letters of credit was $12.9
million and there were no outstanding advances.
The Companys Inmac-WStore subsidiary
maintains a secured revolving credit agreement with a financial institution in
France which is secured by Inmac-WStore 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 June 30, 2010 there was
availability under this credit facility of approximately 3.8 million ($4.8
million) and there was 9.7 million ($12.2 million) of outstanding borrowings.
The Companys WStore UK subsidiary 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 June 30, 2010 there was
availability under this credit facility of approximately £0.8 million ($1.2
million). The Company terminated this facility in July 2010.
5.
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. Total charges
incurred during the second quarter and six months ended June 30, 2010 were $0.2
million and $0.2 million, respectively. These costs were recorded in selling,
general and administrative expenses within the Corporate and Other segment.
The following table
reconciles movement in the associated liabilities incurred from the inception
of the plan (in thousands):
|
|
Severance
and
Personnel
Costs
|
|
Contract
Termination
Costs
|
|
Other Exit Costs
|
|
Total
|
|
Balance January 1, 2009
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Charged to expense
|
|
1,208
|
|
1,644
|
|
80
|
|
2,932
|
|
Paid or otherwise settled
|
|
(1,208
|
)
|
(697
|
)
|
(80
|
)
|
(1,985
|
)
|
Balance December 31, 2009
|
|
|
|
947
|
|
|
|
947
|
|
Charged to expense
|
|
|
|
214
|
|
|
|
214
|
|
Paid or otherwise settled
|
|
|
|
(323
|
)
|
|
|
(323
|
)
|
Balance June 30, 2010
|
|
$
|
|
|
$
|
838
|
|
$
|
|
|
$
|
838
|
|
In addition, the Companys WStore France
integration is progressing and charges of approximately $3.0 million are
anticipated to be incurred for severances and other costs in the second half of
2010.
6.
Segment
Information
Systemax
is primarily a direct marketer of brand name and private label products. Our
operations are organized into two reportable business segments Technology
Products and Industrial Products. Our Software Solutions segment, which was
exited in the second quarter of 2009, is no longer a reportable segment for
reporting purposes. 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 its
Software Solutions segment during the second quarter of 2009. Substantially all
of the third party business activities of the Software Solutions segment have
ended. Current and prior year results for Software Solutions are now included
in Corporate and other below.
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
below.
9
Table of Contents
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 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 the Technology Products segment.
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
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
743,073
|
|
$
|
671,733
|
|
$
|
1,603,212
|
|
$
|
1,377,727
|
|
Industrial Products
|
|
62,249
|
|
48,848
|
|
116,780
|
|
94,504
|
|
Corporate and Other
|
|
553
|
|
1,018
|
|
1,120
|
|
1,636
|
|
Consolidated
|
|
$
|
805,875
|
|
$
|
721,599
|
|
$
|
1,721,112
|
|
$
|
1,473,867
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
15,064
|
|
$
|
16,305
|
|
$
|
36, 819
|
|
$
|
38,606
|
|
Industrial Products
|
|
6,145
|
|
4,043
|
|
9,724
|
|
6,305
|
|
Corporate and Other
|
|
(5,225
|
)
|
(11,679
|
)
|
(10,183
|
)
|
(21,222
|
)
|
Consolidated
|
|
$
|
15,984
|
|
$
|
8,669
|
|
$
|
36,360
|
|
$
|
23,689
|
|
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
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
456,134
|
|
$
|
457,080
|
|
$
|
983,283
|
|
$
|
918,910
|
|
Industrial Products
|
|
62,249
|
|
48,848
|
|
116,780
|
|
94,504
|
|
Corporate and Other
|
|
553
|
|
1,018
|
|
1,120
|
|
1,636
|
|
United States total
|
|
518,936
|
|
506,946
|
|
1,101,183
|
|
1,015,050
|
|
Other North America (Technology Products)
|
|
45,739
|
|
40,994
|
|
99,716
|
|
81,282
|
|
North America total
|
|
564,675
|
|
547,940
|
|
1,200,899
|
|
1,096,332
|
|
Europe (Technology Products)
|
|
241,200
|
|
173,659
|
|
520,213
|
|
377,535
|
|
Consolidated
|
|
$
|
805,875
|
|
$
|
721,599
|
|
$
|
1,721,112
|
|
$
|
1,473,867
|
|
Revenues are attributed to
countries based on the location of the selling subsidiary.
10
Table of Contents
7.
Legal
Proceedings
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
The
Company and its subsidiaries are involved in various lawsuits, claims,
investigations and proceedings, including commercial, employment, tax, consumer, personal injury and
health and safety law matters, which are being handled and defended in the
ordinary course of business. In addition, the Company is subject to various
assertions, claims, proceedings and requests for indemnification concerning
intellectual property, including patent infringement suits involving
technologies that are incorporated in a broad spectrum of products the Company
sells. These matters are in various stages of investigation and
litigation, and are being vigorously defended. Although the Company
does not expect that the outcome in any of these matters, individually or
collectively, will have a material adverse effect on its financial condition or
results of operations, litigation is inherently
unpredictable. Therefore, judgments could be rendered or settlements
entered, that could adversely affect the Companys operating results or cash
flows in a particular period. The Company routinely assesses all of
its litigation and threatened litigation as to the probability of ultimately
incurring a liability, and records its best estimate of the ultimate loss in
situations where it assesses the likelihood of loss as probable and estimable.
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 two reportable business segments
Technology Products and Industrial Products.
Our Software Solutions segment, which was exited in the second quarter
of 2009, is no longer a reportable segment for reporting purposes. Our
Technology Products segment sells computers, computer supplies and consumer
electronics which are marketed in North America and Europe. Except for certain personal computer
11
Table
of Contents
(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,
2010, Technology products accounted for 93% of our net sales. In April 2010 the
Company entered into a lease for a second distribution facility for the North
American operations of its Technology Products segment. The facility, located
in Jefferson, Georgia, is approximately 459,000 square feet and is leased
through April 2030.
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 six months ended
June 30, 2010. 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 Products 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. See Note 6 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 the
Technology Products 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, 2009 and the other information provided in
our Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
In
the discussion of our results of operations we refer to business to business
sales, consumer channel sales and period to period constant currency
comparisons. Business to business sales are sales made direct to other
businesses through managed business relationships, outbound call centers and
extranets. Sales in the Industrial Products segment and Corporate and other are
considered to be business to business sales. Consumer channel sales are sales
from retail stores, consumer websites, inbound call centers and television
shopping channels. Constant currency refers to the adjustment of the results of
our foreign operations to exclude the effects of period to period fluctuations
in currency exchange rates.
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 2009 Annual Report on Form 10-K.
12
Table
of Contents
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,
2009. There have been no significant changes in the application of critical
accounting policies or estimates during 2010. 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 the Companys current operations.
In October 2009, the FASB
issued revised guidance related to multiple-element arrangements which requires
an entity to allocate arrangement consideration at the inception of an
arrangement to all deliverables based on relative selling prices. This update
eliminates the use of the residual method of allocation and requires the
relative-selling-price method in all circumstances. This guidance is effective
for fiscal years beginning on or after June 15, 2010. Companies may use
either prospective application for revenue arrangements entered into, or
materially modified, after the effective date or through retrospective application
to all revenue arrangements for all periods presented. The Company does not
believe this amended guidance will have a material impact on its consolidated
financial statements.
In October 2009, the FASB
issued amended guidance that affects how entities account for revenue
arrangements that contain both hardware and software elements. Products that rely on software will be
accounted for under the revised multiple-element arrangement revenue
recognition guidance mentioned above rather than software revenue recognition
guidance. The revised guidance must be adopted no later than fiscal years
beginning on or after June 15, 2010. The transition method and period for
the adoption of this guidance and the revisions to the multiple-element
arrangements guidance noted above must be the same. The Company does not
believe that this guidance will have a material impact on its consolidated
financial statements.
13
Table
of Contents
Results of Operations
Three and Six Months Ended June 30, 2010 compared to the Three and Six
Months Ended June 30, 2009
Key Performance Indicators (in thousands):
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
% Change
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
743,073
|
|
$
|
671,733
|
|
10.6
|
%
|
$
|
1,603,212
|
|
$
|
1,377,727
|
|
16.4
|
%
|
Industrial products
|
|
62,249
|
|
48,848
|
|
27.4
|
%
|
116,780
|
|
94,504
|
|
23.6
|
%
|
Corporate and other
|
|
553
|
|
1,018
|
|
(45.7
|
)%
|
1,120
|
|
1,636
|
|
(31.5
|
)%
|
Consolidated net sales
|
|
$
|
805,875
|
|
721,599
|
|
11.7
|
%
|
$
|
1,721,112
|
|
$
|
1,473,867
|
|
16.8
|
%
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
564,675
|
|
$
|
547,940
|
|
3.1
|
%
|
$
|
1,200,899
|
|
$
|
1,096,332
|
|
9.5
|
%
|
Europe
|
|
241,200
|
|
173,659
|
|
38.9
|
%
|
520,213
|
|
377,535
|
|
37.8
|
%
|
Consolidated net sales
|
|
$
|
805,875
|
|
$
|
721,599
|
|
11.7
|
%
|
$
|
1,721,112
|
|
$
|
1,473,867
|
|
16.8
|
%
|
Consolidated gross margin
|
|
14.3
|
%
|
14.8
|
%
|
(0.5
|
)%
|
14.0
|
%
|
14.6
|
%
|
(0.6
|
)%
|
Consolidated selling, general and administrative costs
|
|
$
|
99,238
|
|
$
|
98,385
|
|
0.9
|
%
|
$
|
205,103
|
|
$
|
190,915
|
|
7.4
|
%
|
Consolidated selling, general and
administrative costs as a % of net sales
|
|
12.3
|
%
|
13.6
|
%
|
(1.3
|
)%
|
11.9
|
%
|
13.0
|
%
|
(1.1
|
)%
|
Operating income (loss) by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
15,064
|
|
$
|
16,305
|
|
(7.6
|
)%
|
$
|
36,819
|
|
$
|
38,606
|
|
(4.6
|
)%
|
Industrial Products
|
|
6,145
|
|
$
|
4,043
|
|
52.0
|
%
|
$
|
9,724
|
|
$
|
6,305
|
|
54.2
|
%
|
Corporate and other
|
|
(5,225
|
)
|
$
|
(11,679
|
)
|
55.3
|
%
|
$
|
(10,183
|
)
|
$
|
(21,222
|
)
|
52.0
|
%
|
Consolidated operating income
|
|
$
|
15,984
|
|
$
|
8,669
|
|
84.4
|
%
|
$
|
36,360
|
|
$
|
23,689
|
|
53.5
|
%
|
Operating margin by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
2.0
|
%
|
2.4
|
%
|
(0.4
|
)%
|
2.3
|
%
|
2.8
|
%
|
(0.5
|
)%
|
Industrial Products
|
|
9.9
|
%
|
8.3
|
%
|
1.6
|
%
|
8.3
|
%
|
6.7
|
%
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating margin
|
|
2.0
|
%
|
1.2
|
%
|
0.8
|
%
|
2.1
|
%
|
1.6
|
%
|
0.5
|
%
|
Effective income tax rate
|
|
37.1
|
%
|
27.6
|
%
|
9.5
|
%
|
37.3
|
%
|
34.9
|
%
|
2.4
|
%
|
Net income
|
|
$
|
9,450
|
|
$
|
6,491
|
|
45.6
|
%
|
$
|
21,201
|
|
15,189
|
|
39.6
|
%
|
Net margin
|
|
1.2
|
%
|
0.9
|
%
|
0.3
|
%
|
1.2
|
%
|
1.0
|
%
|
0.2
|
%
|
NET
SALES
SEGMENTS
The
Technology Products net sales increase for the three and six month periods
ended June 30, 2010 is attributable to increased business to business sales
worldwide as a result of improved global economic conditions and the
acquisition of WStore Europe SA (WStore) in September 2009. Consumer channel
sales for the three and six month periods ended June 30, 2010 declined,
partially offsetting some of the business to business gains. Consumer channel
sales benefitted from the purchase of Circuit City assets and the subsequent
re-launch of the Circuit City website in mid 2009. On a constant currency basis
and excluding the impact of the WStore acquisition on results, Technology
Products net sales would have grown 4.2% and 8.0%, respectively, for the three
and six month periods ended June 30, 2010.
Industrial
Products sales, primarily business to business, increased for the three and six
month periods ended June 30, 2010 as compared to the same period in 2009. The
sales increase, the majority of which was driven by web sales, is attributed to
improved economic conditions in 2010 resulting in increased demand for the
segments various products as well as an increase in the number of products
offered on its website and in its catalogs.
The
Company announced plans to exit its Software solutions segment during the
second quarter of 2009. Substantially all of the third party business
activities of ProfitCenter Software have ended. Current and prior year results
for this segment are now included in Corporate and other.
14
Table of
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GEOGRAPHIES
North
American sales benefited from a marked increase in business to business
activity during the second quarter and first six months of 2010, particularly
in the Industrial products segment. Growth was offset partially by a decline in
consumer channel sales including same store consumer channel sales. North American sales increased 3.1% and 9.5%,
respectively, for the three and six month periods ended June 30, 2010. On a
constant currency basis North American sales would have increased 2.1% and
8.3%, respectively, for the three and six month periods ended June 30,
2010.
European
sales increased during the second quarter and first six months of 2010 as
global economic conditions improved.
European sales benefited from an improvement in business to business
sales and the WStore acquisition. Consumer channel sales also grew, though not
as strongly as the business to business channel. European sales increased 38.9%
and 37.8%, respectively, for the three and six month periods ended June 30,
2010. On a constant currency basis and excluding the impact of the WStore
acquisition European sales would have increased 17.0% and 10.8%, respectively,
for the three and six month periods ended June 30, 2010.
Worldwide consumer-channel
revenues were $388.5 million in the second quarter of 2010 compared to $412.6
million in the same period in 2009, a decrease of 5.8%. On a constant currency
basis and excluding the results of the WStore acquisition on second quarter
results, worldwide consumer channel sales declined 6.5%. Worldwide business to
business channel sales were $417.4 million in the second quarter of 2010
compared to $309.0 million in the same period in 2009, a 35.1% increase. On a
constant currency basis and excluding the results of the WStore acquisition on
second quarter results, worldwide business to business channel sales grew
22.0%.
Worldwide consumer-channel
revenues for the first six months of 2010 were $858.4 million compared to
$842.4 million in the same period in 2009, an increase of 1.9%. On a constant
currency basis and excluding the results of the WStore acquisition worldwide
consumer channel sales declined 2.8%. Worldwide business to business channel
sales for the first six months of 2010 were $862.7 million compared to $631.5
million in the same period in 2009, a 36.6% increase. On a constant currency
basis and excluding the results of the WStore acquisition worldwide business to
business channel sales grew 24.7%.
GROSS MARGIN
The
decline in consolidated gross margin for the second quarter and first six
months of 2010 resulted primarily from price promotions on certain products,
changes in product mix and the offering of freight incentives in order to both
maintain and grow market share and to respond to competitive pricing pressures.
The Company expects to continue offering such selective incentives to maintain
and grow market share in anticipation of future gross margin expansion. Gross margin is dependent on variables such
as product mix, price protection and other sales incentives offered by the
Companys vendors, 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.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
The
expense increase in selling, general and administrative expenses for the second
quarter of 2010 was primarily the result of $4.4 million increased salary and
related expenses, $0.7 million of increased legal and professional fees, $0.7
million of increased rent and related expenses, offset by savings in catalog
expenses of approximately $4.9 million. The WStore acquisition accounted for
$5.2 million of these mentioned costs. Included in selling, general and
administrative expenses for 2009 are costs related to the former Software Solutions
segment.
The
expense increase in selling, general and administrative expenses for the first
six months of 2010 was primarily the result of $14.2 million increased salary
and related expenses, $2.1 million of increased rent and related expenses, $1.3
million of increased credit card fees, $1.0 million of increased
computer/telephone maintenance expenses, $0.6 million of increased legal and
professional fees, offset by savings in catalog expenses of approximately $8.0
million. The WStore acquisition accounted for $11.8 million of these mentioned
costs. Included in selling, general and administrative expenses for 2009 are
costs related to the former Software Solutions segment.
OPERATING
MARGIN
The
decline in Technology Products operating margin in both the second quarter and
first six months of 2010 is primarily attributable to the price promotions and
freight discounts offered in the quarter and costs related to the WStore
integration.
The
increase in Industrial Products operating margin in both the second quarter and
first six months of 2010 is attributable to increased sales, resulting from
improved economic conditions, the segments new product offerings, and cost
reduction programs originally implemented during 2009.
Corporate
and other expenses declined in both the second quarter and first six months of
2010 primarily as the result of lower payroll and related costs in our
corporate overhead departments and lower payroll and operating costs related to
the former Software Solutions business.
15
Table of Contents
INTEREST
AND OTHER INCOME AND INTEREST EXPENSE
The interest expense
increase in the second quarter and first six months of 2010 is primarily
attributable to the short term debt assumed as part of the WStore acquisition
and interest on capital lease obligations.
INCOME
TAXES
Included
in the 2009 effective tax rate is a reversal of tax reserves of approximately
$1.0 million as the result of statute expirations. Excluding the tax reserve
reversal, the Companys effective tax rate was 39.3%. The lower effective tax
rate in 2010 is primarily the result of a higher percentage of taxable income
outside the U.S. where corporate rates for the Company are typically lower.
Financial Condition, Liquidity and Capital Resources
Our
primary liquidity needs are to support working capital requirements in our
business, fund capital expenditures, including the second North American
distribution center for the Technology Products segments, repurchase Company
stock, fund special dividends declared by our Board of Directors and fund
acquisitions. In addition, in 2010 we anticipate cash needs for costs related
to the WStore integration of approximately $3.0 million. We rely principally
upon operating 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. We believe our current capital structure and cash resources
are adequate for our internal growth initiatives. To the extent our growth
initiatives expand, including major acquisitions or to significantly increase
the pace at which we open retail stores, we would expect to raise additional
capital. We believe that, if needed, we can access public or private funding
alternatives to raise additional capital.
Selected
liquidity data (in thousands):
|
|
June 30, 2010
|
|
December 31,
2009
|
|
$ Change
|
|
Cash
|
|
$
|
32,783
|
|
$
|
58,309
|
|
$
|
(25,526
|
)
|
Accounts receivable, net
|
|
$
|
235,646
|
|
$
|
241,860
|
|
$
|
(6,214
|
)
|
Inventories, net
|
|
$
|
380,487
|
|
$
|
365,725
|
|
$
|
14,762
|
|
Prepaid expenses and other current assets
|
|
$
|
18,998
|
|
$
|
20,066
|
|
$
|
(1,068
|
)
|
Accounts payable
|
|
$
|
316,954
|
|
$
|
346,362
|
|
$
|
(29,408
|
)
|
Accrued expenses and other current liabilities
|
|
$
|
75,245
|
|
$
|
80,945
|
|
$
|
(5,700
|
)
|
Current portion of capitalized lease obligations
|
|
$
|
882
|
|
$
|
1,029
|
|
$
|
(147
|
)
|
Short term debt
|
|
$
|
12,170
|
|
$
|
14,168
|
|
$
|
(1,998
|
)
|
Working capital
|
|
$
|
271,565
|
|
$
|
250,082
|
|
$
|
21,483
|
|
Our
working capital increased primarily as the result of the cash generated from
net income for the period adjusted for non cash charges of approximately $30.5
million offset primarily by inventory purchases. The increase in inventory is
the result of increased retail store inventory in 2010. The reduction in
accounts payable balances in 2010 was primarily the result of the Company
taking advantage of early pay discounts related to inventory purchases. Our
inventory turnover remained relatively consistent at 8.2 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
increase in cash used in operations during 2010 resulted from changes in our
working capital accounts, which used $45.5 million in cash compared to $31.7
million used in 2009, primarily the result of an increase in inventories. Cash
generated from net income adjusted by other non-cash items provided $30.5
million during 2010 compared to $24.0 million provided by these items during
2009, primarily as a result of a higher net income in 2010.
Cash
flows used in investing activities during 2010 totaled $8.8 million and was
used for capital expenditures relating to our retail stores and information
technology. Net cash used in investing activities during 2009 of $20.7 million
were primarily used for the CircuitCity.com acquisition and for capital
expenditures relating to our information and communications systems hardware.
Net
cash of $0.7 million was provided by financing activities for the first six
months of 2010. Proceeds and excess tax benefits from stock option exercises
provided $1.6 million offset by $0.9 million of repayments of capital lease
obligations and net repayments of revolving credit facilities. In 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.
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, 2010, eligible collateral
was $120.0 million and total availability was $107.1 million. There were
outstanding letters of credit of $12.9 million and there were no outstanding
advances
16
Table of
Contents
as
of June 30, 2010. 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 and United Kingdom subsidiaries and
the Companys United Kingdom headquarters building. The credit facility expires
and the outstanding borrowings thereunder are due on October 26, 2010. We
expect
to renew this facility in
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,
2010.
The
Companys WStore subsidiary (See Note 4) maintains a revolving credit agreement
with a financial institution in France which is secured by WStore 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 June 30,
2010 there was availability under this credit facility of approximately 3.8
million ($4.8 million) and there was 9.7 million ($12.2 million) of
outstanding borrowings.
The Companys WStore UK subsidiary (See Note 4) 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 June 30, 2010 there was availability under this
credit facility of approximately £0.8 million ($1.2 million). The Company
terminated this facility in July 2010.
We
also have certain obligations with various parties that include commitments to
make future payments. Our principal commitments at June 30, 2010 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, opening of
a new distribution center in 2010 and in building out and expanding our
existing distribution center facilities and inventory systems. In addition, in
2010 we anticipate cash needs for costs related to the WStore integration of
approximately $3.0 million. These expenses and capital expenditures will
require significant levels of liquidity, which we believe can be adequately
funded from our currently available cash and revolving credit 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. 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 primarily in money market funds or their equivalent. As of June 30,
2010, 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 and Contractual Obligations.
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.
In April 2010 the Company entered into a lease for a second
distribution facility for the North American operations of its Technology
Products segment. The facility, located in Jefferson, Georgia, is approximately
459,000 square feet and is leased through April 2030. The following table details the contractual
obligation related to this lease (in thousands):
17
Table of Contents
Payments
due by period
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
After 2014
|
|
Distribution facility operating
lease
|
|
$
|
|
|
$
|
1,293
|
|
$
|
1,573
|
|
$
|
1,596
|
|
$
|
1,620
|
|
$
|
29,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no other material changes to the Companys contractual obligations from December 31,
2009.
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.
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, 2010 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 June 30, 2010, 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, 2010. 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, 2010 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
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
The Company and its subsidiaries
are involved in various lawsuits, claims, investigations and proceedings,
including commercial, employment, tax, consumer, personal injury and health and
safety law matters, which are being handled and defended in the ordinary course
of business. In addition, the Company is subject to various
assertions, claims, proceedings and requests for indemnification concerning
intellectual property, including patent infringement suits involving
technologies that are incorporated in a broad spectrum
18
Table of Contents
of products the Company
sells. These matters are in various stages of investigation and
litigation, and are being vigorously defended. Although the Company
does not expect that the outcome in any of these matters, individually or
collectively, will have a material adverse effect on its financial condition or
results of operations, litigation is inherently unpredictable. Therefore,
judgments could be rendered or settlements entered, that could adversely affect
the Companys operating results or cash flows in a particular
period. The Company routinely assesses all of its litigation and
threatened litigation as to the probability of ultimately incurring a
liability, and records its best estimate of the ultimate loss in situations
where it assesses the likelihood of loss as probable and estimable.
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, 2010
|
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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