Notes to Condensed Consolidated Financial Statements (Unaudited)
The accompanying condensed consolidated financial statements of Systemax Inc., with its subsidiaries, (the "Company") 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.
On August 31, 2018, the Company closed on the sale of its France-based IT value added reseller business to Bechtle AG. The sale was denominated on a cash-free, debt-free basis and included normalized working capital adjustments. The Company recorded a pre-tax book gain on the sale of the France business, which was reported within the discontinued operations of the Company's European Technology Products Group ("ETG") segment, of approximately $
178.2 million
. The pre-tax book gain included proceeds from the sale of approximately $
267.3 million
offset by the $
82.5 million
of net assets sold and by expenses related to the sale of approximately $
6.6 million
. These expenses included $
5.1 million
of deal transaction costs and $
1.5 million
for accelerated amortization expense of restricted stock units and stock options. Of the expenses mentioned,
$5.1 million
of deal transaction costs required or will require the use of cash. The Company is providing limited transition services to the France business for a period of up to six months, following the closing, under a transition services agreement.
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 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 reported within the Company's European Technology Products Group ("ETG") segment. The transaction closed immediately upon execution of the Purchase Agreement.
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 was 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 was included in accounts receivable, net in the Condensed Consolidated Balance Sheet at December 31, 2017.
The sale of the France business and 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 the 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 and prior year results of the France business and SARL Businesses are included in discontinued operations in the accompanying condensed consolidated financial statements.
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 2014-08, any current and prior year results of the German operations are presented within continuing operations in the condensed consolidated financial statements. With the sale of the France business in August 2018, these results are now presented in the "Corporate and other" segment.
On December 1, 2015, the Company sold its North American Technology Group ("NATG") operating businesses and began the wind-down of its remaining NATG operations. The sale of the NATG business had a major impact on the Company and therefore met the strategic shift criteria as defined under ASU 2014-08. The NATG components in operation at the time of the sale were the B2B and Ecommerce businesses and
three
retail stores. Accordingly, these components and any related results of operations will be reflected in discontinued operations. The Company has financial obligations related to leased facilities of its former NATG business of approximately $
17.5 million
. Some of these leased facilities have been sublet and others are being marketed for sublet. The Company has engaged nationally recognized real estate firms to market these facilities and to assist in establishing the reserves the Company carries for these lease obligations. As of
September 30, 2018
, the Company has a reserve of $
6.7 million
for these lease obligations. The reserves established consider the total lease obligations of $
17.5 million
, current sublet income streams and projected sublet income streams. On a quarterly basis these reserves are re-evaluated particularly related to the projected sublease income streams. In the third quarter of
2018
, the Company recorded lease reserves of approximately $
2.6 million
for these leased facilities, of which $
0.8 million
was recorded within continuing operations and $
1.8 million
within discontinued operations and for the nine months ended September 30, 2018, the Company recorded lease reserves of
$2.5 million
, of which $
0.8 million
was recorded within continuing operations and $
1.7 million
was recorded within discontinued operations. The Company expects that further adjustment may be needed in the future for the remaining facilities if current sublease assumptions do not materialize.
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, 2018
and the results of operations for the three and nine month periods ended
September 30, 2018
and
2017
, statements of comprehensive income (loss) for the three and nine month periods ended
September 30, 2018
and
2017
, cash flows for the
nine
month periods ended
September 30, 2018
and
2017
and changes in shareholders’ equity for the
nine
month period ended
September 30, 2018
. The
December 31, 2017
Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of
December 31, 2017
and for the year then ended included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
. The results for the
nine
month period ended
September 30, 2018
are not necessarily indicative of the results for the 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 September 29, 2018 and September 30, 2017. The third quarters of both
2018
and
2017
included 13 weeks and the first
nine
months of both
2018
and
2017
included 39 weeks.
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.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which 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 was required to be adopted using either a full-retrospective or a modified-retrospective approach. The Company adopted the new standard using the modified-retrospective approach beginning on January 1, 2018. There was no material impact to total revenues in our consolidated statements of income, accounting policies, business processes, internal controls or disclosures. See Note 2 of the Notes to condensed consolidated financial statements.
In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842) Targeted Improvements,
which
provides entities with an additional (and optional)
transition method, in addition to the existing transition method, the modified retrospective approach, to adopt the new leases standard by allowing entities to initially apply the new leases standard, ASU 2016-02,
Leases (Topic 842),
at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This additional transition method changes only when an entity is required to initially apply the transition requirements of the new leases standard; it does not change how those requirements apply. An entity's reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP. ASU 2016-02 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 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 which method to adopt. The Company believes the adoption of the new leasing standard will have a material impact on the consolidated financial statements as the estimated increase of right-of-use assets and lease liabilities on the consolidated balance sheets is expected to exceed
$50 million
. The ultimate impact, however, will depend on the Company's lease portfolio as of the adoption date.
In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting,
which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted after adoption of ASU 2014-09. The Company is evaluating the effect of adopting this pronouncement.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurements,
which eliminates, adds or modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted to adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company is evaluating the effect of adopting this pronouncement.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,
which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted, including adoption in any interim period. The Company is evaluating the effect of adopting this pronouncement.
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.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting,
which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. This new guidance will be applied prospectively to awards modified on or after the adoption date. This standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted this standard beginning January 1, 2018 and its adoption did not materially impact the Company's consolidated financial position or results of operations when implemented in the first quarter of 2018.
As a result of the sale of the Company's France business, the Company’s revenue generated by its operating subsidiaries is now comprised of sales of maintenance, repair and operational (“MRO”) products as well as other industrial and business supplies that are sold by the Industrial Products Group ("IPG"). Information and communications technology (“ICT”) products that were sold by ETG are now reported within discontinued operations. IPG also has revenues from related activities, such as freight and, to a lesser extent, services.
The Company recognizes revenue when a sales arrangement with a customer exists through the Company’s invoicing or a contract, the performance obligations have been identified, the transaction price is fixed or determinable and the Company has satisfied its performance obligations. The Company’s standard terms, provided on its invoices as well as on its websites, are included in communications with the customer and have standard payment terms of 30 days. Certain customers may have extended payment terms that have been pre-approved by the Company’s credit department, but generally none extend longer than 120 days.
The Company’s performance obligation is primarily a single obligation to deliver products. The Company’s performance obligations are satisfied when products are transferred to a customer in accordance with agreed upon shipping terms. Certain sales may include product and/or services that are distinct and accounted for as separate performance obligations. The Company’s performance obligations for services are satisfied when the services are rendered. The Company’s total service revenue is immaterial as it accounted for less than
1%
of total revenue for the third quarter and nine months ended September 30, 2018.
The Company’s revenue is shown as “Net sales” in the accompanying Condensed Consolidated Statements of Operations and is measured as the determined transaction price, net of any variable consideration consisting primarily of rights to return product. The Company has elected to treat shipping and handling revenues as activities to fulfill its performance obligation. Billings
for freight and shipping and handling are recorded in net sales and costs of freight and shipping and handling are recorded in cost of sales in the accompanying Condensed Consolidated Statements of Operations.
The Company records a contract liability in cases where customers pay in advance of the Company satisfying its performance obligation. The Company did not have any material unsatisfied performance obligations or liabilities as of
September 30, 2018
.
The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates is sales returns liability quarterly based upon its historical returns rates as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately
$2.3 million
at
September 30, 2018
and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
Disaggregation of Revenues
IPG serves customers in diverse geographies, which are subject to different economic and industry factors. The Company's presentation of revenue by geography most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and industry factors. The following table presents the Company's revenue by reportable segment and by geography for the three and nine months periods ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
2018
|
|
Net sales:
|
|
|
|
|
|
IPG MRO products and industrial supplies-United States
|
$
|
225.1
|
|
|
$
|
647.5
|
|
|
IPG MRO products and industrial supplies-Canada
|
10.7
|
|
|
31.7
|
|
|
Consolidated
|
$
|
235.8
|
|
|
$
|
679.2
|
|
|
|
|
3.
|
Dispositions and Special Charges
|
The Company’s discontinued operations include the results of the France business sold in August 2018, the SARL Businesses sold in March 2017 and the NATG business sold in December 2015 (See Note 1).
In the third quarter and for the nine months ended September 30, 2018, the Company recorded a pre-tax book gain on the sale of the France business, which was reported within the discontinued operations of the Company's ETG segment, of approximately
$178.2 million
. The pre-tax book gain included proceeds from the sale of approximately
$267.3 million
offset by the
$82.5 million
of net assets sold and by expenses related to the sale of approximately
$6.6 million
. These expenses
included
$5.1 million
of deal transaction costs and
$1.5 million
for accelerated amortization expense of restricted stock units and stock options. Of the expenses mentioned,
$5.1 million
of deal transaction costs required or will require the use of cash.
In the third quarter of 2018, there were a de minimis amount of legal and professional fees incurred related to the wind down of the SARL Businesses. For the nine months ended September 30, 2018, the Company recorded approximately
$0.2 million
in recoveries of escrow funds,
$0.1 million
of accelerated depreciation charges and
$0.1 million
for legal and professional fees related to the wind down of the SARL Businesses, within discontinued operations. The impact of the previously mentioned charges and recoveries related to the wind down of the SARL Businesses for the nine months ended September 30, 2018, net to zero. Of the previously mentioned charges, legal and professional fees required the use of cash. The Company expects that total additional charges related to the wind down of the SARL businesses will be less than
$1.0 million
.
In the third quarter of 2018, the Company's NATG discontinued operations received $
0.3 million
in restitution receipts from a former executive of NATG, recorded approximately $
0.1 million
in favorable accrual adjustments related to the ongoing restitution proceedings and recorded $
1.8 million
in lease reserve adjustments related to their leased facilities, within discontinued operations. For the nine months ended September 30, 2018, the Company's NATG discontinued operations received
$1.0 million
in restitution receipts from a former executive of NATG, recorded lease reserves adjustments of approximately $
1.7 million
related to their leased facilities, received
$0.1 million
in vendor settlements and recorded legal and professional fees, related to the ongoing restitution proceedings, of
$0.1 million
. The impact of the previously mentioned charges and recoveries related to the NATG discontinued operations totaled
$0.7 million
for the nine months ended September 30, 2018. The Company expects that total additional charges related to the sale of the NATG business after this quarter will be less than
$1.0 million
and that these charges will be presented in discontinued operations. Additional costs may be incurred in NATG for outstanding leased facilities if current sublease assumptions do not materialize (see Note 1). Most of these anticipated costs will require the use of cash. Amounts that are unpaid at
September 30, 2018
are recorded in Accrued expenses and other current liabilities and Other liabilities (long term) in the accompanying Condensed Consolidated Balance Sheets.
In the third quarter and for the nine months ended September 30, 2018, the Company's NATG continuing operations recorded approximately $
0.8 million
of special charges for updating our future lease cash flows expectations related to previously exited retail stores and a warehouse.
In the third quarter and for the nine months ended September 30, 2018, the Company's German continuing operations recorded approximately
$0.1 million
of special charges for updating future lease cash flows expectations related to a previously exited lease obligation.
Below is a summary of the impact on net sales, net income (loss) and net income (loss) per share from discontinued operations for the
three and nine
month periods ended
September 30, 2018
and
2017
. A reconciliation of pretax income (loss) of Discontinued operations to the Net Income (loss) of discontinued operations is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales
|
$
|
77.1
|
|
|
$
|
114.9
|
|
|
$
|
352.0
|
|
|
$
|
454.5
|
|
Cost of sales
|
66.2
|
|
|
96.5
|
|
|
295.8
|
|
|
385.4
|
|
Gross profit
|
10.9
|
|
|
18.4
|
|
|
56.2
|
|
|
69.1
|
|
Selling, distribution & administrative expenses
|
6.7
|
|
|
15.3
|
|
|
36.0
|
|
|
59.8
|
|
Pre-tax book gain on sale of France business
|
(178.2
|
)
|
|
0.0
|
|
|
(178.2
|
)
|
|
0.0
|
|
Special charges
|
1.4
|
|
|
0.3
|
|
|
0.7
|
|
|
28.6
|
|
Operating income (loss) from discontinued operations
|
181.0
|
|
|
2.8
|
|
|
197.7
|
|
|
(19.3
|
)
|
Interest and other (income) expenses, net
|
0.1
|
|
|
0.4
|
|
|
(0.2
|
)
|
|
1.0
|
|
Income (loss) from discontinued operations before income taxes
|
180.9
|
|
|
2.4
|
|
|
197.9
|
|
|
(20.3
|
)
|
Provision for income taxes
|
17.2
|
|
|
2.4
|
|
|
23.5
|
|
|
6.0
|
|
Net income (loss) from discontinued operations
|
$
|
163.7
|
|
|
$
|
0.0
|
|
|
$
|
174.4
|
|
|
$
|
(26.3
|
)
|
Net income (loss) per share – basic
|
$
|
4.40
|
|
|
$
|
0.00
|
|
|
$
|
4.69
|
|
|
$
|
(0.71
|
)
|
Net income (loss) per share – diluted
|
$
|
4.32
|
|
|
$
|
0.00
|
|
|
$
|
4.59
|
|
|
$
|
(0.70
|
)
|
Total special charges incurred, within discontinued operations, in the third quarter of 2017 totaled approximately
$0.3 million
, of which $
0.2 million
related to the discontinued operations of the SARL business related to a transitional services agreement and, within NATG discontinued operations, approximately
$0.1 million
of professional costs were incurred related to the ongoing restitution proceedings against certain former NATG executives.
Total special charges incurred, within discontinued operations, for the nine months ended September 30, 2017 totaled approximately
$28.6 million
. The combined loss on the sale of the SARL Businesses totaled
$24.4 million
, which included an $
8.2 million
loss on the sale of net assets, $
14.4 million
of translation adjustments, and
$1.0 million
of legal, professional and other costs,
$0.3 million
of severance and other personnel costs and
$0.3 million
of accelerated depreciation charges and $
0.2 million
related to a transitional services agreement. In addition, NATG discontinued operations incurred special charges of
$4.2 million
, which included approximately $
3.5 million
primarily related to updating our future lease cash flows and $
0.7 million
related to the ongoing restitution proceedings against certain former NATG executives.
Total special charges incurred, within continuing operations, in the third quarter of 2017 and nine months ended September 30, 2017 totaled $
0.1 million
and $
0.3 million
, respectively. These charges related to updating our future lease cash flows expectations related to our previously exited retail stores.
The following table details liabilities related to the sold NATG segment’s leases and other costs and liabilities that remain from the sold Misco Germany business (Corporate) as of
September 30, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate – Lease
liabilities and
other costs
|
|
NATG – Lease
liabilities and
other exit costs
|
|
Total
|
Balance January 1, 2018
|
|
$
|
1.2
|
|
|
$
|
19.0
|
|
|
$
|
20.2
|
|
Charged to expense (income)
|
|
0.1
|
|
|
2.5
|
|
|
2.6
|
|
Paid or otherwise settled
|
|
(0.2)
|
|
|
(14.8
|
)
|
|
(15.0
|
)
|
Balance September 30, 2018
|
|
$
|
1.1
|
|
|
$
|
6.7
|
|
|
$
|
7.8
|
|
.
|
|
4.
|
Net Income (Loss) 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 included in the computation of diluted earnings per share was
0.5 million
shares for the three months ended September 30, 2018 and 2017, and the weighted average number of restricted stock awards included in the computation of diluted earnings per share was
0.2 million
shares for the three months ended September 30, 2018 and 2017. The weighted average number of stock options outstanding included in the computation of diluted earnings per share was
0.6 million
and
0.2 million
shares for the nine months ended September 30, 2018 and 2017, respectively, and the weighted average number of restricted stock awards included in the computation of diluted earnings per share was
0.2 million
shares for the nine months ended September 30, 2018 and 2017. The weighted average number of stock options outstanding excluded from the computation of diluted earnings per share due to their antidilutive effect was
zero
shares for the three months ended
September 30, 2018
and 2017, and
zero
shares and
0.2 million
shares for the nine months ended September 30, 2018 and 2017, respectively.
The Company maintains a
$75 million
secured revolving credit facility 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 (“LIBOR”), 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
September 30, 2018
, eligible collateral under the credit agreement was
$75.0 million
, total availability was
$73.4 million
, total outstanding letters of credit were
$2.3 million
, total excess availability was
$71.1 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
September 30, 2018
.
Systemax Inc., through its operating subsidiaries, is a provider of industrial products in North America going to market through a system of branded e-Commerce websites and relationship marketers. Prior to August 31, 2018, the Company operated and was internally managed in
two
reportable business segments— Industrial Products Group (“IPG”) and Europe Technology Products Group (“ETG”), the Company's France operations. As previously stated, the Company sold its France-based IT value added reseller business on August 31, 2018 and, now, the Company's continuing operations are its IPG businesses in North America, which focus on industrial supplies and MRO (maintenance, repair and operations) markets the Company has served since 1949. Smaller business operations and corporate functions are aggregated and reported as the additional segment – Corporate and Other (“Corporate”).
IPG sells a wide array of maintenance, repair and operational (“MRO”) products, as well as other industrial and general business supplies, which are marketed in North America. Many of these products are manufactured by other companies. Some products are manufactured for us to our own design and marketed on a private label basis.
ETG sold information and communications technology (“ICT”) products. These products were marketed primarily in France and to a much lesser extent Belgium. Substantially all of these products were manufactured by other companies. As previously stated, ETG France business was sold on August 31, 2018. Current and prior year results of these operations, along with the associated gain on the sale, have been classified within discontinued operations.
NATG, which was previously its own reportable segment, is included below for operating losses that remain in continuing operations, primarily related to the wind down of certain leases.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
|
|
|
IPG
|
$
|
235.8
|
|
|
$
|
204.4
|
|
|
$
|
679.2
|
|
|
$
|
597.3
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
IPG
|
$
|
23.9
|
|
|
$
|
19.8
|
|
|
$
|
63.2
|
|
|
$
|
55.2
|
|
NATG – continuing operations
|
(0.8
|
)
|
|
(0.3
|
)
|
|
(0.8
|
)
|
|
(0.7
|
)
|
Corporate and other expenses
|
(4.7
|
)
|
|
(7.0
|
)
|
|
(14.6
|
)
|
|
(20.0
|
)
|
Consolidated
|
$
|
18.4
|
|
|
$
|
12.5
|
|
|
$
|
47.8
|
|
|
$
|
34.5
|
|
Financial information relating to the Company’s continuing operations by geographic area was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
225.1
|
|
|
$
|
196.3
|
|
|
$
|
647.5
|
|
|
$
|
573.5
|
|
Canada
|
10.7
|
|
|
8.1
|
|
|
31.7
|
|
|
23.8
|
|
Consolidated
|
$
|
235.8
|
|
|
$
|
204.4
|
|
|
$
|
679.2
|
|
|
$
|
597.3
|
|
Revenue is attributed to countries based on the location of the selling subsidiary.
|
|
7.
|
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
September 30, 2018
and
2017
, 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 fair value of our reporting units with respect to goodwill, non-amortizing intangibles and long-lived assets is measured in connection with the Company’s annual impairment testing. The Company performs a qualitative assessment of goodwill and non-amortizing intangibles 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.
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.
On December 22, 2017, the Tax Cut and Jobs Act ("TCJA") was enacted in the United States. The TCJA significantly changed 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 applied SAB 118 when accounting for the enactment-date effects of the TCJA for the year ended December 31, 2017 and recorded provisional amounts related to the one-time transition tax for the repatriation of foreign earnings and the revaluation of deferred tax balances. 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 amounts in the fourth quarter of 2018.
As of
September 30, 2018
, the Company has not completed its 2017 Federal income tax return or the analysis for all of the tax effects of the TCJA and has not recorded any adjustments to the amounts recorded at year-end.
The Company and its subsidiaries are from time to time involved in various lawsuits, claims, investigations and proceedings which may include commercial, employment, tax, customs and trade, customer, vendor, personal injury, creditors rights and health and safety law matters, 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) various U.S. Federal and state authorities, as well as Canadian authorities, concerning potential income tax, sales tax and/or "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
23
states seeking recovery of “unclaimed property” and has received separate demands from
21
states requesting payments of their claimed amounts. The Company is complying with the unclaimed property audit, is providing requested information and is corresponding with the states regarding possible further discussions. 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 although Systemax Inc. has been dismissed from the case, the Company is continuing to assess the remaining claims against and the defenses available to the remaining subsidiary defendants; 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
September 30, 2018
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
September 30, 2018
any reasonably possible losses in excess of the amounts accrued would be material to the financial statements.
On July 31, 2018 the Company's Board of Director's approved a share repurchase program with a repurchase authorization of up to
two million
shares of the Company's common stock. Under the share repurchase program, the Company is authorized to purchase shares from time to time through open market purchases, tender offerings or negotiated purchases, subject to market conditions and other factors. During the third quarter of 2018, the Company repurchased
232,550
common shares for approximately
$9.1 million
from certain executive officers and directors. Details of the purchase is as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Month
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid Per Share
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
|
|
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
|
|
|
|
|
|
|
|
|
|
July
|
|
232,550
|
|
$38.96
|
|
232,550
|
|
1,767,450
|