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, 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 November 6, 2010 was 36,677,936.
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)
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
30,449
|
|
$
|
58,309
|
|
Accounts receivable, net
|
|
242,803
|
|
241,860
|
|
Inventories, net
|
|
429,365
|
|
365,725
|
|
Prepaid expenses and other
current assets
|
|
17,817
|
|
20,066
|
|
Deferred income taxes
|
|
8,940
|
|
6,626
|
|
Total current assets
|
|
729,374
|
|
692,586
|
|
|
|
|
|
|
|
Property, plant and
equipment, net
|
|
70,650
|
|
65,598
|
|
Deferred income taxes
|
|
5,110
|
|
8,564
|
|
Goodwill and intangibles
|
|
51,070
|
|
48,127
|
|
Other assets
|
|
2,140
|
|
2,026
|
|
Total assets
|
|
$
|
858,344
|
|
$
|
816,901
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
338,995
|
|
$
|
346,362
|
|
Accrued expenses and other
current liabilities
|
|
79,490
|
|
80,945
|
|
Short-term debt
|
|
30,425
|
|
14,168
|
|
Current portion of long term
debt
|
|
923
|
|
1,029
|
|
Total current liabilities
|
|
449,833
|
|
442,504
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,073
|
|
1,194
|
|
Other liabilities
|
|
11,071
|
|
8,518
|
|
Total liabilities
|
|
461,977
|
|
452,216
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
389
|
|
389
|
|
Additional paid-in capital
|
|
181,341
|
|
180,508
|
|
Treasury stock
|
|
(25,858
|
)
|
(28,545
|
)
|
Retained earnings
|
|
240,798
|
|
210,975
|
|
Accumulated other
comprehensive (loss) income
|
|
(303
|
)
|
1,358
|
|
Total shareholders equity
|
|
396,367
|
|
364,685
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
858,344
|
|
$
|
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
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales
|
|
$
|
862,705
|
|
$
|
753,880
|
|
$
|
2,583,817
|
|
$
|
2,227,747
|
|
Cost of sales
|
|
746,013
|
|
641,117
|
|
2,225,662
|
|
1,900,380
|
|
Gross profit
|
|
116,692
|
|
112,763
|
|
358,155
|
|
327,367
|
|
Selling, general &
administrative expenses
|
|
101,841
|
|
92,396
|
|
306,601
|
|
277,045
|
|
Reorganization and other
charges
|
|
2,855
|
|
998
|
|
3,198
|
|
7,264
|
|
Operating income
|
|
11,996
|
|
19,369
|
|
48,356
|
|
43,058
|
|
Foreign currency exchange
(gain) loss
|
|
(1,843
|
)
|
(989
|
)
|
558
|
|
(389
|
)
|
Interest and other income,
net
|
|
(106
|
)
|
(76
|
)
|
(416
|
)
|
(620
|
)
|
Interest expense
|
|
199
|
|
113
|
|
653
|
|
420
|
|
Income before income taxes
|
|
13,746
|
|
20,321
|
|
47,561
|
|
43,647
|
|
Provision for income taxes
|
|
5,124
|
|
7,723
|
|
17,738
|
|
15,860
|
|
Net income
|
|
$
|
8,622
|
|
$
|
12,598
|
|
$
|
29,823
|
|
$
|
27,787
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.23
|
|
$
|
.34
|
|
$
|
.81
|
|
$
|
.76
|
|
Diluted
|
|
$
|
.23
|
|
$
|
.34
|
|
$
|
.79
|
|
$
|
.74
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
37,052
|
|
36,703
|
|
36,935
|
|
36,669
|
|
Diluted
|
|
37,586
|
|
37,319
|
|
37,577
|
|
37,310
|
|
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
|
|
|
|
2010
|
|
2009
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net income
|
|
$
|
29,823
|
|
$
|
27,787
|
|
Adjustments to reconcile net
income to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
10,480
|
|
8,440
|
|
Deferred income taxes
|
|
(332
|
)
|
(34
|
)
|
Provision for returns and
doubtful accounts
|
|
2,325
|
|
3,629
|
|
Compensation expense related
to equity compensation plans
|
|
1,909
|
|
2,261
|
|
Excess tax benefit from
exercises of stock options
|
|
(758
|
)
|
(287
|
)
|
Loss on dispositions and
abandonment
|
|
71
|
|
88
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(7,640
|
)
|
10,368
|
|
Inventories
|
|
(64,317
|
)
|
(20,130
|
)
|
Prepaid expenses and other
current assets
|
|
3,249
|
|
(2,252
|
)
|
Accounts payable, accrued
expenses and other current liabilities
|
|
724
|
|
(15,632
|
)
|
Net cash (used in) provided
by operating activities
|
|
(24,466
|
)
|
14,238
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchase of Circuit City
Assets
|
|
|
|
(14,494
|
)
|
Purchase of WStore Europe
SA, net of cash acquired
|
|
|
|
924
|
|
Purchases of property, plant
and equipment
|
|
(18,546
|
)
|
(13,724
|
)
|
Proceeds from disposals of
property, plant and equipment
|
|
23
|
|
84
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
(18,523
|
)
|
(27,210
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Proceeds from (payments)
against debt facilities, net
|
|
16,135
|
|
(1,512
|
)
|
Proceeds from issuance of
common stock
|
|
851
|
|
742
|
|
Repurchase of common stock
|
|
|
|
(1,174
|
)
|
Excess tax benefit from
exercises of stock options
|
|
758
|
|
287
|
|
Net cash provided by (used
in) financing activities
|
|
17,744
|
|
(1,657
|
)
|
|
|
|
|
|
|
Effects of exchange rates on
cash
|
|
(2,615
|
)
|
779
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
(27,860
|
)
|
(13,850
|
)
|
Cash beginning of period
|
|
58,309
|
|
115,967
|
|
Cash end of period
|
|
$
|
30,449
|
|
$
|
102,117
|
|
Supplemental disclosures of
non-cash investing and financing activities:
|
|
|
|
|
|
Acquisitions of equipment
through capital leases
|
|
$
|
589
|
|
$
|
676
|
|
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
|
|
|
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock
|
|
106
|
|
|
|
(420
|
)
|
1,259
|
|
|
|
|
|
|
|
Restricted
stock withheld for employee taxes
|
|
(36
|
)
|
|
|
(367
|
)
|
(432
|
)
|
|
|
|
|
|
|
Exercise
of stock options
|
|
157
|
|
|
|
(1,009
|
)
|
1,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit on stock-based compensation
|
|
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(1,661
|
)
|
$
|
(1,661
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
29,823
|
|
|
|
29,823
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
September 30, 2010
|
|
36,678
|
|
$
|
389
|
|
$
|
181,341
|
|
$
|
(25,858
|
)
|
$
|
240,798
|
|
$
|
(303
|
)
|
|
|
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, 2010 and the results
of operations for the three and nine month periods ended September 30,
2010 and 2009, cash flows for the nine month periods ended September 30,
2010 and 2009 and changes in shareholders equity for the nine month period
ended September 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 nine months ended September 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 third
quarter ended on October 2, 2010.
The third quarters of both 2010 and 2009 included 13 weeks and the first
nine months of both 2010 and 2009 included 39 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 and restricted stock 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 0.6
million and 0.8 million shares for the three months ended September 30,
2010 and 2009, respectively, and 0.8 million and 0.7 million shares for the
nine months ended September 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 September 30, 2010 and 2009, comprehensive
income was $14.0 million and $13.5 million, respectively and for the nine month
periods ended September 30, 2010 and 2009, comprehensive income was $28.2
million and $34.7 million, respectively.
4.
Credit Facilities
At September 30, 2010 the Company had a
$120.0 million secured revolving credit agreement with a group of financial
institutions which provided for borrowings in the United States and United
Kingdom. The borrowings were 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 expired on
October 26, 2010 and the Company entered into an amended and restated
revolving credit facility on October 27, 2010. The new facility has a five
year term, maturing on October 26, 2015. The new facility is a $125
million revolving credit facility, which may be increased to $200 million
subject to certain conditions. Availability is subject to a borrowing base
formula that takes into account eligible receivables and eligible inventory.
Borrowings are secured by substantially all of the Companys assets,
8
Table of Contents
including accounts receivable, inventory and
certain other assets, subject to limited exceptions, including the exclusion of
certain foreign assets from the collateral. The amended and restated credit
agreement contains certain operating, financial and other covenants, including
limits on annual levels of capital expenditures, availability tests related to
payments of dividends and stock repurchases and fixed charge coverage tests
related to acquisitions. The Company was in compliance with all of the
covenants of the expired credit agreement in place as of September 30,
2010. As of September 30, 2010, eligible collateral under that agreement
was $120.0 million, total availability was $87.7 million, total outstanding
letters of credit were $13.0 million and total outstanding advances were $19.3
million. The interest rate under the amended and restated facility is computed
at applicable market rates based on LIBOR or the Prime Rate, plus an applicable
margin. The applicable margin varies based on borrowing base availability.
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 September 30, 2010 there
was availability under this credit facility of approximately 2.3 million ($3.2
million) and there was 8.1 million ($11.2 million) of outstanding borrowings.
The Companys WStore UK subsidiary maintained
a £2 million secured revolving credit agreement with a financial institution in
the United Kingdom. The Company
terminated this facility in July 2010.
5.
Recovery
Zone Bond
On September 23, 2010, the Company
(through a subsidiary) completed a $15,000,000 tax exempt Recovery Zone
Facility Bond (the Bonds) financing with the Development Authority of
Jefferson, Georgia (the Authority). The Bonds were issued by the
Authority and purchased by GE Government Finance Inc., and mature on October 1,
2018. Interest on the Bonds is calculated at the rate of 4.15% per
annum and principal and interest payments are due monthly. The proceeds of the
Bonds are to be used to finance or repay the costs of capital equipment
purchased for the Companys distribution facility located in Jefferson,
Georgia. The purchase and installation of all the equipment for the
facility is expected to be completed by December 31, 2011. Pursuant to the
transaction, the Company will transfer to the Authority for consideration
consisting of the Bond proceeds ownership of the equipment to be used at the
distribution facility and the Authority in turn will lease the equipment to the
Companys subsidiary pursuant to a capital equipment lease expiring October 1,
2018. Under the capital equipment lease the Company has the right to acquire
ownership of the equipment at any time for a purchase price sufficient to pay
off all principal and interest on the Bonds, plus $1.00. As a result of the
capital lease treatment for this transaction, the leased equipment will be
included in property, plant and equipment in the Companys consolidated balance
sheet. As of September 30, 2010 there were no outstanding obligations
under this facility.
6.
Business Exit and Reorganization Costs
Business exit
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 third quarter and nine months ended September 30,
2010 were $0 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
|
|
|
|
(507
|
)
|
|
|
(507
|
)
|
Balance September 30, 2010
|
|
$
|
|
|
$
|
654
|
|
$
|
|
|
$
|
654
|
|
9
Table of Contents
Reorganization
In 2010 the Companys WStore
France subsidiary has incurred integration related charges of approximately
$3.2 million ($2.9 million in the third quarter of 2010) for severances and
other costs related to the merger of its Misco and WStore operations. These
costs were recorded in selling, general and administrative expenses within the
Technology Products segment. The Company anticipates incurring minimal
additional costs related to this integration.
The following table details
the associated liabilities incurred related to this plan (in thousands):
|
|
Severance
and
Personnel
Costs
|
|
Other Exit Costs
|
|
Total
|
|
Balance January 1, 2010
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Charged to expense
|
|
2,994
|
|
204
|
|
3,198
|
|
Paid or otherwise settled
|
|
(1,011
|
)
|
(204
|
)
|
(1,215
|
)
|
Balance September 30, 2010
|
|
$
|
1,983
|
|
$
|
|
|
$
|
1,983
|
|
7.
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 and is included in the Corporate and Other segment. Our Technology
Products segment sells computers, computer supplies and consumer electronics
which are marketed in North America and Europe.
Most of the products we sell are manufactured by other companies. We also sell certain computer-related
products manufactured by us or for us to our own design, under various
trademarks.
Our Industrial Products
segment sells a wide array of material handling equipment, storage equipment
and consumable industrial items which are marketed in North America. Most of
these products are manufactured by other companies. Some products are manufactured for us to our
own design and marketed under various trademarks.
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.
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
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
794,246
|
|
$
|
701,429
|
|
$
|
2,397,458
|
|
$
|
2,079,156
|
|
Industrial Products
|
|
67,821
|
|
52,014
|
|
184,601
|
|
146,518
|
|
Corporate and Other
|
|
638
|
|
437
|
|
1,758
|
|
2,073
|
|
Consolidated
|
|
$
|
862,705
|
|
$
|
753,880
|
|
$
|
2,583,817
|
|
$
|
2,227,747
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
8,505
|
|
$
|
21,958
|
|
$
|
45,324
|
|
$
|
60,564
|
|
Industrial Products
|
|
7,915
|
|
3,587
|
|
17,639
|
|
9,892
|
|
Corporate and other expenses
|
|
(4,424
|
)
|
(6,176
|
)
|
(14,607
|
)
|
(27,398
|
)
|
Consolidated
|
|
$
|
11,996
|
|
$
|
19,369
|
|
$
|
48,356
|
|
$
|
43,058
|
|
10
Table of Contents
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
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
496,428
|
|
$
|
450,642
|
|
$
|
1,479,711
|
|
$
|
1,369,552
|
|
Industrial Products
|
|
67,821
|
|
52,014
|
|
184,601
|
|
146,518
|
|
Corporate and Other
|
|
638
|
|
437
|
|
1,758
|
|
2,073
|
|
United States total
|
|
564,887
|
|
503,093
|
|
1,666,070
|
|
1,518,143
|
|
Other North America
(Technology Products)
|
|
51,868
|
|
49,032
|
|
151,584
|
|
130,314
|
|
North America total
|
|
616,755
|
|
552,125
|
|
1,817,654
|
|
1,648,457
|
|
Europe (Technology Products)
|
|
245,950
|
|
201,755
|
|
766,163
|
|
579,290
|
|
Consolidated
|
|
$
|
862,705
|
|
$
|
753,880
|
|
$
|
2,583,817
|
|
$
|
2,227,747
|
|
Revenues are attributed to
countries based on the location of the selling subsidiary.
8.
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 (the Florida AGs Office) 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 primarily during 2005 and 2006. The lawsuit sought injunctive relief,
damages, civil penalties and other equitable relief. The Company denied the allegations in the
lawsuit. On October 26, 2010 the Company entered into a settlement
agreement with the Florida AGs Office.
Pursuant to this settlement agreement the lawsuit is being dismissed and
the Company admitted no wrongdoing but agreed to reimburse the Florida AGs
Office for its legal and investigative costs and to make a charitable
contribution to a Florida-based charitable organization (collectively the Settlement
Payments). The Settlement Payments are not material to the Company.
Other Matters
The
Company and its subsidiaries are involved in various lawsuits, claims,
investigations and proceedings including commercial, employment, 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. The Company is also audited by (or has
initiated voluntary disclosure agreements with) numerous governmental agencies
in various countries, including U.S. Federal and state authorities, concerning
potential income tax, sales tax and unclaimed property liabilities. These matters are in various stages of
investigation, negotiation and/or litigation, and are being vigorously
defended. Although the Company does not
expect, based on currently available information, 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, the ultimate
outcome 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.
11
Table
of Contents
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. In recent years, the Company has expanded into selling its products
in brick and mortar retail stores. 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. Most of the products we sell are
manufactured by other companies. We also
sell certain computer-related products manufactured by us or for us to our own
design, under various trademarks. For the nine months ended September 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. Most of these products are
manufactured by other companies. Some
products are manufactured for us to our own design and marketed under the
various trademarks. Industrial products accounted for 7% of our net sales for
the nine months ended September 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
allows us to effectively market many more products than historically was the
case and which 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
12
Table of Contents
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.
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 September 15, 2010. Companies may
use either prospective application for
13
Table of Contents
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 September 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.
14
Table
of Contents
Results of Operations
Three and Nine Months Ended September 30, 2010
compared to the Three and Nine Months Ended September 30, 2009
Key Performance Indicators (in thousands):
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
%
|
|
September 30,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
% Change
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
794,246
|
|
$
|
701,429
|
|
13.2
|
%
|
$
|
2,397,458
|
|
$
|
2,079,156
|
|
15.3
|
%
|
Industrial products
|
|
67,821
|
|
52,014
|
|
30.4
|
%
|
184,601
|
|
146,518
|
|
26.0
|
%
|
Corporate and other
|
|
638
|
|
437
|
|
46.0
|
%
|
1,758
|
|
2,073
|
|
(15.2
|
)%
|
Consolidated net sales
|
|
$
|
862,705
|
|
$
|
753,880
|
|
14.4
|
%
|
$
|
2,583,817
|
|
$
|
2,227,747
|
|
16.0
|
%
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
616,755
|
|
$
|
552,125
|
|
11.7
|
%
|
$
|
1,817,654
|
|
$
|
1,648,457
|
|
10.3
|
%
|
Europe
|
|
245,950
|
|
201,755
|
|
21.9
|
%
|
766,163
|
|
579,290
|
|
32.3
|
%
|
Consolidated net sales
|
|
$
|
862,705
|
|
$
|
753,880
|
|
14.4
|
%
|
$
|
2,583,817
|
|
$
|
2,227,747
|
|
16.0
|
%
|
Net sales by channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
427,536
|
|
$
|
404,368
|
|
5.7
|
%
|
$
|
1,285,988
|
|
$
|
1,246,771
|
|
3.1
|
%
|
Business to business
|
|
$
|
435,169
|
|
$
|
349,512
|
|
24.5
|
%
|
$
|
1,297,829
|
|
$
|
980,976
|
|
32.3
|
%
|
Consolidated net sales
|
|
$
|
862,705
|
|
$
|
753,880
|
|
14.4
|
%
|
$
|
2,583,817
|
|
$
|
2,227,747
|
|
16.0
|
%
|
Consolidated gross margin
|
|
13.5
|
%
|
15.0
|
%
|
(1.5
|
)%
|
13.9
|
%
|
14.7
|
%
|
(0.8
|
)%
|
Consolidated selling, general and administrative costs
|
|
$
|
104,696
|
|
$
|
93,394
|
|
12.1
|
%
|
$
|
309,799
|
|
$
|
284,309
|
|
9.0
|
%
|
Consolidated selling, general and administrative costs
as a % of net sales
|
|
12.1
|
%
|
12.4
|
%
|
(0.3
|
)%
|
12.0
|
%
|
12.8
|
%
|
(0.8
|
)%
|
Operating income (loss) by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
$
|
8,505
|
|
$
|
21,958
|
|
(61.3
|
)%
|
$
|
45,324
|
|
$
|
60,564
|
|
(25.2
|
)%
|
Industrial Products
|
|
$
|
7,915
|
|
$
|
3,587
|
|
120.7
|
%
|
$
|
17,639
|
|
$
|
9,892
|
|
78.3
|
%
|
Corporate and other
|
|
$
|
(4,424
|
)
|
$
|
(6,176
|
)
|
(28.4
|
)%
|
$
|
(14,607
|
)
|
$
|
(27,398
|
)
|
(46.7
|
)%
|
Consolidated operating income
|
|
$
|
11,996
|
|
$
|
19,369
|
|
(38.1
|
)%
|
$
|
48,356
|
|
$
|
43,058
|
|
12.3
|
%
|
Operating margin by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Products
|
|
1.1
|
%
|
3.1
|
%
|
(2.0
|
)%
|
1.9
|
%
|
2.9
|
%
|
(1.0
|
)%
|
Industrial Products
|
|
11.7
|
%
|
6.9
|
%
|
4.8
|
%
|
9.6
|
%
|
6.8
|
%
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating margin
|
|
1.4
|
%
|
2.6
|
%
|
(1.2
|
)%
|
1.9
|
%
|
1.9
|
%
|
|
|
Effective income tax rate
|
|
37.3
|
%
|
38.0
|
%
|
(0.7
|
)%
|
37.3
|
%
|
36.3
|
%
|
1.0
|
%
|
Net income
|
|
$
|
8,622
|
|
$
|
12,598
|
|
(31.6
|
)%
|
$
|
29,823
|
|
$
|
27,787
|
|
7.3
|
%
|
Net margin
|
|
1.0
|
%
|
1.7
|
%
|
(0.7
|
)%
|
1.2
|
%
|
1.3
|
%
|
(0.1
|
)%
|
NET SALES
SEGMENTS
The
Technology Products net sales increase for the three and nine month periods
ended September 30, 2010 is attributable to increased business to business
and consumer channel sales worldwide as a result of improved global economic
conditions, the expansion of the number of our retail stores in the United
States and the acquisition of WStore Europe SA (WStore) in September 2009.
On a constant currency basis and excluding the impact of the WStore acquisition
on results, Technology Products net sales would have grown 9.3% and 8.4%,
respectively, for the three and nine month periods ended September 30,
2010.
Industrial
Products sales, primarily business to business, increased for the three and
nine month periods ended September 30, 2010 as compared to the same period
in 2009. The sales increase, the majority of which was driven by web sales, is
attributable to improved economic conditions in North America 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.
15
Table
of Contents
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.
GEOGRAPHIES
North
American sales benefited from a marked increase in business to business
activity during the third quarter and nine months of 2010 in both the
Technology Products and Industrial products segments as a result of improved
economic conditions in North America. North American sales also benefited from
an expansion of the number of our retail stores in the United States, offset
partially by slower growth in consumer web sales. On a constant currency basis
North American sales would have increased 11.2% and 9.3%, respectively, for the
three and nine month periods ended September 30, 2010.
European
sales benefited from an increase in business to business sales during the third
quarter and nine months of 2010 as global economic conditions improved. European sales also benefited from the WStore
acquisition completed in September 2009. Consumer channel sales also grew,
though not as strongly as the business to business channel. On a constant
currency basis and excluding the impact of the WStore acquisition European
sales would have increased 10.0% and 10.6%, respectively, for the three and
nine month periods ended September 30, 2010.
CHANNEL SALES
Worldwide consumer-channel
sales increases in the quarter and first nine months ended September 30
was primarily the result of an increase in the number of retail stores in North
America partially offset by consumer weakness in Europe. On a constant currency
basis and excluding the results of the WStore acquisition on third quarter
results, worldwide consumer channel sales increased 5.5%. On a constant
currency basis and excluding the results of the WStore acquisition worldwide
consumer channel sales increased 2.1% for the first nine months of 2010.
Worldwide business to
business channel sales increases in the quarter and first nine months ended September 30
was primarily the result of an improvement in global economic conditions and
the acquisition of WStore. On a constant currency basis and excluding the
results of the WStore acquisition on third quarter results, worldwide business
to business channel sales grew 17.5%. On a constant currency basis and
excluding the results of the WStore acquisition worldwide business to business
channel sales grew 18.9% for the first nine months of 2010.
GROSS
MARGIN
The
decline in consolidated gross margin for the third quarter and nine months of
2010 resulted primarily from freight discounts offered on the Companys North American
websites, North American consumer related product margin contraction, start up
costs related to the opening of a new distribution center in North America
partially offset by improvement in gross profit in Europe and in Industrial
Products. 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/REORGANIZATION
AND OTHER CHARGES
The
increase in selling, general and administrative expenses for the third quarter
of 2010 was primarily the result of $8.2 million increased salary and related
expenses, $1.6 million of increased rent and related expenses, offset by
savings in catalog expenses of approximately $0.9 million. Retail expansion in
the United States and having WStore results in for the full quarter in 2010
were primary drivers of the cost increases in 2010. WStore integration related
costs accounted for $2.9 million of these aforementioned costs. Included in
selling, general and administrative expenses for 2009 are costs related to the
former Software Solutions segment.
The
increase in selling, general and administrative expenses for the first nine
months of 2010 was primarily the result of $22.4 million of increased salary
and related expenses, $3.7 million of increased rent and related expenses, $2.1
million of increased credit card fees, $2.0 million of increased depreciation
and amortization charges, $1.4 million of increased computer/telephone
maintenance expenses, offset by savings in catalog expenses of approximately
$8.9 million. WStore integration related costs accounted for $3.2 million of
these aforementioned costs. Included in selling, general and administrative
expenses for 2009 are costs related to the former Software Solutions segment.
16
Table
of Contents
INTEREST
AND OTHER INCOME AND INTEREST EXPENSE
The interest expense
increase in the third quarter and nine months of 2010 is primarily attributable
to the short term debt assumed as part of the WStore acquisition, revolving
credit balances in the United States and interest on capital lease obligations.
Interest expense for 2009 is primarily interest on capital lease obligations.
INCOME
TAXES
Included
in the 2010 effective tax rate is a foreign tax credit benefit of approximately
$0.5 million. Excluding this benefit the Companys effective tax rate would
have been 38.3%. 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 would have
been 38.7%.
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. 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 seek 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):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
$ Change
|
|
Cash
|
|
$
|
30,449
|
|
$
|
58,309
|
|
$
|
(27,860
|
)
|
Accounts receivable, net
|
|
$
|
242,803
|
|
$
|
241,860
|
|
$
|
943
|
|
Inventories, net
|
|
$
|
429,365
|
|
$
|
365,725
|
|
$
|
63,640
|
|
Prepaid expenses and other current assets
|
|
$
|
17,817
|
|
$
|
20,066
|
|
$
|
(2,249
|
)
|
Accounts payable
|
|
$
|
338,995
|
|
$
|
346,362
|
|
$
|
(7,367
|
)
|
Accrued expenses and other current liabilities
|
|
$
|
79,490
|
|
$
|
80,945
|
|
$
|
(1,455
|
)
|
Current portion of capitalized lease obligations
|
|
$
|
923
|
|
$
|
1,029
|
|
$
|
(106
|
)
|
Short term debt
|
|
$
|
30,425
|
|
$
|
14,168
|
|
$
|
16,257
|
|
Working capital
|
|
$
|
279,541
|
|
$
|
250,082
|
|
$
|
29,459
|
|
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 $43.5
million offset primarily by inventory purchases. The increase in inventory is
the result of increased retail store inventory in 2010 and the opening of a new
distribution facility for Technology Products in the third quarter of 2010. Our
inventory turnover remained relatively consistent at 7.3 times on an annual
basis compared to 7.8 times in the same period in 2009. Future inventory and
accounts receivable balances will continue to fluctuate with stocking needs for
our new distribution facility and new retail stores, 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 $68.0 million in cash compared to $27.6
million used in 2009, primarily the result of an increase in inventories
related to the additional retail stores and distribution center in the United
States. Cash generated from net income adjusted by other non-cash items
provided $43.5 million during 2010 compared to $41.9 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 $18.5 million and was
used for capital expenditures relating to our retail stores, information technology
and new distribution center. Net cash used in investing activities during 2009
of $27.2 million was used for the CircuitCity.com and WStore acquisitions and
for capital expenditures relating to retail stores and information technology.
Net
cash of $17.7 million was provided by financing activities for the first nine
months of 2010. Net proceeds from credit facilities provided $16.1 million and
proceeds and excess tax benefits from stock option exercises provided $1.6
million. In the first nine months of 2009, we repurchased $1.2 million of
common stock and repaid $1.5 million of bank borrowings and capital lease
obligations. Proceeds and excess tax benefits from stock option exercises
provided approximately $1.0 million of cash.
17
Table
of Contents
Under our previous $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, 2010, eligible collateral was $120.0
million and total availability was $87.7 million. There were outstanding
letters of credit of $13.0 million and $19.3 million of outstanding advances as
of September 30, 2010. Borrowings were 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. This credit facility
expired on October 26, 2010 and the Company entered into an amended and
restated revolving credit facility on October 27, 2010. The new facility
has a five year term, maturing on October 26, 2015. The new facility is a
$125 million revolving credit facility, which may be increased to $200 million
subject to certain conditions. Availability is subject to a borrowing base
formula that takes into account eligible receivables and eligible inventory.
Borrowings are secured by substantially all of the Companys assets, including
accounts receivable, inventory and certain other assets, subject to limited
exceptions, including the exclusion of certain foreign assets from the collateral. The amended and restated credit agreement
contains certain operating, financial and other covenants, including limits on
annual levels of capital expenditures, availability tests related to payments
of dividends and stock repurchases and fixed charge coverage tests related to
acquisitions. The Company was in compliance with all of the covenants of the
expired credit agreement in place as of September 30, 2010. As of September 30,
2010, eligible collateral under that agreement was $120.0 million, total
availability was $87.7 million, total outstanding letters of credit were $13.0
million and total outstanding advances were $19.3 million. The interest rate under the amended and
restated facility is computed at applicable market rates based on LIBOR or the
Prime Rate, plus an applicable margin. The applicable margin varies based on
borrowing base availability. We were in compliance with all of the covenants of
the expired credit agreement in place as of September 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 September 30,
2010 there was availability under this credit facility of approximately 2.3
million ($3.2 million) and there was 8.1 million ($11.2 million) of
outstanding borrowings.
The Companys WStore UK subsidiary (See Note 4) maintained £2 million
secured revolving credit agreement with a financial institution in the United
Kingdom. The Company terminated this
facility in July 2010.
On September 23, 2010,
the Company (through a subsidiary) completed a $15,000,000 tax exempt Recovery
Zone Facility Bond (the Bonds) financing with the Development Authority of
Jefferson, Georgia (the Authority). The Bonds were issued by the Authority
and purchased by GE Government Finance Inc., and mature on October 1,
2018. Interest on the Bonds is
calculated at the rate of 4.15% per annum and principal and interest payments
are due monthly. The proceeds of the Bonds are to be used to finance or repay
the costs of capital equipment purchased for the Companys distribution
facility located in Jefferson, Georgia.
The purchase and installation of all the equipment for the facility is
expected to be completed by December 31, 2011. Pursuant to the
transaction, the Company will transfer to the Authority, for consideration
consisting of the Bonds proceeds, ownership of the equipment to be used at the
distribution facility and the Authority in turn will lease the equipment to the
Companys subsidiary pursuant to a capital equipment lease expiring October 1,
2018. Under the capital equipment lease the Company has the right to acquire
ownership of the equipment at any time for a purchase price sufficient to pay
off all principal and interest on the Bonds, plus $1.00. As a result of the
capital lease treatment for this transaction, the leased equipment will be
included in property, plant and equipment in the Companys
consolidated balance sheet
.
As of September 30, 2010 there were no outstanding obligations under this
facility. Drawings as of the date of this filing were approximately $5.4
million.
We
also have certain obligations with various parties that include commitments to
make future payments. Our principal commitments at September 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 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, stocking
of the new distribution center in 2010 and in building out and expanding our
existing distribution center facilities and inventory systems. In addition, in
2010
18
Table of
Contents
we
anticipate cash needs for costs related to the WStore integration. 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
maintain our cash primarily in money market funds or their equivalent. As of September 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):
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Table
of Contents
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 September 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 September 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 September 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 September 30, 2010 that have
materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
20
Table
of Contents
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 (the
Florida AGs Office) 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
primarily during 2005 and 2006. The
lawsuit sought injunctive relief, damages, civil penalties and other equitable
relief. The Company denies the
allegations in the lawsuit. On October 26, 2010 the Company entered into a
settlement agreement with the Florida AGs Office. Pursuant to this settlement
agreement the lawsuit is being dismissed and the Company admitted no wrongdoing
but agreed to reimburse the Florida AGs Office for its legal and investigative
costs and to make a charitable contribution to a Florida-based charitable
organization (collectively the Settlement Payments). The Settlement Payments
are not material to the Company.
Other
Matters
The
Company and its subsidiaries are involved in various lawsuits, claims,
investigations and proceedings including commercial, employment, 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. The Company is also audited by (or has
initiated voluntary disclosure agreements with) numerous governmental agencies
in various countries, including U.S. Federal and state authorities, concerning
potential income tax, sales tax and unclaimed property liabilities. These matters are in various stages of
investigation, negotiation and/or litigation, and are being vigorously
defended. Although the Company does not
expect, based on currently available information, 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, the ultimate
outcome 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.
21
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
|
22
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
10, 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
|
23
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