NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Systemax Inc., through its subsidiaries, is primarily a direct marketer of brand name and private label products. The Company operates and is internally managed in
two
reportable segments - Industrial Products Group (“IPG”) and Europe Technology Products Group (“ETG”). Smaller business operations and corporate functions are aggregated and reported as the additional segment – Corporate and Other (“Corporate”). As previously disclosed in the second quarter of 2017 and for all periods presented, the Company modified the presentation of certain costs associated with operating our distribution centers as well as with our Purchasing and Product Development personnel. Historically these costs had been included as a component of cost of sales and are now included within Selling, Distribution and Administrative expenses ("SD&A"). For the year ended 2017, 2016 and 2015, the costs reclassified from cost of sales to SD&A, included within continuing operations, was
$21.8 million
,
$38.9 million
and
$34.0 million
, respectively,
As disclosed in our Form 8-K dated March 31, 2017, on March 24, 2017, certain wholly owned subsidiaries of the Company executed a definitive securities purchase agreement (the “Purchase Agreement”) with certain special purpose companies formed by Hilco Capital Limited (“Hilco” and together with its management team partners, “Purchaser”). Pursuant to the Purchase Agreement, Purchaser acquired all of the Company’s interests in Systemax Europe SARL, which included its subsidiaries, Systemax Business Services K.F.T., Misco UK Limited, Systemax Italy S.R.L., Misco Iberia Computer Supplies S.L., Misco AB, Global Directmail B.V. and Misco Solutions B.V. (collectively, the “SARL Businesses”). The SARL businesses were reported within the Company's European Technology Products Group ("ETG") segment. The transaction closed immediately upon execution of the Purchase Agreement.
The Company retained its France technology value added reseller business, which is conducted through its subsidiary, Inmac Wstore S.A.S., which was not part of the sale transaction.
The SARL Businesses were sold on a cash-free, debt-free basis; proceeds were nominal. As part of the transaction, the Company retained a
5%
residual equity position in the Purchaser’s acquiring entity, HUK 77 Limited, which is being accounted for on the cost method, to which no value was ascribed, a
$3.3 million
note receivable (
$2.2 million
balance at December 31, 2017 which was paid in full in January 2018) and provided limited transition services to Purchaser through December 19, 2017 under a transition services agreement. The note receivable is included in accounts receivable, net in the Consolidated Balance Sheet at December 31, 2017.
The sale of the SARL Businesses met the “strategic shift with major impact” criteria as defined under Accounting Standards Update ("ASU") 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
, which requires disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under ASU 2014-08 in order for a disposal to qualify for discontinued operations presentation in the financial statements, the disposal must be a "strategic shift" with a major impact for the reporting entity. If an entity meets this threshold, and other requirements, only the components that were in operation at the time of disposal are presented as discontinued operations. Therefore, the current year and prior year results of the SARL Businesses are included in discontinued operations in the accompanying consolidated financial statements.
The Company sold certain assets of its Misco Germany business in 2016, which had been reported as part of its ETG segment. As this disposition was not a strategic shift with a major impact as defined under ASU 2014-08, prior year results of the Misco Germany operations are presented within continuing operations. Also in 2016, the Company sold its rebate processing business, which had been reported as part of its Corporate segment, and this disposition was also not a strategic shift with a major impact as defined under ASU 2014-08, prior year results of the rebate processing business are presented within continuing operations.
In 2015, the Company announced a restructuring of its NATG business in March 2015. The NATG segment sold products categorized as Information and Communications Technology (“ICT”) and Consumer Electronics (“CE”) products. These products included computers, computer supplies and consumer electronics which were marketed in North America. The Company followed the guidance under Accounting Standards Update (“ASU”) 2014-8,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,
which required disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under ASU 2014-8 in order for a disposal to qualify for discontinued operations presentation in the financial statements, the disposal must be a “strategic shift” with a major impact for the reporting entity. If the entity meets this threshold, only the components that were in operation at the time of disposal are presented as discontinued operations. The sale of the NATG business in December 2015 had a major impact on the Company and therefore met the strategic shift criteria. The NATG components in operation at the time of the sale were the B2B and Ecommerce businesses
and
three
remaining retail stores. Accordingly, these components and the results of operations have been adjusted in the accompanying financial statements to reflect their presentation in discontinued operations.
Principles of Consolidation
— The accompanying consolidated financial statements include the accounts of Systemax Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “Systemax”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
—
Certain prior year amounts were reclassified to conform to current year presentation. As previously disclosed, in the second quarter of 2017 and for all periods presented the Company modified the presentation of certain costs associated with operating our distribution centers as well as with our Purchasing and Product Development personnel. Historically these costs had been included as a component of cost of sales and are now included within Selling, Distribution and Administrative expenses ("SD&A"). For the year ended 2017, 2016 and 2015, the costs reclassified from cost of sales to SD&A, included within continuing operations, was
$21.8 million
,
$38.9 million
and
$34.0 million
, respectively,
Fiscal Year
— The Company’s fiscal year ends at midnight on the Saturday closest to December 31. For clarity of presentation herein, all fiscal years are referred to as if they ended on December 31. The fiscal year is divided into four fiscal quarters that each end at midnight on a Saturday. Fiscal quarters will typically include 13 weeks, but the fourth quarter will include 14 weeks in a 53 week fiscal year. For clarity of presentation herein, all fiscal quarters are referred to as if they ended on the traditional calendar month.
The full year of 2017 and 2016 included 52 weeks compared to 2015 which had 53 weeks.
Use of Estimates In Financial Statements
— The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions that the Company believes are necessary to consider to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Company’s business environment, therefore, actual results could differ from these estimates.
Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and assumptions by management affect the allowance for doubtful accounts, sales returns and allowances, inventory reserves, allowances for cooperative advertising, vendor drop shipments, the carrying value of long‑lived assets (including goodwill and intangible assets), capitalization and amortization of software development costs, the provision for income taxes and related deferred tax accounts, certain accrued liabilities, revenue recognition, contingencies, sub-rental lease income, litigation and related legal accruals and the value attributed to employee stock options and other stock‑based awards.
Foreign Currency Translation
— The Company has operations in numerous foreign countries. The functional currency of each foreign country is the local currency. The financial statements of the Company’s foreign entities are translated into U.S. dollars, the reporting currency, using year-end exchange rates for assets and liabilities, year to date average exchange rates for the statement of operations items and historical rates for equity accounts. Translation gains or losses are recorded as a separate component of shareholders’ equity.
Cash
— The Company considers amounts held in money market accounts and other short-term investments, including overnight bank deposits, with an original maturity date of three months or less to be cash. Cash overdrafts are classified in accounts payable.
Inventories
— Inventories consist primarily of finished goods and are stated at the lower of cost or net realizable value. Cost is determined by using the first-in, first-out method except in ETG where an average cost is used.
Property, Plant and Equipment
— Property, plant and equipment is stated at cost. Furniture, fixtures and equipment, including equipment under capital leases, are depreciated using the straight-line or accelerated method over their estimated useful lives ranging from
three
to
ten years
. Leasehold improvements are amortized over the shorter of the useful lives or the term of the respective leases.
Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statement of operations in the period realized.
Internal-Use Software
- Internal‑use software is included in fixed assets and is amortized on a straight‑line basis over
3 years
. The Company capitalizes costs incurred during the application development stage. Costs related to minor upgrades, minor enhancements and maintenance activities are expensed as incurred.
Evaluation of Long-lived Assets
— Long lived assets are assets used in the Company’s operations and include, definite-lived intangible assets, leasehold improvements, warehouse and similar property used to generate sales and cash flows. Long lived assets are tested for impairment utilizing a recoverability test. The recoverability test compares the carrying value of an asset group to the undiscounted cash flows directly attributable to the asset group over the life of the primary asset. If the undiscounted cash flows of an asset group is less than the carrying value of the asset group, the fair value of the asset group is then measured. If the fair value is also determined to be less than the carrying value of the asset group, the asset group is impaired.
In 2016, an impairment charge of approximately
$1.7 million
was recorded in the ETG segment discontinued operations in the United Kingdom as a result of negative cash flows in the business. .
Business Combinations
— The Company accounts for its business combinations using the acquisition method of accounting. The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date. The excess of (i) the total costs of acquisition over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill.
Goodwill and Intangible Assets
— Goodwill represents the excess of the cost of acquired assets over the fair value of assets acquired. The Company performs a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment shows that the fair value of the reporting unit exceeds its carrying amount, the company is not required to complete the annual two step goodwill impairment test. If a quantitative analysis is required to be performed for goodwill, the fair value of the reporting unit to which the goodwill has been assigned is determined using a discounted cash flow model. A discounted cash flow model is also used to determine fair value of indefinite-lived intangibles using projected cash flows of the intangible. Unobservable inputs related to these discounted cash flow models include projected sales growth, gross margin percentages, new business opportunities, working capital requirements, capital expenditures and growth in selling, distribution and administrative expense. Any excess of a reporting unit's carrying amount over fair value would be charged to impairment expense.
For non-amortizing intangibles the Company performs a qualitative assessment to determine if there are indicators of impairment. If indicators of impairment exist, a fair market value analysis of the intangibles would be completed using a discounted cash flow model with inputs such as projected sales growth, gross margin percentages, new business opportunities, working capital requirements, capital expenditures and selling, distribution and administrative expense. Any excess of book carrying value over the fair market value of the intangible asset determined in the analysis would be charged to impairment expense.
In December
2016
, the Company conducted an evaluation of the intangible assets in its ETG discontinued operations segment and IPG segment and concluded that assets were impaired in the United Kingdom and Mexico operations and impairment charges of approximately
$0.3 million
and
$0.1 million
, respectively, was recorded in the fourth quarter.
Income Taxes
— The Company accounts for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax basis and tax credit carry forwards and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse.
The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
The Company recognizes and measures uncertain tax positions using a two‑step approach. The first step is to evaluate the tax position taken or expected to be taken by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a regular basis. Its evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of audit and effective settlement of audit issues. The Company’s
policy is to include interest and penalties related to unrecognized tax benefits as income tax expense in the consolidated statements of operations.
Revenue Recognition and Accounts Receivable
—In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The new revenue recognition standard is effective for interim and annual periods beginning on January 1, 2018. The new standard is required to be adopted using either a full-retrospective or a modified-retrospective approach. The Company will adopt the standard using the modified-retrospective approach beginning in 2018. The Company has completed an impact assessment and has determined that there will be no material impact to total revenues in our consolidated statements of income, accounting policies, business processes, internal controls or disclosures.
The Company recognizes sales of products, including shipping revenue, when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Generally, these criteria are met at the time the product is received by the customers when title and risk of loss have transferred except in our Industrial Products segment where title and risk pass at time of shipment. Allowances for estimated subsequent customer returns, rebates and sales incentives are provided when revenues are recorded. Revenues exclude sales tax collected. The Company evaluates collectability of accounts receivable based on numerous factors, including past transaction history with customers and their credit rating and provides a reserve for accounts that are potentially uncollectible. Trade receivables are generally written off once all collection efforts have been exhausted. Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and subsequent customer returns.
Shipping and Handling Costs
— The Company recognizes shipping and handling costs in cost of sales.
Advertising Costs
— Expenditures for internet, television, local radio and newspaper advertising are expensed in the period the advertising takes place. Catalog preparation, printing and postage expenditures are amortized over the period of catalog distribution during which the benefits are expected, generally
one
to
four months
.
Net advertising expenses were
$67.0 million
, $
71.4 million
and
$74.4 million
during
2017
,
2016
and
2015
, respectively, and are included in the accompanying consolidated statements of operations within continuing and discontinued operations. Of the previously mentioned amounts, ETG discontinued operations net advertising expenses totaled
$0.6 million
during 2017 and
$2.5 million
during 2016 and 2015. NATG discontinued operations net advertising expenses totaled
$0.3 million
,
$1.5 million
and $
7.5 million
during
2017
,
2016
and
2015
, respectively. For 2017 and 2016 NATG advertising expense was primarily related to the wind down of outstanding accounts. The Company utilizes advertising programs to drive traffic to its websites, support vendors, including catalogs, internet and magazine advertising, and receives payments and credits from vendors, including consideration pursuant to volume incentive programs and cooperative marketing programs. The Company accounts for consideration from vendors as a reduction of cost of sales unless certain conditions are met showing that the funds are used for specific, incremental, identifiable costs, in which case the consideration is accounted for as a reduction in the related expense category, such as advertising expense. The amount of vendor consideration recorded as a reduction of selling, distribution and administrative expenses totaled
$5.8 million
,
$6.4 million
and
$20.2 million
during
2017
,
2016
and
2015
, respectively. Of the previously mentioned amounts, ETG discontinued operations amount of vendor consideration was
$0.4 million
,
$2.6 million
and
$3.3 million
during 2017, 2016 and 2015, respectively. NATG discontinued operations vendor consideration for
2016
was $
0.9 million
in costs due primarily to vendor balance reconciliations and for
2015
, NATG operations vendor consideration of
$12.1 million
was recorded as a reduction of selling, distribution and administrative expenses primarily in discontinued operations.
Stock Based Compensation
— In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which modifies certain accounting aspects for share-based payments to employees including, among other elements, the accounting for income taxes and forfeitures, as well as classifications in the statement of cash flows. The Company adopted this standard effective January 1, 2017 and its adoption did not materially impact the Company's consolidated financial position or results of operations when implemented in the first quarter of 2017. Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement rather than paid-in capital, which is a change required to be applied on a prospective basis in accordance with the new guidance. We adopted the cash flow presentation that requires presentation of excess tax benefits within operating activities on a prospective basis. Accordingly, for the year ended December 31, 2017, we recorded discrete income tax benefits in the consolidated statement of operations of approximately
$0.8 million
, for excess tax benefits related to equity compensation. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact on our results of operations. The presentation requirements for cash flows related to employee taxes paid for withheld shares is disclosed in our consolidated statement of cash flows and has been applied retrospectively, Cash flows related to employee taxes paid for withheld shares was immaterial for 2016 and 2015.
The fair value of employee share options is recognized in expense over the vesting period of the options, using the graded attribution method. The fair value of employee share options is determined on the date of grant using the Black-Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve. Stock-based compensation expense includes an estimate for forfeitures and is recognized over the expected term of the award.
Net Income (Loss) Per Common Share
– Net income per common share - basic is 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 included in the computation of diluted earnings per share was
0.4 million
and the weighted average number of restricted stock awards included in the computation of diluted earnings per share was
0.2 million
for the year ended December 31, 2017. Shares used in calculating basic and diluted net loss per share was the same for the years ended December 31, 2016 and 2015, respectively, as the inclusion of all potential shares of common stock of the Company outstanding would have been anti‑dilutive. The weighted average number of stock options and restricted stock awards outstanding excluded from the computation of diluted income (loss) per share was
0.04 million
shares,
1.3 million
shares, and
1.0 million
shares for the years ended
December 31, 2017
,
2016
and
2015
, respectively, due to their antidilutive effect.
Employee Benefit Plans
-
The Company’s U.S. subsidiaries participate in a defined contribution 401(k) plan covering substantially all U.S. employees. Employees may invest
1%
or more of their eligible compensation, limited to maximum amounts as determined by the Internal Revenue Service. The Company provides a matching contribution to the plan, determined as a percentage of the employees’ contributions. Aggregate expense to the Company for contributions to the plan was approximately
$0.7 million
in 2017,
$0.4 million
in
2016
and
$0.9 million
in
2015
, respectively and of these amounts, NATG operations expense was
zero
in each of
2017
and
2016
and
$0.4 million
in
2015
.
Fair Value Measurements
- Financial instruments consist primarily of investments in cash, trade accounts receivable, debt and accounts payable. The Company estimates the fair value of financial instruments based on interest rates available to the Company. At
December 31, 2017
and
2016
, the carrying amounts of cash, accounts receivable and accounts payable are considered to be representative of their respective fair values due to their short-term nature. Cash is classified as Level 1 within the fair value hierarchy. The Company’s debt is considered to be representative of its fair value because of its variable interest rate. The weighted average interest rate on short-term borrowings was
4.7%
,
4.7%
and
4.3%
, in
2017
,
2016
and
2015
, respectively.
The fair value of goodwill, non-amortizing intangibles and long lived assets is measured in connection with the Company’s annual impairment testing as discussed above.
Significant Concentrations -
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. The Company’s excess cash balances are invested with money center banks. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and their geographic dispersion comprising the Company’s customer base. The Company also performs on-going credit evaluations and maintains allowances for potential losses as warranted.
The Company purchases substantially all of our products and components directly from manufacturers and large wholesale distributors.
Two
vendors accounted for 10% of more of our purchases in continuing operations in
2017
: one vendor accounted for
16.0%
and another vendor accounted for
12.0%
. In
2016
, two vendors accounted for 10% or more of our purchases: each vendor accounted for
13.6%
of our purchases and in
2015
, one vendor accounted for
11.2%
and another accounted for
11.1%
of our purchases.
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 Company’s current or reasonably foreseeable operating structure. Below are the new authoritative pronouncements that management believes are relevant to Company’s current operations.
In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The new revenue recognition standard is effective for interim and annual periods beginning on January 1, 2018. The new standard is required to be adopted using either a full-retrospective or a modified-retrospective approach. The Company will adopt these standards using the modified-retrospective approach beginning on January 1, 2018. The Company has completed an impact assessment and has determined that there will be no material impact to total revenues in our consolidated statements of income, accounting policies, business processes, internal controls or disclosures.
In February 2016, the FASB issued ASU 2016-2,
Leases (Topic 842)
. ASU 2016-2 related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this standard on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which modifies certain accounting aspects for share-based payments to employees including, among other elements, the accounting for income taxes and forfeitures, as well as classifications in the statement of cash flows. The Company adopted this standard effective January 1, 2017 and its adoption did not materially impact the Company's consolidated financial position or results of operations when implemented in the first quarter of 2017. Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement rather than paid-in capital, which is a change required to be applied on a prospective basis in accordance with the new guidance. We adopted the cash flow presentation that requires presentation of excess tax benefits within operating activities on a prospective basis. Accordingly, for the year ended December 31, 2017, we recorded discrete income tax benefits in the consolidated statement of operations of approximately
$0.8 million
, for excess tax benefits related to equity compensation. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact on our results of operations. The presentation requirements for cash flows related to employee taxes paid for withheld shares is disclosed in our consolidated statement of cash flows and has been applied retrospectively, Cash flows related to employee taxes paid for withheld shares was immaterial for 2016 and 2015.
In March 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment,
which eliminates the second step from the goodwill impairment test. An entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the effect of adopting this pronouncement.
2. DISPOSITIONS AND SPECIAL CHARGES
For 2017 and prior year periods the Company’s discontinued operations include the results of the SARL Businesses sold in March 2017 and the NATG business sold in December 2015 (See Note 1). The loss on the sale of the SARL Businesses totaled
$23.7 million
for the year ended December 31, 2017, which included an
$8.2 million
loss on the sale of net assets,
$14.4 million
of cumulative translation adjustments,
$1.1 million
of legal, professional and other costs,
$0.8 million
recovery from settlement of an outstanding obligation related to the sale,
$0.3 million
of severance and other personnel costs and
$0.5 million
of costs related to a transitional services agreement. Of these charges previously mentioned,
$1.4 million
required the use of cash.
NATG discontinued operations incurred special charges of approximately
$6.9 million
throughout the year ended December 31, 2017, of which
$6.2 million
primarily related to updating our future lease cash flows and
$0.7 million
related to ongoing restitution proceedings against certain former NATG executives.
Below is a summary of the impact on net sales and net loss and loss per share from discontinued operations for the years ended December 31, 2017, 2016 and 2015.
A reconciliation of pretax loss of Discontinued operations to the Net loss of discontinued operations is as follows:
|
|
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|
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|
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|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
$
|
117.0
|
|
|
$
|
521.6
|
|
|
$
|
1,664.6
|
|
Cost of sales
|
102.9
|
|
|
461.6
|
|
|
1,516.8
|
|
Gross profit
|
14.1
|
|
|
60.0
|
|
|
147.8
|
|
Selling, distribution and administrative expenses
|
22.1
|
|
|
96.9
|
|
|
221.0
|
|
Special charges, net
|
30.6
|
|
|
11.5
|
|
|
2.6
|
|
Operating loss from discontinued operations
|
(38.6
|
)
|
|
(48.4
|
)
|
|
(75.8
|
)
|
Foreign currency exchange loss
|
0.8
|
|
|
—
|
|
|
1.8
|
|
Interest and other expense (income), net
|
—
|
|
|
0.3
|
|
|
0.3
|
|
Loss of discontinued operations before income taxes
|
(39.4
|
)
|
|
(48.7
|
)
|
|
(77.9
|
)
|
Provision (benefit) for income tax
|
(3.7
|
)
|
|
0.8
|
|
|
(2.1
|
)
|
Net loss from discontinued operations
|
$
|
(35.7
|
)
|
|
$
|
(49.5
|
)
|
|
$
|
(75.8
|
)
|
Net loss per share - basic and diluted
|
$
|
(0.96
|
)
|
|
$
|
(1.33
|
)
|
|
$
|
(2.04
|
)
|
In September 2016 the Company sold the operating business of Misco Germany and in December 2016 the Company sold its rebate processing business. These divestitures were not considered a major strategic shift and the results of these businesses are reflected in continuing operations.
In
2017
the Company incurred special charges of
$30.9 million
, of which
$0.3 million
is included in continuing operations within the NATG segment and
$30.6 million
is included in discontinued operations within the ETG and NATG segments.
The Company expects that total additional charges related to the sale of the SARL Businesses will be less than
$1.0 million
which will be presented in discontinued operations.
The Company’s NATG segment incurred special charges for the year ended
December 31, 2017
of approximately
$7.2 million
, with approximately
$6.5 million
related to updating our future lease cash flows expectations related to previously exited retail stores of which $
0.3 million
is included in continuing operations, and
$6.2 million
in discontinued operations as these charges related to the distribution center and the NATG corporate headquarters, and
$0.7 million
related to ongoing restitution proceedings against certain former NATG executives which is included in discontinued operations. Amounts that are unpaid at
December 31, 2017
are recorded in Accrued expenses and other current liabilities and Other liabilities in the accompanying consolidated balance sheets.
The following table details the associated liabilities related to the ETG segment's severance and other costs recorded within discontinued operations, other restructuring charges that remain for the sale of Germany business in 2016 that is included in continuing operations and the NATG segment's lease liabilities and other costs and (in millions):
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ETG - Severance and other costs
|
|
ETG – Lease
liabilities and
other costs
|
|
NATG – Workforce
reductions
|
|
NATG – Lease
liabilities and
other exit costs
|
|
Total
|
Balance January 1, 2017
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
19.3
|
|
|
$
|
20.5
|
|
Charged to expense
|
0.3
|
|
|
—
|
|
|
—
|
|
|
6.5
|
|
|
6.8
|
|
Paid or otherwise settled
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(6.8
|
)
|
|
(7.1
|
)
|
Balance December 31, 2017
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
19.0
|
|
|
$
|
20.2
|
|
The following table details the associated liabilities incurred related to the Technology Products segments special charges (in millions) for
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ETG -
Workforce
Reductions and
Personnel Costs
|
|
ETG – Lease
liabilities and
other costs
|
|
NATG-
Workforce
Reductions
|
|
NATG – Lease
liabilities and
other exit costs
|
|
Total
|
Balance, January 1, 2016
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
16.3
|
|
|
$
|
19.3
|
|
Charged to expense
|
—
|
|
|
1.9
|
|
|
0.2
|
|
|
16.9
|
|
|
19.0
|
|
Paid or otherwise settled
|
(0.3
|
)
|
|
(0.7
|
)
|
|
(2.9
|
)
|
|
(13.9
|
)
|
|
(17.8
|
)
|
Balance, December 31, 2016
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
19.3
|
|
|
$
|
20.5
|
|
3. GOODWILL AND INTANGIBLES
Goodwill and indefinite-lived intangible assets
:
The following table provides information related to the carrying value of goodwill (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Balance, January 1
|
$
|
7.6
|
|
|
$
|
9.2
|
|
Impairment
|
—
|
|
|
(0.4
|
)
|
Reclassified to discontinued operations due to sale
|
—
|
|
|
(1.2
|
)
|
Balance, December 31
|
$
|
7.6
|
|
|
$
|
7.6
|
|
Due to the sale of the SARL businesses in March 2017, the Company has reclassified
$1.2 million
of goodwill at December 31, 2016, to long-term assets from discontinued operations.
In 2017, in the ETG segment, $
1.8 million
of trademarks that were considered definite-lived intangibles in the prior year are now considered indefinite lived based upon changes in circumstances. The following table provides information related to the carrying value of indefinite lived intangibles as of December 31, 2017 (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Balance, January 1
|
$
|
0.7
|
|
|
$
|
0.7
|
|
France trademark
|
1.8
|
|
|
—
|
|
Balance, December 31
|
$
|
2.5
|
|
|
$
|
0.7
|
|
|
|
|
|
Definite-lived intangible assets:
The following table summarizes information related to definite-lived intangible assets as of
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortization
Period (Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
|
Weighted avg
useful life
|
Client lists
|
5-10 yrs
|
|
$
|
2.3
|
|
|
$
|
0.9
|
|
|
$
|
1.4
|
|
|
7.0
|
Leases
|
3-6 yrs
|
|
0.8
|
|
|
0.4
|
|
|
0.4
|
|
|
3.1
|
Domain name
|
5 yrs
|
|
3.4
|
|
|
0.8
|
|
|
2.6
|
|
|
3.8
|
Total
|
|
|
$
|
6.5
|
|
|
$
|
2.1
|
|
|
$
|
4.4
|
|
|
4.8
|
Due to the sale of the SARL businesses, the Company has reclassified net book value of definite-lived intangible assets of approximately
$0.4 million
to long term assets of discontinued operations. Also, in 2017,
$1.8 million
of trademarks that were considered definite-lived assets in the prior year is now considered indefinite-lived based upon changes in circumstances.
The following table summarizes information related to definite-lived intangible assets as of
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortization
Period (Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
|
Weighted avg
useful life
|
Client lists
|
5-10 yrs
|
|
$
|
2.3
|
|
|
$
|
0.6
|
|
|
$
|
1.7
|
|
|
8.0
|
Leases
|
3-6 yrs
|
|
0.8
|
|
|
0.3
|
|
|
0.5
|
|
|
4.1
|
Domain name
|
5 yrs
|
|
3.4
|
|
|
0.2
|
|
|
3.2
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
6.5
|
|
|
$
|
1.1
|
|
|
$
|
5.4
|
|
|
5.7
|
The aggregate amortization expense for these intangibles was approximately
$1.0 million
in
2017
. The estimated amortization for future years ending December 31 is as follows (in millions):
|
|
|
|
|
2018
|
$
|
1.0
|
|
2019
|
1.0
|
|
2020
|
1.1
|
|
2021
|
0.7
|
|
2022 and after
|
$
|
0.6
|
|
Total
|
$
|
4.4
|
|
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Land improvements
|
$
|
0.8
|
|
|
$
|
0.8
|
|
Furniture and fixtures, office, computer and other equipment and software
|
48.8
|
|
|
47.1
|
|
Leasehold improvements
|
16.8
|
|
|
14.6
|
|
|
66.4
|
|
|
62.5
|
|
Less accumulated depreciation and amortization
|
51.3
|
|
|
46.1
|
|
Property, plant and equipment, net
|
$
|
15.1
|
|
|
$
|
16.4
|
|
Due to the sale of the SARL businesses in March 2017, net property, plant and equipment, at December 31, 2016, of
$13.1 million
, including capital leases of
$0.2 million
, have been reclassified to long term assets of discontinued operations on the consolidated balance sheets.
Included in property, plant and equipment are assets under capital leases, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Office, computer and other equipment
|
$
|
6.0
|
|
|
$
|
5.7
|
|
Less: Accumulated amortization
|
5.6
|
|
|
5.4
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
Depreciation charged to continuing operations for property, plant and equipment including capital leases in
2017
,
2016
, and
2015
was
$3.9 million
,
$4.3 million
and
$5.6 million
, respectively. ETG and NATG discontinued operations total depreciation expense was
$0.4 million
,
$3.1 million
and
$5.5 million
, for
2017
,
2016
and
2015
, respectively.
5. CREDIT FACILITIES
The Company maintains a
$75 million
secured revolving credit agreement with one financial institution which has a
five
year term, maturing on
October 28, 2021
and provides for borrowings in the United States. The 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 revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the Company will be required to maintain a fixed charge coverage ratio (as defined). The borrowings under the agreement are subject to borrowing base limitations of up to
85%
of eligible accounts receivable and the inventory advance rate computed as the lesser of
60%
or
85%
of the net orderly liquidation value (“NOLV”). Borrowings are secured by substantially all of the borrower’s assets, as defined, including all accounts, accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral. The interest rate under the amended and restated facility is computed at applicable market rates based on the London interbank offered rate (“LIBO”), the Federal Reserve Bank of New York (“NYFRB”) or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability. As of
December 31, 2017
, eligible collateral under the credit agreement was $
74.6 million
, total availability was
$73.1 million
, total outstanding letters of credit were
$2.9 million
, total excess availability was
$70.2 million
and there were
no
outstanding borrowings. The Company was in compliance with all of the covenants of the credit agreement in place as of
December 31, 2017
.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Payroll and employee benefits
|
$
|
23.1
|
|
|
$
|
18.6
|
|
Advertising
|
6.5
|
|
|
6.3
|
|
Sales and VAT tax payable
|
4.7
|
|
|
3.4
|
|
Freight
|
4.0
|
|
|
3.2
|
|
Reorganization costs
|
8.1
|
|
|
7.6
|
|
Income taxes payable
|
7.6
|
|
|
0.6
|
|
Other
|
10.0
|
|
|
9.5
|
|
|
$
|
64.0
|
|
|
$
|
49.2
|
|
7. SHAREHOLDERS’ EQUITY
Stock-Based Compensation Plans
The Company currently has
three
equity compensation plans which reserve shares of common stock for issuance to key employees, directors, consultants and advisors to the Company. The following is a description of these plans:
The
1999 Long-term Stock Incentive Plan, as amended (“1999 Plan”)
- This plan was adopted in October 1999 with substantially the same terms and provisions as the 1995 Long-term Stock Incentive Plan. The number of shares that may be granted under this plan to a maximum of
7,500,000
. The maximum number of shares granted per type of award to any individual may not exceed
1,500,000
in any calendar year and
3,000,000
in total. The ability to grant new awards under this plan ended on December 31, 2009 but awards granted prior to such date continue until their expiration. A total of
158,375
options were outstanding under this plan as of
December 31, 2017
.
The 2006 Stock Incentive Plan For Non-Employee Directors -
This plan, adopted by the Company’s stockholders in October, 2006, replaces the 1995 Stock Option Plan for Non-Employee Directors. The Company adopted the plan so that it could offer directors of the Company who are not employees of the Company or of any entity in which the Company has more than a
50%
equity interest (“independent directors”) an opportunity to participate in the ownership of the Company by receiving options to purchase shares of common stock at a price equal to the fair market value at the date of grant of the option and restricted stock awards. Awards for a maximum of
200,000
shares may be granted under this plan. A total of
5,000
options were outstanding under this plan as of
December 31, 2017
.
The 2010 Long-term Stock Incentive Plan (“2010 Plan”)
- This plan was adopted in April 2010 with substantially the same terms and provisions as the 1999 Long-term Stock Incentive Plan. The maximum number of shares granted per type of award to any individual may not exceed
1,500,000
in any calendar year. Restricted stock grants and common stock awards reduce stock options otherwise available for future grant. Awards for a maximum of
7,500,000
shares may be granted under this plan. A total of
837,925
options and
191,267
restricted stock units were outstanding under this plan as of
December 31, 2017
.
Shares issued under our share-based compensation plans are usually issued from shares of our common stock held in the treasury.
Compensation cost related to non-qualified stock options recognized in operating results (selling, distribution and administrative expense) for
2017
,
2016
and
2015
was
$1.1 million
,
$0.8 million
, and
$0.2 million
respectively, and of these amounts ETG segment's compensation cost related to non-qualified stock options was de minimis in 2017, approximately
$0.1 million
in 2016 and de minimis in 2015. NATG segment’s compensation cost related to non-qualified stock options was de minimis in
2016
and
2015
. The related future income tax benefits recognized for
2017
,
2016
and
2015
were
$0.2 million
,
$0.3 million
and
$0.1 million
, respectively.
Stock Options
The following table presents the weighted-average assumptions used to estimate the fair value of options granted in
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Expected annual dividend yield
|
2.4
|
%
|
|
—
|
%
|
|
—
|
%
|
Risk-free interest rate
|
2.26
|
%
|
|
1.64
|
%
|
|
1.73
|
%
|
Expected volatility
|
48.9
|
%
|
|
44.4
|
%
|
|
40.2
|
%
|
Expected life in years
|
4.00
|
|
|
7.10
|
|
|
6.30
|
|
The following table summarizes information concerning outstanding and exercisable options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
2017
|
|
2016
|
|
2015
|
|
Shares
|
|
Weighted
Avg. Exercise
Price
|
|
Shares
|
|
Weighted
Avg. Exercise
Price
|
|
Shares
|
|
Weighted
Avg. Exercise
Price
|
Outstanding at beginning of year
|
1,410,250
|
|
|
$
|
12.57
|
|
|
954,625
|
|
|
$
|
15.98
|
|
|
1,127,250
|
|
|
$
|
16.12
|
|
Granted
|
10,000
|
|
|
$
|
24.36
|
|
|
670,000
|
|
|
$
|
8.43
|
|
|
25,000
|
|
|
$
|
10.62
|
|
Exercised
|
(138,450
|
)
|
|
$
|
13.49
|
|
|
—
|
|
|
$
|
—
|
|
|
(4,000
|
)
|
|
$
|
6.30
|
|
Cancelled or expired
|
(280,500
|
)
|
|
$
|
16.04
|
|
|
(214,375
|
)
|
|
$
|
14.86
|
|
|
(193,625
|
)
|
|
$
|
16.29
|
|
Outstanding at end of year
|
1,001,300
|
|
|
$
|
11.58
|
|
|
1,410,250
|
|
|
$
|
12.57
|
|
|
954,625
|
|
|
$
|
15.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end
|
588,802
|
|
|
|
|
|
750,250
|
|
|
|
|
|
832,125
|
|
|
|
|
Weighted average fair value per option granted during the year
|
$
|
10.69
|
|
|
|
|
|
$
|
3.94
|
|
|
|
|
|
$
|
4.44
|
|
|
|
|
The total intrinsic value of options exercised was
$1.3 million
in
2017
and de minimis in
2016
and
2015
.
The following table summarizes information about options vested and exercisable or nonvested that are expected to vest (nonvested outstanding less expected forfeitures) at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value (in
millions)
|
$
|
5.00
|
|
to
|
$
|
10.00
|
|
|
505,738
|
|
|
$
|
8.53
|
|
|
8.34
|
|
$
|
12.5
|
|
$
|
10.01
|
|
to
|
$
|
15.00
|
|
|
306,375
|
|
|
$
|
13.00
|
|
|
2.63
|
|
6.2
|
|
$
|
15.01
|
|
to
|
$
|
20.00
|
|
|
156,600
|
|
|
$
|
18.32
|
|
|
4.47
|
|
2.3
|
|
$
|
20.01
|
|
to
|
$
|
24.36
|
|
|
10,000
|
|
|
$
|
24.36
|
|
|
9.61
|
|
0.1
|
|
$
|
5.00
|
|
to
|
$
|
24.36
|
|
|
978,713
|
|
|
$
|
11.66
|
|
|
5.94
|
|
$
|
21.1
|
|
The aggregate intrinsic value in the tables above represents the total pretax intrinsic value (the difference between the closing stock price on the last day of trading in
2017
and the exercise price) that would have been received by the option holders had all options been exercised on
December 31, 2017
. This value will change based on the fair market value of the Company’s common stock.
The following table reflects the activity for all unvested stock options during
2017
:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Grant-
Date Fair Value
|
Unvested at January 1, 2017
|
660,000
|
|
|
$
|
4.02
|
|
Granted
|
10,000
|
|
|
$
|
10.69
|
|
Vested
|
(176,252
|
)
|
|
$
|
4.84
|
|
Forfeited
|
(81,250
|
)
|
|
$
|
3.21
|
|
Unvested at December 31, 2017
|
412,498
|
|
|
$
|
4.93
|
|
At
December 31, 2017
, there was approximately
$1.0 million
of unrecognized compensation costs related to unvested stock options, which is expected to be recognized over a weighted average period of
2.4714611872
. The total fair value of stock options vested during
2017
,
2016
and
2015
was
$0.9 million
,
$0.6 million
and
$1.1 million
, respectively.
Restricted Stock and Restricted Stock Units
In August 2010, the Company granted
175,000
RSUs under the 2010 Plan to a key employee who is also a Company director. These RSUs have none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed. This RSU award was a non-performance award which vests in
ten
equal annual installments of
17,500
units beginning May 15, 2011 and each May 15, thereafter. Compensation expense related to this RSU award was approximately
$0.1 million
in
2017
and
2016
and
$0.2 million
during
2015
.
In November 2011, the Company granted
100,000
RSUs under the 2010 Plan to a key employee who is also a Company director. These RSUs have none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed. This RSU award was a non-performance award which vests in
ten
equal annual installments of
10,000
units beginning November 14, 2012 and each November 14 thereafter. Compensation expense related to this RSU award was approximately
$0.1 million
in
2017
and
2016
and
$0.2 million
, during
2015
.
In January 2012 and March 2012, the Company granted
50,000
RSUs under the 2010 Plan to each of two key employees. These RSUs have none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed. These RSU awards were non-performance awards which vest in
ten
equal annual installments of
10,000
units beginning January 3, 2013 and March 1, 2013, respectively, and each January 3 and March 1, thereafter. The termination without cause of one of these key employees during 2015 caused the accelerated vesting of the remaining
35,000
shares in accordance with the restricted stock agreement with the Company. Compensation expense related to the remaining RSU award was approximately
$0.1 million
in
2017
and
2016
and combined compensation expense was approximately
$0.4 million
in
2015
.
In July 2015, the Company granted
23,620
RSUs under the 2010 Plan to, at that time, a key employee. These RSU's had none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed. This RSU award was a non-performance award which was to vest in
four
equal annual installments of
5,905
units beginning July 6, 2015 and each July 6 thereafter. This key employee was terminated in the third quarter of 2016 and this award was forfeited. Compensation expense related to this RSU award was de minimis in
2016
.
In February 2016, the Company granted
100,000
RSUs under the 2010 Plan to certain key employees, one of whom is also a Company director. These RSUs have none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed. The RSU awards were non-performance awards which vest in
three
annual installments beginning February 1, 2017. Compensation expense related to these RSU awards was approximately
$0.2 million
in
2017
and $
0.5 million
in
2016
.
In October 2017 and November 2017, the Company granted
53,288
RSU's under the 2010 Plan to certain key employees. These RSUs have none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed. The RSU awarded in October 2017 was a non-performance award which vest in
two
installments:
1,844
units vested immediately and
1,844
units vest in April 2018. The RSU's granted in November 2017 of
49,600
units were performance awards which vest in up to
three
installments beginning December 2019. Combined compensation expense related to these performance and non-performance RSU awards was approximately
$0.1 million
during 2017.
Share-based compensation expense for restricted stock issued to Directors was
$(0.1) million
in
2017
due to the resignation of two Directors during the year and $
0.1 million
in each of
2016
and
2015
. All of the above share-based compensation expense is recognized in selling, distribution and administrative expense in
2017
,
2016
and
2015
.
8. INCOME TAXES
On December 22, 2017, the Tax Cut and Jobs Act ("TCJA") was enacted in the United States. The TCJA significantly changes U.S. corporate tax impacts by, among other things, lowering the corporate tax rate to 21% from 35% effective January 1, 2018, implementing a territorial tax system and imposing a one-time repatriation tax on previously untaxed, accumulated earnings of foreign subsidiaries. As a result of the new tax law, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 allows companies to record the tax impacts of the new law as provisional amounts during a measurement period of up to one year from the enactment date of the new law. The Company has recognized a provisional amount for the one-time repatriation tax of approximately
$5.2 million
and utilized its available net operating losses to offset this
tax. The Company expects to complete its analysis of the historical earnings and profits of all of its foreign subsidiaries and record any adjustment to the provisional amount within the one year measurement period.
Deferred tax assets and liabilities are measured using enacted tax rates expected to be in place in the year in which they are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its net deferred tax assets in the U.S. at December 31, 2017 and recorded tax expense of approximately
$10.3 million
.
On December 31, 2017 the French Parliament adopted the Finance Law for 2018. Under this law, French corporate income tax rates are reduced from
33.33%
to
25%
over a five year period.
As a result of the scheduled reductions in the French corporate income tax rate, the Company revalued its French net deferred tax assets at December 31, 2017 and recorded tax expense of approximately
$0.5 million
.
The Company will continue to analyze the impacts of the TCJA on its consolidated financial statements. Any additional impacts from the enactment of the TCJA will be recorded as they are identified during the measurement period.
The following table summarizes our U.S. and foreign components of income (loss) from continuing operations before income taxes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
47.8
|
|
|
$
|
8.6
|
|
|
$
|
(22.3
|
)
|
Foreign
|
23.0
|
|
|
17.5
|
|
|
10.6
|
|
Total
|
$
|
70.8
|
|
|
$
|
26.1
|
|
|
$
|
(11.7
|
)
|
The following table summarizes the (benefit) provision for income taxes from continuing operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
$
|
3.1
|
|
State
|
1.1
|
|
|
1.2
|
|
|
0.8
|
|
Foreign
|
10.7
|
|
|
3.8
|
|
|
4.1
|
|
Total current
|
$
|
12.5
|
|
|
$
|
5.1
|
|
|
$
|
8.0
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(12.6
|
)
|
|
$
|
—
|
|
|
$
|
0.2
|
|
State
|
(3.6
|
)
|
|
1.1
|
|
|
(0.2
|
)
|
Foreign
|
(1.6
|
)
|
|
3.0
|
|
|
4.3
|
|
Total deferred
|
$
|
(17.8
|
)
|
|
$
|
4.1
|
|
|
$
|
4.3
|
|
TOTAL
|
$
|
(5.3
|
)
|
|
$
|
9.2
|
|
|
$
|
12.3
|
|
Tax benefit (expense) from discontinued operations was
$3.7 million
,
$(0.8) million
and
$2.1 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Income taxes are accrued and paid by each foreign entity in accordance with applicable local regulations.
A reconciliation of the difference between the income tax expense and the computed income tax expense based on the Federal statutory corporate rate is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Income tax at Federal statutory rate
|
$
|
24.8
|
|
|
35.0
|
%
|
|
$
|
9.1
|
|
|
35.0
|
%
|
|
$
|
(4.1
|
)
|
|
35.0
|
%
|
Foreign taxes at rates different from the U.S. rate
|
1.1
|
|
|
1.6
|
%
|
|
0.8
|
|
|
3.1
|
%
|
|
1.4
|
|
|
(12.0
|
)%
|
State and local income taxes, net of federal tax benefit
|
5.0
|
|
|
7.1
|
%
|
|
(0.7
|
)
|
|
(2.7
|
)%
|
|
(1.4
|
)
|
|
12.0
|
%
|
Impact of state rate changes
|
0.3
|
|
|
0.5
|
%
|
|
1.4
|
|
|
5.3
|
%
|
|
0.7
|
|
|
(6.0
|
)%
|
Changes in valuation allowances
|
(21.7
|
)
|
|
(30.7
|
)%
|
|
(1.2
|
)
|
|
(4.6
|
)%
|
|
15.9
|
|
|
(135.8
|
)%
|
Reversal of valuation allowances
|
(29.4
|
)
|
|
(41.5
|
)%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
2017 TCJA, net deferred tax remeasurment and repatriation tax impacts
|
15.7
|
|
|
22.1
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Non-deductible items
|
(0.4
|
)
|
|
(0.6
|
)%
|
|
(0.3
|
)
|
|
(1.2
|
)%
|
|
—
|
|
|
—
|
%
|
Other items, net
|
(0.7
|
)
|
|
(1.0
|
)%
|
|
0.1
|
|
|
0.4
|
%
|
|
(0.2
|
)
|
|
1.7
|
%
|
Income tax
|
$
|
(5.3
|
)
|
|
(7.5
|
)%
|
|
$
|
9.2
|
|
|
35.3
|
%
|
|
$
|
12.3
|
|
|
(105.1
|
)%
|
The deferred tax assets and liabilities are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Assets:
|
|
|
|
Accrued expenses and other liabilities
|
$
|
5.9
|
|
|
$
|
12.1
|
|
Inventory
|
1.1
|
|
|
1.5
|
|
Depreciation
|
1.4
|
|
|
0.6
|
|
Intangible & other
|
8.1
|
|
|
13.2
|
|
Net operating loss and credit carryforwards
|
28.6
|
|
|
46.5
|
|
Valuation allowances
|
(18.9
|
)
|
|
(69.7
|
)
|
Total non-current deferred tax assets
|
26.2
|
|
|
4.2
|
|
Liabilities:
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
Other
|
$
|
0.1
|
|
|
$
|
0.3
|
|
Total non-current liabilities
|
$
|
0.1
|
|
|
$
|
0.3
|
|
During 2017 the Company utilized approximately
$26.4 million
of U.S. federal net operating losses to offset U.S. federal pretax income and in the fourth quarter of 2017 the Company reversed approximately
$29.4 million
of valuation allowances against its U.S. federal and certain state deferred tax assets as the Company determined that it was more likely than not that the deferred tax assets will be utilized. During the current year the Company recorded valuation allowances against deferred tax assets of approximately
$0.6 million
in jurisdictions where the Company has continued losses and the Company believes it is not more likely than not that the deferred tax assets will be utilized
.
The Company has not provided for federal income taxes applicable to the undistributed earnings of its foreign subsidiary in India of approximately
$1.4 million
as of
December 31, 2017
, since these earnings are considered indefinitely reinvested. The Company has gross foreign net operating loss carryforwards of
$33.9 million
which expire through
2032
and gross U.S. federal net operating loss carry forwards of
$35.9 million
which expire through
2036
. The Company records these benefits as assets to the extent that utilization of such assets is more likely than not; otherwise, a valuation allowance has been recorded. The Company has also provided valuation allowances for certain state deferred tax assets and net operating loss carryforwards where it is not likely they will be realized.
As of
December 31, 2017
, the Company has approximately
$1.3 million
in federal tax credit carryforwards expiring in years through
2026
and various amounts of state and foreign net operating loss carryforwards expiring through
2037
. The Company has recorded valuation allowances of approximately
$18.9 million
, including valuations against state deductibility of temporary differences including net operating losses carryforwards of
$7.4 million
, foreign tax credits of
$1.3 million
and tax effected temporary differences and net operating loss carryforwards in foreign jurisdictions of
$10.2 million
.
The Company is routinely audited by federal, state and foreign tax authorities with respect to its income taxes. The Company regularly reviews and evaluates the likelihood of audit assessments. The Company’s federal income tax returns have been audited through 2013. The Company has not signed any consent to extend the statute of limitations for any subsequent years. The Company’s significant state tax returns have been audited through 2009. The Company considers its significant tax jurisdictions in foreign locations to be France and Canada. The Company remains subject to examination in France for years after 2013 and in Canada for years after 2013.
In accordance with the guidance for accounting for uncertainty in income taxes the Company recognizes the tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit of an uncertain tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount that is greater than
50%
likely to be realized upon settlement with the tax authority. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of accruals, our effective tax rate in a given financial statement period could be affected. As of
December 31, 2017
, the Company had
no
uncertain tax positions. Interest and penalties, if any, are recorded in income tax expense. There were
no
accrued interests or penalty charges related to unrecognized tax benefits recorded in income tax expense in 2017, 2016 or 2015.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Leases
- The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilities and equipment which expire at various dates through August 2032. The Company currently leases its headquarters office/warehouse facility in New York from an entity owned by the Company’s
three
principal shareholders and senior executive officers. The Company also acquires certain computer, communications equipment, and machinery and equipment pursuant to capital lease obligations.
At
December 31, 2017
, the future minimum annual lease payments for capital and third-party operating leases were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Total
|
2018
|
$
|
0.1
|
|
|
$
|
20.9
|
|
|
$
|
21.0
|
|
2019
|
0.1
|
|
|
15.5
|
|
|
15.6
|
|
2020
|
—
|
|
|
14.2
|
|
|
14.2
|
|
2021
|
—
|
|
|
10.9
|
|
|
10.9
|
|
2022
|
—
|
|
|
9.6
|
|
|
9.6
|
|
2023-2027
|
—
|
|
|
38.3
|
|
|
38.3
|
|
2028-2032
|
—
|
|
|
17.2
|
|
|
17.2
|
|
Thereafter
|
—
|
|
|
—
|
|
|
—
|
|
Total minimum lease payments
|
0.2
|
|
|
126.6
|
|
|
126.8
|
|
Less: sublease rental income
|
—
|
|
|
6.3
|
|
|
6.3
|
|
Lease obligation net of subleases
|
0.2
|
|
|
$
|
120.3
|
|
|
$
|
120.5
|
|
Less: amount representing interest
|
—
|
|
|
|
|
|
|
|
Present value of minimum capital lease payments (including current portion of $0.2M)
|
$
|
0.2
|
|
|
|
|
|
|
|
Annual rent expense aggregated approximately
$13.5 million
,
$17.7 million
and
$26.4 million
in
2017
,
2016
and
2015
, respectively. Included in rent expense was
$0.9 million
in
2017
,
$0.9 million
in
2016
,
$1.0 million
in
2015
, to related parties. Rent expense is net of sublease income of
$0.4 million
for
2017
,
$0.4 million
for
2016
, and
$0.1 million
for
2015
, respectively. Discontinued ETG and NATG operations annual rent expense totaled approximately
$0.8 million
,
$5.2 million
and
$14.2 million
for
2017
,
2016
and
2015
, respectively.
The operating lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. The Company recognizes rent expense on a straight‑line basis over the lease period and has accrued for rent expense incurred but not paid. Deferred rent represents the difference between
actual operating lease payments due and straight‑line rent expense. The excess is recorded as a deferred rent liability in the early periods of the lease, when cash payments are generally lower than straight‑line rent expense, and are reduced in the later periods of the lease when payments begin to exceed the straight‑line expense. The Company also accounts for leasehold improvement incentives within its deferred rent liability.
Other Matters
The Company and its subsidiaries are from time to time involved in various lawsuits, claims, investigations and proceedings which may include commercial, employment, customer, personal injury, creditors rights and health and safety law matters, as well as VAT tax disputes in European jurisdictions in which it has done business, and which are handled and defended in the ordinary course of business. In addition, the Company is from time to time subjected to various assertions, claims, proceedings and requests for damages and/or indemnification concerning sales channel practices and intellectual property matters, including patent infringement suits involving technologies that are incorporated in a broad spectrum of products the Company sells or that are incorporated in the Company’s e-commerce sales channels, as well as trademark/copyright infringement claims. 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. The Company is also being audited by an entity representing
21
states seeking recovery of “unclaimed property”. The Company is complying with the unclaimed property audit and is providing requested information. The Company intends to vigorously defend these matters and believes it has strong defenses. In September 2017 the Company and certain subsidiaries comprising its former NATG "Tiger" consumer electronics business were sued in United States District Court, Northern District of California by a software publisher alleging that the NATG subsidiaries violated certain contractual sales channel restrictions resulting in claims of breach of contract and trademark/copyright infringement. The matter is at a very early stage and the Company is assessing the claims and its defenses; the Company cannot predict the outcome of this matter and believes the potential damages, if any, cannot be estimated at this time.
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 position or results of operations, the ultimate outcome is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company regularly 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. In this regard, the Company establishes accrual estimates for its various lawsuits, claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably estimated. At December 31, 2017 the Company has established accruals for certain of its various lawsuits, claims, investigations and proceedings based upon estimates of the most likely outcome in a range of loss or the minimum amounts in a range of loss if no amount within a range is a more likely estimate. The Company does not believe that at December 31, 2017 any reasonably possible losses in excess of the amounts accrued would be material to the financial statements.
10. SEGMENT AND RELATED INFORMATION
The Company operates and is internally managed in
two
reportable business segments— IPG and ETG. Smaller business operations and corporate functions are aggregated and reported as the additional segment - Corporate . On March 24, 2017, the Company sold its SARL Businesses and its continuing ETG operations now only include those in France. Prior year comparatives will include France, and the divested German operations which was sold in September 2016.
On September 2, 2016 the Company sold certain assets of its Misco Germany operations which had been reported as part of its ETG segment. As this disposition was not a strategic shift with a major impact as defined under ASU 2014-8, prior and current year results of the German operations are presented within continuing operations in the Consolidated Financial Statements. For the year ended
December 31, 2016
, net sales of Misco Germany included in continuing operations were
$33.9 million
and the net loss, including approximately
$1.7 million
of intercompany charges, was
$6.4 million
. The Company recorded special charges related to this transaction of approximately
$1.7 million
.
On
December 31, 2016
, the Company sold all of its issued and outstanding membership interests of its rebate processing business which had been reported as part of its Corporate segment. As this disposition was not a strategic shift with a major impact as defined under ASU 2014-8, prior and current year results of the rebate processing business are presented within continuing operations in the consolidated financial statements. For the year ended
December 31, 2016
, net sales of the rebate
processing business included in continuing operations were
$3.6 million
and the net loss was
$2.3 million
, including intercompany charges of
$0.1 million
. The Company recorded a gain of approximately
$3.9 million
on this sale.
The Company’s chief operating decision-maker is the Company’s Chief Executive Officer (“CEO”). The CEO, in his role as Chief Operating Decision Maker (“CODM”), evaluates segment performance based on operating income (loss) from continuing operations. The CODM reviews assets and makes significant 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. Corporate costs not identified with the disclosed segments are grouped as “Corporate and other expenses.”
Financial information relating to the Company’s continuing operations by reportable segment was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net Sales:
|
|
|
|
|
|
IPG
|
$
|
791.8
|
|
|
$
|
715.6
|
|
|
$
|
698.6
|
|
ETG
|
473.6
|
|
|
451.1
|
|
|
441.7
|
|
NATG
|
—
|
|
|
—
|
|
|
97.8
|
|
Corporate and other
|
—
|
|
|
3.6
|
|
|
5.4
|
|
Consolidated
|
$
|
1,265.4
|
|
|
$
|
1,170.3
|
|
|
$
|
1,243.5
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
|
|
|
IPG
|
$
|
3.9
|
|
|
$
|
3.6
|
|
|
$
|
3.8
|
|
ETG
|
0.5
|
|
|
0.8
|
|
|
0.5
|
|
NATG
|
—
|
|
|
—
|
|
|
0.6
|
|
Corporate and other
|
0.7
|
|
|
0.9
|
|
|
1.0
|
|
Consolidated
|
$
|
5.1
|
|
|
$
|
5.3
|
|
|
$
|
5.9
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
IPG
|
$
|
69.6
|
|
|
$
|
34.3
|
|
|
$
|
43.7
|
|
ETG
|
24.5
|
|
|
14.5
|
|
|
13.0
|
|
NATG
|
(0.6
|
)
|
|
(2.8
|
)
|
|
(38.2
|
)
|
Corporate and other expenses
|
(22.2
|
)
|
|
(18.3
|
)
|
|
(22.0
|
)
|
Consolidated
|
$
|
71.3
|
|
|
$
|
27.7
|
|
|
$
|
(3.5
|
)
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
IPG
|
$
|
220.4
|
|
|
$
|
201.5
|
|
|
$
|
203.8
|
|
ETG
|
188.0
|
|
|
165.2
|
|
|
140.5
|
|
ETG - discontinued
|
—
|
|
|
109.4
|
|
|
166.4
|
|
NATG
|
13.6
|
|
|
6.9
|
|
|
151.6
|
|
Corporate and other
|
129.4
|
|
|
83.1
|
|
|
47.8
|
|
Consolidated
|
$
|
551.4
|
|
|
$
|
566.1
|
|
|
$
|
710.1
|
|
Financial information relating to the Company’s continuing operations by geographic area was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net Sales:
|
|
|
|
|
|
United States
|
$
|
759.4
|
|
|
$
|
692.3
|
|
|
$
|
676.8
|
|
France
|
473.6
|
|
|
417.2
|
|
|
382.6
|
|
Other Europe
|
—
|
|
|
33.9
|
|
|
59.1
|
|
Other North America
|
32.4
|
|
|
26.9
|
|
|
125.0
|
|
Consolidated
|
$
|
1,265.4
|
|
|
$
|
1,170.3
|
|
|
$
|
1,243.5
|
|
|
|
|
|
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
|
United States
|
$
|
13.9
|
|
|
$
|
15.4
|
|
|
$
|
18.1
|
|
France
|
1.2
|
|
|
1.0
|
|
|
1.1
|
|
Other Europe and Asia
|
—
|
|
|
—
|
|
|
0.1
|
|
Consolidated
|
$
|
15.1
|
|
|
$
|
16.4
|
|
|
$
|
19.3
|
|
Net sales are attributed to countries based on location of selling subsidiary.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data, excluding discontinued operations, is as follows (in millions, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
2017
|
|
|
|
|
|
|
|
Net sales
|
$
|
302.5
|
|
|
$
|
313.0
|
|
|
$
|
319.3
|
|
|
$
|
330.6
|
|
Gross profit
|
$
|
81.8
|
|
|
$
|
91.5
|
|
|
$
|
89.6
|
|
|
$
|
88.5
|
|
Net income from continuing operations
|
$
|
10.3
|
|
|
$
|
19.3
|
|
|
$
|
14.1
|
|
|
$
|
32.4
|
|
Net income per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.29
|
|
|
$
|
0.52
|
|
|
$
|
0.38
|
|
|
$
|
0.87
|
|
Diluted
|
$
|
0.28
|
|
|
$
|
0.52
|
|
|
$
|
0.37
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
286.8
|
|
|
$
|
297.7
|
|
|
$
|
290.2
|
|
|
$
|
295.6
|
|
Gross profit
|
$
|
75.9
|
|
|
$
|
78.0
|
|
|
$
|
75.7
|
|
|
$
|
78.3
|
|
Net income from continuing operations
|
$
|
1.5
|
|
|
$
|
2.3
|
|
|
$
|
1.6
|
|
|
$
|
11.5
|
|
Net income per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.31
|
|
Diluted
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.31
|
|