NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Systemax Inc., through its operating subsidiaries, is primarily a direct marketer of brand name and private label industrial and business equipment and supplies in North America going to market through a system of branded e-commerce websites and relationship marketers. As previously disclosed, in August 2018 the Company sold its France-based IT business. With the completion of the sale, Systemax operates and is internally managed in one reportable business segment. The Company sells a wide array of industrial and general business hard goods and supplies and to a lesser extent products that would fall into the generally recognizable category of maintenance, repair and operations ("MRO"), markets the Company has served since 1949.
As previously disclosed, in 2018 the Company sold its France-based IT value added reseller business and recorded a pre-tax book gain of approximately $178.9 million. Also, as previously disclosed in 2017 the Company sold Systemax Europe SARL and its subsidiaries (the "SARL Businesses") and recorded a pre-tax book loss on the sale of $23.7 million. The France business and SARL Businesses were reported within the Company's former European Technology Products Group ("ETG") segment.
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 prior year results of the France business and SARL Businesses are included in discontinued operations in the accompanying consolidated financial statements.
Net sales of the France business, included within discontinued operations, totaled $352.0 million and $473.6 million in 2018 and 2017, respectively. Net gain from the sale of the France business and eight months of operating activity, included within discontinued operations, totaled $175.8 million in 2018, and net income from the France business, included in discontinued operations, was $10.6 million in 2017.
Net sales of the SARL Businesses, included within discontinued operations, totaled $117.0 million in 2017 and net income included in discontinued operations totaled $0.2 million in 2018, and net loss of $28.2 million in 2017.
Also included in discontinued operations is the Company's former North American Technology Products Group ("NATG"), which was sold in December 2015 and has been winding down its operations since then. The sale of the NATG business had a major impact on the Company and therefore certain components met the strategic shift criteria as defined under ASU 2014-08. Accordingly, these components and any related results of operations are reflected in discontinued operations. For the years ended December 31, 2019, 2018 and 2017, net loss from the discontinued NATG business totaled $1.5 million, $0.8 million and $7.5 million, respectively.
During 2018 the Company's recorded a net gain of $3.1 million related to the settlement of previously disclosed state audits offset by an impairment charge resulting from the decision to impair the trade and domain names of C&H Distributors, which was recorded within selling, distribution and administrative expenses.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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.
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. For clarity of presentation herein, all fiscal quarters are referred to as if they ended on the traditional calendar month. The full year of 2019, 2018 and 2017 included 52 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, product returns liabilities, inventory reserves, allowances for cooperative advertising, the carrying value of long‑lived assets (including goodwill and intangible assets), the provision for income taxes and related deferred tax accounts, certain accrued liabilities, revenue recognition, contingencies, sublease 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 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.
Leases — On January 1, 2019, the Company adopted ASU 2016-02, "Leases" (Topic 842). This ASU requires all companies to record their operating and finance leases that meet certain criteria under the standard as Right of Use ("ROU") assets with the corresponding lease obligations recorded as short term and long term liabilities. The Company adopted this standard utilizing the modified retrospective transition method that allows for a cumulative-effect adjustment in the period of adoption of the new leasing standard without restating prior periods. There was no cumulative-effect adjustment made to opening retained earnings upon adoption of this ASU. Additionally, the Company elected to adopt the available package of practical expedients under the transition guidance.
The Company has operating and finance leases for office and warehouse facilities, headquarters and call centers and certain computer, communications equipment and machinery and equipment which provide the right to use the underlying assets in exchange for agreed upon lease payments, determined by the payment schedule contained in each lease. The Company determines if an arrangement is an operating or finance lease at the inception of the lease. The Company has elected not to apply recognition requirements to leases with terms of one year or less. All other leases are recorded on the balance sheet, with ROU assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease. The Company’s lease portfolio consists primarily of operating leases which expire at various dates through 2032. See Note 3 to the consolidated financial statements.
Property, Plant and Equipment — Property, plant and equipment is stated at cost. Furniture, fixtures and equipment are depreciated using the straight-line or accelerated method over their estimated useful lives ranging from three to fifteen years. Leasehold improvements are amortized over the shorter of the useful lives or the term of the respective leases. In 2019 the Company reclassified approximately $4.2 million of its warehouse racking equipment, which had previously been reported under leasehold improvements, to other equipment.
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.
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 operates in one reporting unit and in the fourth quarter of each year performs a quantitative assessment of its goodwill by comparing the Company's fair market value, or market capitalization, to the carrying value of the Company, including goodwill, to determine if impairment exists. Any excess of the carrying amount over fair value would be charged to impairment expense.
On January 1, 2019 the Company reclassified approximately $0.3 million of the opening balance of definite-lived intangible assets to operating lease right-of-use assets.
In the fourth quarter of 2018, the Company determined that it would no longer be using the trademark or domain name of C&H Distributors and wrote off the unamortized balance of that definite lived intangible asset of approximately $1.9 million, which was recorded within selling, distribution and administrative expenses.
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.
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.
Revenue Recognition and Accounts Receivable — In May 2014, the Financial Accounting Standards Board (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 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 on January 1, 2018. There was no material impact to total revenues in our consolidated statements of operations, accounting policies, business processes or internal controls as a result of this adoption. See Note 4 to the consolidated financial statements.
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 $69.8 million, $70.4 million and $67.0 million during 2019, 2018 and 2017, respectively, and are included in the accompanying consolidated statements of operations within continuing and discontinued operations. Of the
previously mentioned amounts, the Company's discontinued operations net advertising expenses totaled $0 million, $1.1 million and $2.5 million during 2019, 2018 and 2017, respectively.
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 $2.2 million, $3.3 million and $5.8 million during 2019, 2018 and 2017, respectively. Of the previously mentioned amounts, the Company's discontinued operations amount of vendor consideration was $0.0 million, $2.0 million and $4.7 million during 2019, 2018 and 2017, respectively.
Stock Based Compensation — 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 adopted this standard beginning January 1, 2019 and its adoption did not materially impact the Company's consolidated financial position or results of operations.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting, which clarified when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. In the first quarter of 2019, the Company repriced approximately 0.6 million of outstanding stock options and recorded approximately $0.6 million of related compensation expense. For the year ended December 31, 2019, total related compensation expense was $0.7 million. Due to the sale of the France business in August 2018, the Company accelerated the vesting of certain stock options and recorded additional compensation expense of approximately $0.3 million, which was recorded within discontinued operations.
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 calculated its dividend yield by dividing the annualized regular quarterly dividend by the current stock price at grant date. 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.
The fair value of the restricted stock and performance restricted stock is the closing stock price on the NYSE of the Company's common stock on the date of grant or the closing stock price of the Company's common stock on the last business day prior to the grant date. Upon delivery, a portion of the RSU award may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSU's/PRSU's will be settled in shares of the Company's common stock after the vesting period and on the prescribed delivery date. These RSUs/PRSU's have none of the rights as other shares of common stock, other than rights to cash dividends, until common stock is distributed.
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 undistributed and distributed net income from continuing operations available to common shareholders-basic was $49.7 million, $49.8 million and $65.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The undistributed and distributed net income from continuing operations available to common shareholders-diluted was $49.7 million, $49.5 million and $65.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The undistributed and distributed net (loss) income from discontinued operations available to common shareholders-basic was $(1.5) million, $174.4 million and $(25.1) million for the years ended December 31, 2019, 2018 and 2017, respectively. The undistributed and distributed net (loss) income from discontinued operations available to common shareholders-diluted was $(1.5) million, $175.2 million and $(25.1)
million for the years ended December 31, 2019, 2018 and 2017, respectively. The weighted average number of stock options outstanding included in the computation of diluted earnings per share was 0.2 million and the weighted average number of restricted stock awards included in the computation of diluted earnings per share was 0.0 million for the year ended December 31, 2019. The weighted average number of stock options outstanding included in the computation of diluted earnings per share was 0.5 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, 2018. 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. The weighted average number of stock options and/or restricted stock awards outstanding excluded from the computation of diluted income per share was 0.4 million shares, de minimis shares, and 0.04 million shares for the years ended December 31, 2019, 2018 and 2017, 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 $1.1 million, $1.2 million and $0.7 million in 2019, 2018 and 2017, respectively.
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, 2019 and 2018, 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 6.2% in 2019, 5.7% in 2018 and 4.7% in 2017.
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 its products and components directly from both large and small manufacturers as well as large wholesale distributors. No supplier accounted for 10% or more of our product purchases for continuing operations in 2019, 2018 and 2017. Most private label products are manufactured by third parties to our specifications.
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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles and the methodology for calculating income tax rates in an interim period, among other updates. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company will adopt this ASU effective January 1, 2021. The Company is evaluating the effect of the adoption of 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 does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations.
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 does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations.
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 early adopted this standard on January 1, 2019. There was no material impact on the Company's financial position or results of operations upon adoption of this standard.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as modified by subsequently issued ASU's 2018-19, 2019-04, 2019-05 and 2019-11. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. 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 will adopt this ASU effective January 1, 2020. The Company's trade accounts receivables are subject to this standard. The Company has completed its evaluation of the impact of adopting this standard and has concluded that it will not have a material impact on the Company's financial position or results of operations.
The Company has operating and finance leases for office and warehouse facilities, headquarters, call centers, machinery and certain computer and communications equipment which provide the right to use the underlying assets in exchange for agreed upon lease payments, determined by the payment schedule contained in each lease. The Company’s lease portfolio consists primarily of operating leases which expire at various dates through 2032.
In the second quarter of 2019, the Company entered into a lease agreement for a portion of a distribution facility located in Texas for approximately 490,000 square feet and a lease term of 125 months. The total lease obligation is approximately $19.8 million. The Company is separately charged for real estate taxes, insurance and common area maintenance. The Company recorded an ROU asset and related lease liability of approximately $14.7 million during the second quarter of 2019.
In the third quarter and fourth quarters of 2019, the Company renewed, extended or expanded four of its leased facilities for an additional obligation of $2.0 million and recorded ROU assets and related lease liabilities of approximately $1.8 million. Also, in the third quarter of 2019, the Company's former German branch recorded approximately $0.8 million of gain related to a buyout of its outstanding lease obligation.
The Company's operating lease costs, included in continuing operations, was $12.0 million, $11.4 million and $11.2 million, for the years ended December 31, 2019, 2018 and 2017, respectively.
The following tables summarizes the Company's ROU weighted average remaining lease term and discount rate for continuing and discontinued operations as of December 31, 2019.
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Year Ended December 31,
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2019
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Weighted Average Remaining Lease Term
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Operating leases
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8.4 years
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Weighted Average Discount Rate
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Operating leases
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5.7
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%
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Maturities of lease liabilities were as follows (in millions):
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Year Ending December 31
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Operating Leases
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2020
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$
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13.8
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2021
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10.9
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2022
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10.0
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2023
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9.9
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2024
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9.7
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Thereafter
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35.5
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Total lease payments
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89.8
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Less: interest
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(21.2
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)
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Total present value of lease liabilities
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$
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68.6
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The Company currently leases its headquarters office facility from an entity owned by the Company’s principal shareholders. Total expense recorded was $1.0 million in 2019 and 2018 and $0.9 million in 2017, to related parties.
The ROU assets and corresponding lease liabilities are recorded based upon the net present value of the remaining lease payments, discounted using interest rates determined by utilizing such factors as the Company's current credit facility terms, the length of the remaining term of the lease, the Company's expected debt credit rating and comparable company term loan yields. Adoption of the new standard resulted in the Company recording ROU assets and lease liabilities of approximately $54 million and $64 million, respectively, at January 1, 2019. Certain leases may include options to extend the lease, however the Company is not including any impact of such options in the valuation of its ROU assets or liabilities as they are not currently considered probable of being extended. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. The Company has sublease agreements for certain unused facilities. For the year ended December 31, 2019, the Company recorded $1.9 million of sublease income in continuing and discontinued operations. Future rent streams related to sublease agreements of $1.7 million to be collected in less than one year and $1.9 million to be collected between one and three years.
The Company’s revenue generated by its operating subsidiaries is comprised of sales of a wide array of industrial and general business hard goods and supplies and to a lesser extent products that would fall into the generally recognizable category of MRO products. The Company also has revenues from related activities, such as freight and, to a lesser extent, services.
The Company recognizes revenue from contracts with its customers utilizing the following steps:
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•
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Identifying the contract with the customer
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•
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Identifying the performance obligations under the contract
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•
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Determine the transaction price
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•
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Allocate transaction price to performance obligations, if necessary
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•
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Recognizing revenue as performance obligations are satisfied
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The Company's invoice, and the terms and conditions of sale contained therein, constitutes the evidence of an arrangement and is the contract with the customer. The performance obligations are generally delivery of the products listed on the invoice and the transaction price for each product is listed. Allocation of transaction price is generally not needed. Performance obligations are satisfied, and revenue is recognized upon the shipment of goods from one of the Company’s distribution centers or drop shippers for most contracts or in certain cases revenue will be recognized upon delivery and acceptance by the customer. Customer acceptance occurs when the customer accepts the shipment. 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.
Provisions for sales returns and allowances are estimated based on historical data and are recorded concurrently with the recognition of revenue. These provisions are reviewed and adjusted periodically by the Company. Revenue is presented net of sales taxes collected from customers and remitted to government authorities. Revenue is reduced for any early payment discounts or volume incentive rebates offered to customers.
The Company’s revenue is shown as “Net sales” in the accompanying 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 Consolidated Statements of Operations.
The Company will record 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 December 31, 2019.
The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates its sales returns liability quarterly based upon its historical return rates as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately $1.9 million and $1.8 million at December 31, 2019 and 2018, respectively, and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.
Disaggregation of Revenues
The Company 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, from continuing operations, by geography for the year ended December 31, 2019, 2018 and 2017 (in millions):
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Year Ended December 31,
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2019
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2018
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2017
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Net sales:
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|
|
|
|
|
|
United States
|
|
$
|
901.3
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|
|
$
|
854.6
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|
|
$
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759.4
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Canada
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|
45.6
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|
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42.3
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|
|
32.4
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Consolidated
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$
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946.9
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|
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$
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896.9
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|
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$
|
791.8
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5. DISPOSITIONS AND SPECIAL GAINS AND 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).
On August 31, 2018, the Company closed on the sale of its France-based IT value added reseller business. The Company recorded a pre-tax book gain on the sale of the France business, of approximately $178.9 million for the year ended December 31, 2018.
The Company incurred special charges within discontinued operations of $0.0 million, $0.6 million and $30.6 million for the years ended 2019, 2018 and 2017, respectively.
For the year ended December 31, 2018, the Company recorded special charges of approximately $0.6 million in discontinued operations. The Company recorded lease reserve adjustments related to its previously exited leased facilities for the discontinued NATG business of approximately $1.7 million and additional legal and professional fees of $0.1 million for ongoing restitution proceedings. Offsetting these expenses were approximately $1.0 million in restitution receipts and $0.2 million in vendor settlement receipts from the discontinued NATG business.
For the year ended December 31, 2017, the Company recorded special charges of $30.6 million in discontinued operations. A pre-tax book loss on the sale of the SARL Businesses of approximately $23.7 million was recorded and approximately $6.9 million of additional charges were recorded from the discontinued NATG business, of which $6.2 million primarily related to updating our future lease cash flows and $0.7 million related to ongoing restitution proceedings.
The Company has completed the wind-down activities related to the sale of the France business, but may incur additional charges related to statutory tax and other indemnities given at closing. The Company has substantially completed the wind-down activities related to the NATG business, although certain NATG activities related to sublet facilities, settling accounts payable and other contingent liabilities continue. The Company expects that additional NATG wind-down costs incurred during 2020 or later may aggregate up to $1.0 million, which will be presented in discontinued operations.
Below is a summary of the impact on net sales, net income (loss) and net income (loss) per share from discontinued operations for the years ended December 31, 2019, 2018 and 2017.
Results of discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
$
|
0.0
|
|
|
$
|
352.0
|
|
|
$
|
590.6
|
|
Cost of sales
|
0.0
|
|
|
295.8
|
|
|
498.3
|
|
Gross profit
|
0.0
|
|
|
56.2
|
|
|
92.3
|
|
Selling, distribution and administrative expenses
|
2.1
|
|
|
36.5
|
|
|
74.7
|
|
Pre-tax book gain on sale of France business
|
0.0
|
|
|
(178.9
|
)
|
|
0.0
|
|
Special charges, net
|
0.0
|
|
|
0.6
|
|
|
30.6
|
|
Operating (loss) income from discontinued operations
|
(2.1
|
)
|
|
198.0
|
|
|
(13.0
|
)
|
Foreign currency exchange (income) loss
|
0.0
|
|
|
(0.2
|
)
|
|
0.8
|
|
Interest and other expense (income), net
|
0.0
|
|
|
0.0
|
|
|
0.3
|
|
Income (loss) of discontinued operations before income taxes
|
(2.1
|
)
|
|
198.2
|
|
|
(14.1
|
)
|
(Benefit) provision for income tax
|
(0.6
|
)
|
|
23.0
|
|
|
11.0
|
|
Net income (loss) from discontinued operations
|
$
|
(1.5
|
)
|
|
$
|
175.2
|
|
|
$
|
(25.1
|
)
|
Net income (loss) per share - basic
|
$
|
(0.04
|
)
|
|
$
|
4.69
|
|
|
$
|
(0.68
|
)
|
Net income (loss) per share - diluted
|
$
|
(0.04
|
)
|
|
$
|
4.62
|
|
|
$
|
(0.67
|
)
|
In the third quarter of 2019, within continuing operations, the Company's former German branch recorded special gains of approximately $0.8 million related to a buyout for its outstanding lease obligation.
The Company recorded special charges of $0.8 million in 2018 and 0.3 million in 2017, within continuing operations, related to updating lease reserves adjustments related to its outstanding NATG business lease obligations.
The following table details liabilities related to the exit costs of the sold businesses that remain for 2019 (in millions):
|
|
|
|
|
|
|
|
Accrued exit costs
|
Balance January 1, 2019
|
|
$
|
2.8
|
|
Charged to expense
|
|
0.7
|
|
Paid or otherwise settled
|
|
(0.7
|
)
|
Balance December 31, 2019
|
|
$
|
2.8
|
|
On January 1, 2019, the Company reclassified approximately $4.3 million of the opening balance of the exit cost liability related to lease obligations to operating lease right-of-use assets.
The following table details liabilities related to the exit costs of the sold businesses for 2018 (in millions):
|
|
|
|
|
|
|
|
Accrued exit costs
|
Balance, January 1, 2018
|
|
$
|
20.2
|
|
Charged to expense
|
|
2.5
|
|
Paid or otherwise settled
|
|
(15.6
|
)
|
Balance, December 31, 2018
|
|
$
|
7.1
|
|
6. 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,
|
|
2019
|
|
2018
|
Balance, December 31
|
$
|
5.5
|
|
|
$
|
5.5
|
|
The following table provides information related to the carrying value of indefinite lived intangibles as of December 31, 2019 and 2018, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Balance, December 31
|
$
|
0.7
|
|
|
$
|
0.7
|
|
Definite-lived intangible assets:
On January 1, 2019 the Company reclassified approximately $0.3 million of the opening balance of definite-lived intangible assets to operating lease right-of-use assets.
The following table summarizes information related to definite-lived intangible assets as of December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Amortization
Period (Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
|
Weighted avg
useful life
|
Client lists
|
5-10 yrs
|
|
$
|
2.0
|
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
|
5.1
|
Domain name
|
5 yrs
|
|
3.4
|
|
|
3.4
|
|
|
0.0
|
|
|
0.0
|
Total
|
|
|
$
|
5.4
|
|
|
$
|
4.4
|
|
|
$
|
1.0
|
|
|
5.1
|
The following table summarizes information related to definite-lived intangible assets as of December 31, 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortization
Period (Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
|
Weighted avg
useful life
|
Client lists
|
5-10 yrs
|
|
$
|
2.0
|
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
|
6.1
|
Leases
|
3-6 yrs
|
|
0.8
|
|
|
0.5
|
|
|
0.3
|
|
|
1.9
|
Domain name
|
5 yrs
|
|
3.4
|
|
|
3.4
|
|
|
0.0
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
6.2
|
|
|
$
|
4.7
|
|
|
$
|
1.5
|
|
|
5.2
|
The aggregate amortization expense for these intangibles was approximately $0.2 million in 2019. The estimated amortization for future years ending December 31 is as follows (in millions):
|
|
|
|
|
2020
|
$
|
0.2
|
|
2021
|
0.2
|
|
2022
|
0.2
|
|
2023
|
0.2
|
|
2024 and after
|
$
|
0.2
|
|
Total
|
$
|
1.0
|
|
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Land improvements
|
$
|
0.8
|
|
|
$
|
0.8
|
|
Furniture and fixtures, office, computer and other equipment and software
|
44.3
|
|
|
42.8
|
|
Leasehold improvements
|
13.1
|
|
|
11.7
|
|
|
58.2
|
|
|
55.3
|
|
Less accumulated depreciation and amortization
|
40.4
|
|
|
40.4
|
|
Property, plant and equipment, net
|
$
|
17.8
|
|
|
$
|
14.9
|
|
Depreciation charged to continuing operations for property, plant and equipment including capital leases in 2019, 2018, and 2017 was $3.9 million, $3.5 million and $3.6 million, respectively. ETG and NATG discontinued operations total depreciation expense was $0 million, $0.3 million and $0.7 million, for 2019, 2018 and 2017, respectively.
8. CREDIT FACILITIES
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 December 31, 2019, eligible collateral under the credit agreement was $75.0 million, total availability was $72.5 million, total outstanding letters of credit were $1.3 million, total excess availability was $71.2 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, 2019.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Payroll and employee benefits
|
$
|
11.3
|
|
|
$
|
12.0
|
|
Advertising
|
4.9
|
|
|
5.5
|
|
Sales and VAT tax payable
|
2.6
|
|
|
2.8
|
|
Freight
|
6.8
|
|
|
4.9
|
|
Reorganization costs
|
0.4
|
|
|
2.0
|
|
Product returns liability
|
1.9
|
|
|
1.8
|
|
Other
|
6.1
|
|
|
6.0
|
|
|
$
|
34.0
|
|
|
$
|
35.0
|
|
10. SHAREHOLDERS’ EQUITY
Stock-Based Compensation Plans
The Company currently has one equity compensation plan which reserves shares of common stock for issuance to key employees, directors, consultants and advisors to the Company. The following is a description of this plan:
The 2010 Long-term Stock Incentive Plan (“2010 Plan”) - This plan was adopted in April 2010 and allows the Company to issue incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards and other stock based awards authorized by the Compensation Committee of the Board of Directors. Options and awards issued under this plan expire ten years after the options and awards are granted. 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 764,784 options and 172,595 restricted stock units were outstanding under this plan as of December 31, 2019.
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 continuing operations (selling, distribution and administrative expenses) for 2019, 2018 and 2017 was $3.3 million, $0.3 million, and $1.1 million respectively. In the first quarter of 2019, the Company repriced approximately 0.6 million shares of outstanding stock options and recorded approximately $0.6 million of related compensation expense and for the year ended December 31, 2019, the Company recorded $0.7 million of related compensation expense. France discontinued operations compensation cost related to non-qualified stock options was $0.4 million in 2018, primarily related to the acceleration of stock options due to the sale of the France business of approximately $0.3 million and de minimis compensation cost in 2017. The related future income tax benefits recognized for 2019, 2018 and 2017 were $0.7 million, $0.1 million and $0.2 million, respectively.
Stock Options
The following table presents the weighted-average assumptions used to estimate the fair value of options granted in 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Expected annual dividend yield
|
1.9
|
%
|
|
1.4
|
%
|
|
2.4
|
%
|
Risk-free interest rate
|
2.65
|
%
|
|
2.94
|
%
|
|
2.26
|
%
|
Expected volatility
|
50.4
|
%
|
|
48.0
|
%
|
|
48.9
|
%
|
Expected life in years
|
5.0
|
|
|
5.2
|
|
|
4.0
|
|
The following table summarizes information concerning outstanding and exercisable options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
2019
|
|
2018
|
|
2017
|
|
Shares
|
|
Weighted
Avg. Exercise
Price
|
|
Shares
|
|
Weighted
Avg. Exercise
Price
|
|
Shares
|
|
Weighted
Avg. Exercise
Price
|
Outstanding at beginning of year
|
596,148
|
|
|
$
|
11.64
|
|
|
1,001,300
|
|
|
$
|
11.58
|
|
|
1,410,250
|
|
|
$
|
12.57
|
|
Granted
|
1,038,536
|
|
|
$
|
15.76
|
|
|
17,550
|
|
|
$
|
31.66
|
|
|
10,000
|
|
|
$
|
24.36
|
|
Exercised
|
(224,750
|
)
|
|
$
|
8.92
|
|
|
(400,203
|
)
|
|
$
|
12.18
|
|
|
(138,450
|
)
|
|
$
|
13.49
|
|
Canceled or expired
|
(645,150
|
)
|
|
$
|
12.50
|
|
|
(22,499
|
)
|
|
$
|
15.24
|
|
|
(280,500
|
)
|
|
$
|
16.04
|
|
Outstanding at end of year
|
764,784
|
|
|
$
|
17.31
|
|
|
596,148
|
|
|
$
|
11.64
|
|
|
1,001,300
|
|
|
$
|
11.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end
|
227,598
|
|
|
|
|
|
341,515
|
|
|
|
|
|
588,802
|
|
|
|
|
Weighted average fair value per option granted during the year
|
$
|
9.16
|
|
|
|
|
|
$
|
12.87
|
|
|
|
|
|
$
|
10.69
|
|
|
|
|
The total intrinsic value of options exercised was $3.4 million in 2019 and $9.5 million in 2018 and $1.3 million in 2017.
The following table summarizes information about options vested and exercisable or non-vested that are expected to vest (non-vested outstanding less expected forfeitures) at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Options outstanding and
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value (in
millions)
|
$
|
5.00
|
|
to
|
$
|
10.00
|
|
|
232,000
|
|
|
$
|
6.23
|
|
|
6.28
|
|
$
|
4.5
|
|
$
|
10.01
|
|
to
|
$
|
15.00
|
|
|
10,000
|
|
|
$
|
10.39
|
|
|
0.51
|
|
0.1
|
|
$
|
15.01
|
|
to
|
$
|
20.00
|
|
|
92,285
|
|
|
$
|
16.93
|
|
|
3.05
|
|
0.8
|
|
$
|
20.01
|
|
to
|
$
|
25.00
|
|
|
430,499
|
|
|
$
|
23.52
|
|
|
9.07
|
|
0.8
|
|
$
|
5.00
|
|
to
|
$
|
25.00
|
|
|
764,784
|
|
|
$
|
17.31
|
|
|
7.39
|
|
$
|
6.2
|
|
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 2019 and the exercise price) that would have been received by the option holders had all options been exercised on December 31, 2019. 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 2019:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Grant-
Date Fair Value
|
Unvested at January 1, 2019
|
254,633
|
|
|
$
|
4.73
|
|
Granted
|
1,038,536
|
|
|
$
|
9.16
|
|
Vested
|
(452,348
|
)
|
|
$
|
8.80
|
|
Forfeited
|
(303,635
|
)
|
|
$
|
5.62
|
|
Unvested at December 31, 2019
|
537,186
|
|
|
$
|
9.38
|
|
At December 31, 2019, there was approximately $2.5 million of unrecognized compensation costs related to unvested stock options, which is expected to be recognized over a weighted average period of 3.7 years. The total fair value of stock options vested during 2019, 2018 and 2017 was $4.0 million, $1.2 million and $0.9 million, respectively.
Restricted Stock and Restricted Stock Units
The following table reflects the activity for restricted stock awards, excluding the restricted stock issued to Directors (in millions, except shares data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Granted
|
|
Shares Granted
|
|
Outstanding at December 31, 2019
|
|
Rights to Cash Dividend
|
|
Other Participation Rights
|
|
Performance Award
|
|
Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
2010
|
|
175,000
|
|
|
—
|
|
|
Yes
|
|
None
|
|
No
|
|
$
|
0.0
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
2011
|
|
100,000
|
|
|
—
|
|
|
Yes
|
|
None
|
|
No
|
|
0.0
|
|
|
0.2
|
|
|
0.1
|
|
2012
|
|
50,000
|
|
|
15,000
|
|
|
Yes
|
|
None
|
|
No
|
|
0 (1)
|
|
|
0 (1)
|
|
|
0.1
|
|
2016
|
|
100,000
|
|
|
—
|
|
|
Yes
|
|
None
|
|
No
|
|
0 (1)
|
|
|
0.1
|
|
|
0.2
|
|
2017
|
|
53,288
|
|
|
—
|
|
|
Yes
|
|
None
|
|
No
|
|
0.0
|
|
|
0 (1)
|
|
|
0.1
|
|
2017
|
|
49,600
|
|
|
—
|
|
|
Yes
|
|
None
|
|
Yes
|
|
0.0
|
|
|
1.5 (2)
|
|
|
0 (1)
|
|
2018
|
|
5,117
|
|
|
—
|
|
|
Yes
|
|
None
|
|
No
|
|
0.0
|
|
|
0 (1)
|
|
|
0.0
|
|
2019
|
|
30,251
|
|
|
30,251
|
|
|
Yes
|
|
None
|
|
No
|
|
0.3
|
|
|
0.0
|
|
|
0.0
|
|
2019
|
|
149,412
|
|
|
114,513
|
|
|
Yes
|
|
None
|
|
Yes
|
|
1.3
|
|
|
0.0
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.6
|
|
|
$
|
1.9
|
|
|
$
|
0.6
|
|
|
|
|
|
1
|
|
less than $0.1 million of expense recorded
|
2
|
|
As a result of the sale of the France business in August 2018 and terms of the performance award, compensation expense of $1.5 million and less than $0.1 million was recorded in discontinued operations for the year ended 2018 and 2017, respectively.
|
Share-based compensation expense for restricted stock issued to Directors was $0.2 million in 2019, $0.1 million in 2018 and $0.1 million benefit in 2017 due to the resignation of two Directors during the year.
At December 31, 2019, there was approximately $2.5 million of unrecognized compensation cost related to the unvested RSU's, which is expected to be recognized over a weighted average period of 3.05 years.
In 2018, due to the sale of the France business, $1.5 million of compensation expense related to the performance RSU's above were reported in discontinued operations and less than $0.1 million was recorded during 2017.
Compensation expense related to RSU and performance RSU's reported within continuing operations was approximately $1.8 million, $0.5 million and $0.5 million for the years ended December 31, 2019, 218 and 2017, respectively. Share-based compensation expense related to restricted stock units and performance RSU's is recognized within selling, distribution and administrative expenses.
The following table reflects the activity for all unvested restricted stock during 2019:
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Grant-
Date Fair Value
|
Unvested at January 1, 2019
|
132.484
|
|
|
14.31
|
|
Granted
|
188.717
|
|
|
23.39
|
|
Vested
|
(133.725
|
)
|
|
14.39
|
|
Forfeited
|
(14.881
|
)
|
|
26.45
|
|
Unvested at December 31, 2019
|
172.595
|
|
|
23.14
|
|
Employee Stock Purchase Plan
The 2018 Employee Stock Purchase Plan - This plan was approved by the Company's stockholders in December 2018 and a reserve of 500,000 shares of common stock has been established under this plan. The Company adopted this plan, the terms of which allow for eligible employees (as defined in the 2018 Employee Stock Purchase Plan) to participate in the purchase, during each six month purchase period, up to a maximum of 10,000 shares of the Company's common stock at a purchase price equal to 85% of the closing price at either the start date or the end date of the stock purchase period, whichever is lower. Compensation expense related to this plan of approximately $0.3 million and $0.1 million, respectively, is recognized in selling, distribution and administrative expenses during 2019 and 2018. As of December 31, 2019, approximately 455,771 shares remain reserved for issuance under this plan. Employees purchased approximately 44,229 shares of common stock during fiscal year 2019 at an average per share price of $17.61.
Stock Repurchase
In 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. In 2018, the Company repurchased 232,550 common shares for approximately $9.1 million. Details of the purchase was as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Month/Year
|
|
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 2018
|
|
232,550
|
|
38.96
|
|
232,550
|
|
1,767,450
|
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,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
65.8
|
|
|
$
|
62.8
|
|
|
$
|
45.6
|
|
Foreign
|
0.3
|
|
|
0.1
|
|
|
(0.1
|
)
|
Total
|
$
|
66.1
|
|
|
$
|
62.9
|
|
|
$
|
45.5
|
|
The following table summarizes the (benefit) provision for income taxes from continuing operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
12.5
|
|
|
$
|
2.6
|
|
|
$
|
0.7
|
|
State
|
2.1
|
|
|
2.4
|
|
|
1.1
|
|
Foreign
|
0.1
|
|
|
0.0
|
|
|
0.1
|
|
Total current
|
$
|
14.7
|
|
|
$
|
5.0
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
1.1
|
|
|
$
|
7.7
|
|
|
$
|
(18.3
|
)
|
State
|
0.3
|
|
|
0.6
|
|
|
(3.6
|
)
|
Foreign
|
0.0
|
|
|
0.1
|
|
|
0.0
|
|
Total deferred
|
$
|
1.4
|
|
|
$
|
8.4
|
|
|
$
|
(21.9
|
)
|
TOTAL
|
$
|
16.1
|
|
|
$
|
13.4
|
|
|
$
|
(20.0
|
)
|
Tax expense from discontinued operations was $(0.6) million, $23.0 million and $11.0 million for the years ended December 31, 2019, 2018 and 2017, 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,
|
|
2019
|
|
2018
|
|
2017
|
Income tax at Federal statutory rate
|
$
|
13.9
|
|
|
21.0
|
%
|
|
$
|
13.2
|
|
|
21.0
|
%
|
|
$
|
15.9
|
|
|
35.0
|
%
|
State and local income taxes, net of federal tax benefit
|
2.4
|
|
|
3.7
|
%
|
|
2.6
|
|
|
4.1
|
%
|
|
5.0
|
|
|
11.0
|
%
|
Impact of state rate changes
|
0.1
|
|
|
0.1
|
%
|
|
(0.1
|
)
|
|
(0.2
|
)%
|
|
0.3
|
|
|
0.7
|
%
|
Changes in valuation allowances
|
0.0
|
|
|
—
|
%
|
|
0.0
|
|
|
—
|
%
|
|
(21.7
|
)
|
|
(47.7
|
)%
|
Reversal of valuation allowances
|
(0.3
|
)
|
|
(0.4
|
)%
|
|
(0.2
|
)
|
|
(0.3
|
)%
|
|
(29.4
|
)
|
|
(64.6
|
)%
|
2017 TCJA, net deferred tax remeasurement and repatriation tax impacts
|
0.0
|
|
|
—
|
%
|
|
0.0
|
|
|
—
|
%
|
|
10.4
|
|
|
22.9
|
%
|
Stock based compensation
|
(0.5
|
)
|
|
(0.8
|
)%
|
|
(1.5
|
)
|
|
(2.4
|
)%
|
|
0.0
|
|
|
—
|
%
|
Non-deductible items
|
0.8
|
|
|
1.2
|
%
|
|
0.1
|
|
|
0.2
|
%
|
|
0.1
|
|
|
0.2
|
%
|
Other items, net
|
(0.3
|
)
|
|
(0.4
|
)%
|
|
(0.7
|
)
|
|
(1.1
|
)%
|
|
(0.6
|
)
|
|
(1.5
|
)%
|
Income tax
|
$
|
16.1
|
|
|
24.4
|
%
|
|
$
|
13.4
|
|
|
21.3
|
%
|
|
$
|
(20.0
|
)
|
|
(44.0
|
)%
|
The deferred tax assets and liabilities are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Assets:
|
|
|
|
Accrued expenses and other liabilities
|
$
|
1.3
|
|
|
$
|
3.5
|
|
Inventory
|
1.3
|
|
|
1.3
|
|
Operating lease obligations
|
16.5
|
|
|
0.0
|
|
Intangible & other
|
1.3
|
|
|
3.1
|
|
Net operating loss and credit carryforwards
|
17.7
|
|
|
19.3
|
|
Valuation allowances
|
(16.8
|
)
|
|
(18.3
|
)
|
Total deferred tax assets
|
$
|
21.3
|
|
|
$
|
8.9
|
|
Liabilities:
|
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
14.0
|
|
|
$
|
0.0
|
|
Other
|
0.1
|
|
|
0.1
|
|
Total deferred tax liabilities
|
$
|
14.1
|
|
|
$
|
0.1
|
|
During 2019 the Company utilized approximately $2.8 million in state NOLs to offset state pretax income. As of December 31, 2019, the Company has foreign NOLs of $9.0 million which expire through 2032 and foreign tax credit carryforwards of $1.7 million expiring in years through 2027. The Company has recorded valuation allowances of approximately $16.8 million, including valuations against state net operating loss carryforwards of $5.8 million, foreign NOLs of $9.0 million, $0.3 million against the deductibility of state and foreign temporary tax differences and $1.7 million against foreign tax carryforwards. Valuation allowances have been recorded against these assets as the Company believes it is more likely than not that these NOLs, temporary differences and foreign tax credits will not be utilized in the near future.
The Company has not provided for federal income taxes applicable to the undistributed earnings of its foreign subsidiary in India and Canada of approximately $0.2 million as of December 31, 2019, since these earnings are considered permanently reinvested in the subsidiaries. The Company's permanent reinvestment assertion has not changed following the enactment of the TCJA. If the Company ceases to be permanently reinvested in its foreign subsidiaries, the Company may be subject to foreign withholding and other taxes on undistributed earnings and may need to record a deferred tax liability for any outside basis difference in its investments in its foreign subsidiaries.
The Company recorded a tax benefit in discontinued operations of approximately $0.6 million primarily from the Company's former NATG operations. Under the TCJA each U.S. shareholder of a controlled foreign corporation ("CFC") must include in its gross taxable income in any tax year the aggregate net GILTI, or net income, of its CFCs. In 2019 the Company has included in taxable income the net income of its subsidiaries in the Netherlands, India, and Canada. The Company has elected to treat GILTI expense as a period cost when incurred.
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 Canada and India. The Company remains subject to examination in France for years after 2013 and in Canada for years after 2013.
As of December 31, 2019, the Company had no uncertain tax positions. Interest and penalties, if any, are recorded in income tax expense. There were no accrued interest or penalty charges related to unrecognized tax benefits recorded in income tax expense in 2019, 2018 or 2017.
12. COMMITMENTS, CONTINGENCIES AND 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, 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's NATG subsidiaries are being audited by an entity representing 28 states seeking recovery of “unclaimed property” and has received separate demands from 20 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. This matter was settled in 2019 without material impact to the Company.
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, 2019 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, 2019 any reasonably possible losses in excess of the amounts accrued would be material to the financial statements.
13. SUBSEQUENT EVENT
In February 2020, the Company's Board of Directors declared a special dividend of $1.00 per share to common stock shareholders of record at the close of business on March 9, 2020, payable of March 16, 2020. Estimated dividends to be paid total $38.0 million.
14. 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
|
2019
|
|
|
|
|
|
|
|
Net sales
|
$
|
232.2
|
|
|
$
|
248.6
|
|
|
$
|
243.9
|
|
|
$
|
222.2
|
|
Gross profit
|
$
|
80.3
|
|
|
$
|
86.0
|
|
|
$
|
84.4
|
|
|
$
|
75.0
|
|
Net income from continuing operations
|
$
|
10.0
|
|
|
$
|
14.9
|
|
|
$
|
13.7
|
|
|
$
|
11.4
|
|
Net income per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.27
|
|
|
$
|
0.40
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
Diluted
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
212.2
|
|
|
$
|
231.2
|
|
|
$
|
235.8
|
|
|
$
|
217.7
|
|
Gross profit
|
$
|
72.5
|
|
|
$
|
80.0
|
|
|
$
|
82.2
|
|
|
$
|
73.0
|
|
Net income from continuing operations
|
$
|
8.7
|
|
|
$
|
13.4
|
|
|
$
|
15.1
|
|
|
$
|
12.3
|
|
Net income per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.23
|
|
|
$
|
0.36
|
|
|
$
|
0.41
|
|
|
$
|
0.33
|
|
Diluted
|
$
|
0.23
|
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
$
|
0.33
|
|