GLOBAL INDUSTRIAL COMPANY Overview
Systemax Inc. , through its subsidiaries, is primarily a direct marketer of brand name and private label industrial and business equipment and supplies inNorth America going to market through a system of branded e-commerce websites and relationship marketers.
Continuing Operations
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") products,
which are marketed in North America . Many of these products are manufactured by
other companies. Some products are manufactured for us and sold under our brand
as a white label product, and some are manufactured to our own design and sold
under our brand as a private label product, in each case marketed under our
trademarks: Global™, GlobalIndustrial.com™, Nexel™ Paramount™ and Interion™.
Discontinued Operations
The Company's discontinued operations include the results of theFrance business sold inAugust 2018 , the SARL Businesses sold inMarch 2017 and the NATG business sold inDecember 2015 (see Note 1 and Note 5). Total net sales from discontinued operations were$0.0 million ,$352.0 million and$590.6 million in 2019, 2018, and 2017, respectively. 20 --------------------------------------------------------------------------------
Operating Conditions
The North American industrial products market is highly fragmented and we compete against numerous competitors in multiple distribution channels. Industrial products distribution is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of maintaining inventory, leasing warehouse space, inventory management systems, and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stock and drop-shipment fulfillment. The primary component of our operating expenses historically has been employee-related costs, which includes items such as wages, commissions, bonuses, employee benefits and equity-based compensation, as well as marketing expenses, primarily comprised of digital marketing spend, and occupancy related charges associated with our leased distribution and call center facilities. We continually assess our operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs. In the discussion of our results of operations, constant currency refers to the adjustment of the results of our foreign operations to exclude the effects of period to period fluctuations in currency exchange rates. In order to provide more meaningful information to investors, the Company is presenting its operating income and operating margin on a non-GAAP basis in the "Reconciliation of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing Operations" table, as it depicts the operations that are currently generating sales and that will continue to do so in future periods. This Non-GAAP presentation reflects the Misco Germany and the entire NATG operations as discontinued operations for all periods presented. Additional non-GAAP adjustments for executive separation and transition costs, one-time benefit from state audit settlements, net of impairment charges recorded on certain intangible assets, intangible amortization and equity compensation are made to continuing operations. The Company has elected to omit discussion of the earliest year presented,December 31, 2017 , in MD&A. This discussion can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for the year endedDecember 31, 2018 , filed onMarch 14, 2019 . 21 -------------------------------------------------------------------------------- Highlights from 2019 The following discussion of our results of operations and financial condition will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements included herein. • Consolidated sales increased 5.6% to$946.9 million compared to$896.9 million in the prior year. • On a constant currency basis, average daily sales increased 5.7% compared to prior year.
• Consolidated operating income grew 7.1% to
• Net income per diluted share from continuing operations increased 0.8%
to $1.32 .
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GAAP Results of OperationsKey Performance Indicators* (in millions):
Years Ended December 31 , Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Net sales of continuing
operations:
Consolidated net sales $ 946.9 $ 896.9 $ 791.8 5.6 % 13.3 %
Consolidated gross profit $ 325.7 $ 307.7 $ 273.2 5.8 % 12.6 %
Consolidated gross margin 34.4 % 34.3 % 34.5 % 0.1 % (0.2 ) %
Consolidated SD&A costs** $ 260.4 $ 245.2 $ 227.2 6.2 % 7.9 %
Consolidated SD&A costs**
as % of sales 27.5 % 27.3 % 28.7 % 0.2 % (1.4 ) %
Consolidated operating
income $ 66.1 $ 61.7 $ 45.7 7.1 % 35.0 %
Consolidated operating
margin from continuing
operations 7.0 % 6.9 % 5.8 % 0.1 % 1.1 %
Effective income tax rate 24.4 % 21.3 % (44.0 ) % 3.1 % 65.3 %
Net income from continuing
operations $ 50.0 $ 49.5 65.5 (1) 1.0 % (24.4 ) %
Net margin from continuing
operations 5.3 % 5.5 % 8.3 % (0.2 ) % (2.8 ) %
Income (loss) from
discontinued operations,
net of tax $ (1.5 ) $ 175.2 $ (25.1 ) (100.9 ) % 798.0 %
excludes discontinued operations (See Note 5 of Notes to Consolidated
* Financial Statements).
excludes special charges, net (See Note 5 of Notes to Consolidated Financial
** Statements).
Includes $20.0 million of income tax benefits primarily related to thereversal of valuation allowances against the Company's deferred tax assets
1 and the impacts ofU.S. tax reform enacted in Q4 of 2017. 23
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SYSTEMAX INC.
Reconciliation of Consolidated GAAP Operating Income from Continuing Operations
to Consolidated Non-GAAP Operating Income from Continuing Operations - Unaudited
(In millions)
Years Ended December 31,(2) Change
GAAP: 2019 2018(1) 2017(1) 2019 vs. 2018 2018 vs. 2017
Net sales $ 946.9 $ 896.9 $ 791.8 5.6 % 13.3 %
Average daily sales* $ 3.7 $ 3.5 $ 3.1 5.7 % 13.3 %
Operating income $ 66.1 $ 61.7 $ 45.7 7.1 % 35.0 %
Operating margin% 7.0 % 6.9 % 5.8 % 0.1 % 1.1 %
Non-GAAP adjustments:
Executive separation & transition costs 1.2 1.0 0.0 Stock based compensation 4.7 0.9 1.6 Intangible amortization 0.2 1.0 1.0 Reverse results ofGermany and NATG included in GAAP operating income continuing operations (1.4 ) 0.8 1.1 One-time benefit from state audit settlements, net of impairment charge recorded on certain intangible assets 0.0 (3.1 ) 0.0 Total Non-GAAP Adjustments: 4.7 0.6 3.7 Non-GAAP operating income$ 70.8 $ 62.3 $ 49.4 13.6 % 26.1 % Non-GAAP operating margin % 7.5 % 6.9 % 6.2 % 0.6 % 0.7 %
Average daily sales is calculated based upon the number of selling days in
each period, converted to US Dollars on a constant currency basis. IPG had
* 253 selling days for the year ended
1 On
Prior and current year results of these divested operations, along with the
associated gain, have been classified as discontinued operations. On March
24, 2017, the Company closed on the sale of its
businesses, other than its operations in
results of these divested businesses, along with the associated loss on the
sale recorded in 2017, have been classified as discontinued operations. The
Company believes that the non-GAAP presentation conveys additional
meaningful information to investors as it depicts the operations that are
currently generating sales and that will continue to do so in future
periods. See accompanying GAAP reconciliation tables.
2
that ends at midnight on the Saturday closest to
of presentation, fiscal years and quarters are described as if they ended on
the last day of the respective calendar month. The actual fiscal quarter
ended on December 28, 2019 , December 29, 2018 and December 30, 2017 ,
respectively. The years ended 2019, 2018 and 2017 included 52 weeks.
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Management's discussion and analysis that follows will include current operations and discontinued operations. The discussion is based upon the GAAP Results of Operations table.
NET SALES The Company's net sales increased 5.6% compared to prior year reflecting solid demand across key product categories as the business experienced a soft market environment and a cautious but committed customer base during 2019. Growth rates slowed in 2019 to 2.1% in the fourth quarter as a result of the ongoing challenging trade environment. Overall, the Company's product categories generally had mixed results with continued strength in key categories where we are making investments in our offering and subject matter expertise. Additionally, in the fourth quarter of 2019, the Company experienced softness in its heating products categories primarily the result of the mild winter weather in theU.S. Net sales benefited from growth in theCanada business which delivered a sales increase of approximately 7.8%, 10.5% on a constant currency basis, compared to prior year.U.S. revenue increased 5.5% compared to prior year. On a constant currency basis, average daily sales increased 5.7% compared to prior year. GROSS MARGIN Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, cooperative advertising funds classified as a reduction of cost of sales, free freight and freight discounting arrangements, inventory valuation and obsolescence and other variables, any or all of which may result in fluctuations in gross margin. Gross margin was 34.4% compared to 34.3% in the prior year reflecting a moderate increase in product and freight margins. The stable gross margin performance reflects proactive management of our inventory, purchasing and pricing to address tariff increases. These tariffs have increased and will continue to increase our costs of procurement. If the Company is able to adequately review its supply chain and monitor sell prices in the market, and successfully work with suppliers to mitigate costs, the Company does not expect any material impact on its business from the 2018 and 2019 tariff actions and continues to believe that any impact from the tariffs currently in effect will be gradual and not material to the business, although there can be no assurance.
SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES ("SD&A"), EXCLUDING SPECIAL GAINS AND CHARGES
Selling, distribution and administrative expenses totaled$260.4 million ,$245.2 million and$227.2 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. SD&A costs as a percentage of sales increased in 2019 compared to 2018 by 20 basis points as a result of increased salary and related costs of approximately$9.2 million due to compensation rate increases, increased staffing levels in our distribution centers, executive separation and transition costs and increased equity-based compensation expense. Included within the$9.2 million is increased executive separation and transition costs of approximately$0.2 million , increased equity-based compensation expense of approximately$3.8 million , of which approximately$0.7 million was recorded for the year for the repricing of approximately 0.6 million of outstanding stock options. Included in SD&A is approximately$3.9 million of operating expenses for the year endedDecember 31, 2019 , for our newTexas distribution facility which commenced receiving and shipping operations in the third quarter of 2019. In the fourth quarter of 2018, the Company recorded a net gain of approximately$3.1 million related to the settlement of previously disclosed state audits offset by an impairment charge against certain intangible assets. Excluding this net gain, the Company's SD&A costs as a percentage of sales decreased 20 basis points in 2019 compared to prior year, as a result of improved leverage within our fixed cost structure, which allowed the Company to absorb the incremental cost of our newTexas operations.
CONTINUING OPERATIONS SPECIAL GAINS AND CHARGES
During the third quarter of 2019 and for the year ended
The Company's NATG business incurred special charges of approximately
DISCONTINUED OPERATIONS
The Company's discontinued operations include the results of the
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Total special gains and charges included in discontinued operations totaled $0
million , $0.6 million and $30.6 million for the years ended December 31, 2019 ,
2018 and 2017, respectively.
For the year ended December 31, 2018 , the Company recorded $178.9 million of
pre-tax book gain on the sale of the France business and recorded $0.6 million
of special charges related to the discontinued NATG business.
OPERATING MARGIN
The Company's operating margin increase of 10 basis points in 2019 compared to 2018 was driven by increased net sales, improved leverage within our fixed cost structure, good spend discipline in regards to marketing and general operating expenses and a gain related to settlements of outstanding obligations of our former German branch. Consolidated operating margin was impacted by special gains and charges of$0.8 million ,$0.8 million and$0.3 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively.
INTEREST AND OTHER (INCOME) EXPENSE, NET
Interest and other (income) expense, net from continuing operations was$0.0 million for 2019 and$1.6 million income in 2018, primarily attributable to the interest earned on our short-term investments from the cash repatriated tothe United States from the sale of theFrance business, net of interest charges related to our credit facility.
INCOME TAXES
The Company recorded net tax expense in continuing operations for 2019 of$16.1 million , or 24.4%, and a net tax benefit in discontinued operations of$0.6 million . Tax expense from continuing operations was primarily the result of pretax income in theU.S. and was benefited by approximately$0.5 million of stock option exercises and approximately$0.2 million from dividend equivalent payments. Non-deductible expense, including executive compensation, was approximately$0.8 million . Tax benefit in discontinued operations is primarily attributed to pretax losses incurred in the discontinued NATG business. The Company recorded net tax expense in continuing operations for 2018 of$13.4 million and net tax expense in discontinued operations of$23.0 million . Tax expense from continuing operations was primarily the result of pretax income in theU.S. and was benefited by approximately$1.5 million of stock option exercises. During 2018 the Company completed its accounting for the impacts of the Tax Cut and Jobs Act and adjusted its provisional repatriation tax to approximately$4.5 million . Tax expense in discontinued operations is attributed to tax on the operations of the Company's French operations for the eight months of ownership in 2018 andU.S. tax on the sale of the French operations in 2018.
Financial Condition, Liquidity and Capital Resources
Selected liquidity data (in millions):
December 31,
2019 2018 $ Change
Cash $ 97.2 $ 295.4 $ (198.2 )
Accounts receivable, net $ 88.2 $ 84.1 $ 4.1
Inventories $ 112.5 $ 107.3 $ 5.2
Prepaid expenses and other current assets $ 6.4 $ 10.6 $ (4.2 )
Accounts payable $ 115.9 $ 101.1 $ 14.8
Dividend payable $ 0.0 $ 243.5 $ (243.5 )
Accrued expenses and other current liabilities $ 34.0 $ 35.0 $ (1.0 )
Operating lease liabilities $ 9.9 $ 0.0 $ 9.9
Working capital $ 144.5 $ 117.8 $ 26.7
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Historical Cash Flows
Year Ended December 31,
2019 2018 2017
Net cash provided by operating activities from
continuing operations $ 70.3 $ 9.8 $ (1.9 ) $ (32.1 ) $ 1.5 Net cash used in investing activities from continuing operations$ (6.9 ) $ (4.5
)
$ 0.0 $ 249.6 $ (0.4 ) Net cash used in financing activities from continuing operations$ (259.6 ) $ (115.0 ) $ (11.5 ) Effects of exchange rates on cash$ (0.1 ) $ 3.1 $ 3.5 Net (decrease) increase in cash and cash equivalents$ (198.2 ) $ 110.9 $ 34.8 Our primary liquidity needs are to support working capital requirements in our business, funding recently declared and any future dividends, funding capital expenditures, continuing investment in upgrading and expanding our technological capabilities and information technology infrastructure, and funding acquisitions. We rely principally upon operating cash flows to meet these needs. We believe that cash flow available from these sources and our availability under our credit facility will be sufficient to fund our working capital and other cash requirements for at least the next twelve months. We believe our current capital structure and cash resources are adequate for our internal growth initiatives. To the extent our growth initiatives expand, including major acquisitions, we would seek to raise additional capital. We believe that, if needed, we can access public or private funding alternatives to raise additional capital. Our working capital increased$26.7 million primarily related to net income for the year endedDecember 31, 2019 , increased accounts receivable and inventory balances offset by decreased balance in prepaid expenses and other current assets compared to increased accounts payable balances, dividends paid in 2019 and the recording of$9.9 million of current operating lease liabilities. Accounts receivable days outstanding were at 35.9 in 2019 compared to 34.0 in 2018. Inventory turns were 5.9 in 2019 compared to 6.3 in 2018 and accounts payable days outstanding were 68.7 in 2019 compared to 66.3 in 2018. We expect that future accounts receivable, inventory and accounts payable balances will fluctuate with net sales and the product mix of our net sales.
Operating Activities
Net cash provided by operating activities from continuing operations was$70.3 million resulting from changes in our working capital accounts, which provided$9.1 million in cash compared to$56.1 million used in 2018, primarily the result of increased accounts payable, accrued expenses, other current liabilities and other liabilities balances in 2019. Cash generated from net income from continuing operations adjusted by other non-cash items provided$61.2 million compared to$65.9 million provided by these items in 2018, primarily related to the change in the provision for deferred income taxes, increased stock-based compensation in 2019 offset by a gain from the settlement of an outstanding lease obligation of our former German branch. 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 and for the year endedDecember 31, 2019 , total related compensation expense related to these repriced options was$0.7 million . Net cash provided by operating activities from continuing operations in 2018 was$9.8 million resulting from changes in our working capital accounts, which used$56.1 million in cash compared to$6.7 million used in 2017, primarily the result of increased accounts receivable and inventory balances and the fluctuation in our accounts payable and accrued expenses balances. Cash generated from net income from continuing operations adjusted by other non-cash items provided$65.9 million in 2018 compared to$50.8 million provided by these items in 2017, primarily related to the change in the provision for deferred income taxes. Net cash used in operating activities from discontinued operations was$1.9 million and$32.1 million in 2019 and 2018, respectively, and net cash provided by discontinued operations was$1.5 million in 2017. Cash used in discontinued operations in 2018 was primarily related to the Company's soldFrance -based IT business.
Investing Activities
Net cash used in investing activities from continuing operations totaled$6.9 million ,$4.5 million and$2.4 million for 2019, 2018 and 2017, respectively. In 2019, investing activities primarily related to the opening of a new distribution center inTexas and other warehouse projects including wire decking, in-rack sprinkler systems, video security systems and warehouse lighting. In 2018, investing activities primarily included costs for a warehouse lighting project, warehouse lift trucks and batteries, information technology equipment and leasehold improvements for the business. Net cash used in investing activities in 2017 included warehouse pick modules and mobile sales application software for the business. Net cash used in discontinued operations was 27 -------------------------------------------------------------------------------- zero for 2019. In 2018, discontinued operations provided$249.6 million primarily from cash received on the sale of theFrance business of approximately$250.0 million , offset by$0.4 million of fixed asset purchases from theFrance business during the first eight months of 2018 compared to$0.4 million used in 2017. Financing Activities Net cash used in financing activities was$259.6 million ,$115.0 million and$11.5 million in 2019, 2018 and 2017, respectively. In 2019, cash used in financing activities was primarily related to the payment of the special dividend declared inDecember 2018 of$243.5 million and regularly quarterly dividends that totaled approximately$18.1 million . Proceeds from stock option exercises, net of payments for payroll taxes through shares withheld, totaled$1.2 million and proceeds from the issuance of common stock from our employee stock purchase plan totaled$0.8 million . In 2018, cash used in financing activities was primarily related to the special dividend and regular quarterly dividend payments in total of$109.3 million . These payments included$55.7 million dividend declared inDecember 2017 but paid inJanuary 2018 , the special dividend of$37.2 million paid inJune 2018 and the regular quarterly dividends of$4.1 million for each of the four quarters of 2018. The Company repurchased$9.1 million of treasury shares under the share repurchase program and repaid$0.1 million of outstanding capital lease obligations. Proceeds from stock option exercises of$5.4 million were offset by payments of payroll taxes on stock-based compensation through shares withheld of$1.9 million . In 2017, cash used in financing activities was primarily for dividends paid during 2017 totaling$13.0 million ,$0.1 million used to repay outstanding capital lease obligations and$0.8 million used as payment of payroll taxes on stock-based compensation through shares withheld offset by$2.4 million from proceeds from stock option exercises. OnJuly 31, 2018 the Company'sBoard 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 . Details of the purchase is as follows: Total Number of Maximum Number Shares Purchased as of Shares that May Part of Publicly Yet Be Purchased Total Number of Average Price Announced Plans Under the Plans Fiscal Month/Year Shares Purchased Paid Per Share or Programs or Programs July 2018 232,550$38.96 232,550 1,767,450 The Company maintains a$75.0 million secured revolving credit agreement with one financial institution which has a five-year term, maturing onOctober 28, 2021 and provides for borrowings inthe 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 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 theLondon interbank offered rate ("LIBOR"), theFederal Reserve Bank of New York ("NYFRB") or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability. As ofDecember 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 , 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 ofDecember 31, 2019 . Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, distribution and administrative costs, product mix and relative levels of domestic and foreign sales. Unusual gains or expense items, such as special (gains) charges and settlements, may impact earnings and are separately disclosed. We expect that past performance may not be indicative of future performance due to the competitive nature of our business segments where the need to adjust prices to gain or hold market share is prevalent. 28 -------------------------------------------------------------------------------- Macroeconomic conditions, such as business and consumer sentiment, may affect our revenues, cash flows or financial condition. However, we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues, cash flows or financial condition. We are not currently interest rate sensitive, as we have minimal debt.
The expenses, capital expenditures and exit activities described above will
require significant levels of liquidity, which we believe can be adequately
funded from our currently available cash resources. In 2020 we anticipate
capital expenditures in the range of
In the past we have engaged in opportunistic acquisitions, choosing to pay the purchase price in cash, and may do so in the future as favorable situations arise. However, a deep and prolonged period of reduced business spending could adversely impact our cash resources and force us to either forego future acquisition opportunities or to pay the purchase price using debt, which could have an adverse effect on our earnings. We believe that our cash balances, future cash flows from operations and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for at least the next twelve months. We maintain our cash and cash equivalents in money market funds or their equivalent that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees. As ofDecember 31, 2019 , we had no investments with maturities of greater than three months. Accordingly, we do not believe that our cash balances have significant exposure to interest rate risk. AtDecember 31, 2019 cash balances held in foreign subsidiaries totaled approximately$4.4 million . These balances are held in local country banks and are held primarily to support local working capital needs. The Company had in excess of$164 million of liquidity (cash and an undrawn line of credit) in theU.S. as ofDecember 31, 2019 , which is sufficient to fund itsU.S. operations and capital needs, including any dividend payments, for the foreseeable future.
We are obligated under non-cancelable operating leases for the rental of most of
our facilities and certain of our equipment which expires at various dates
through 2032. We have sublease agreements for unused space we lease in
Following is a summary of our contractual obligations for future principal payments on our debt, payments on our non-cancelable operating leases and minimum payments on our other purchase obligations as ofDecember 31, 2019 (in millions): Less than More than Total 1 year 1-3 years 3-5 years 5 years Contractual Obligations: Capital lease obligations$ 0.1 $ 0.1 $ - $ - $ - Operating lease liabilities 89.8 13.8 30.8 24.8 20.4 Purchase & other obligations 26.7 4.4 11.2 11.1 -
Total contractual obligations
35.9
Our purchase and other obligations consist primarily of product purchase commitments, certain employment agreements and service agreements.
In addition to the contractual obligations noted above, we had
We are party to certain litigation, the outcome of which we believe, based on discussions with legal counsel, will not have a material adverse effect on our consolidated financial statements. Tax contingencies are related to uncertain tax positions taken on income tax returns that may result in additional tax, interest and penalties being paid to taxing authorities. As ofDecember 31, 2019 , the Company had no material uncertain tax positions. 29 --------------------------------------------------------------------------------
Discontinued Operations
The sale of theFrance based IT business met the "strategic shift with major impact" criteria as defined under Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under ASU 2014-08 in order for a disposal to qualify for discontinued operations presentation in the financial statements, the disposal must be a "strategic shift" with a major impact for the reporting entity. If an entity meets this threshold, and other requirements, only the components that were in operation at the time of disposal are presented as discontinued operations. Therefore, the current year and all prior year results of theFrance based IT business are included in discontinued operations in the accompanying consolidated financial statements. For the year endedDecember 31, 2018 and 2017, net sales of theFrance business included in discontinued operations totaled$352.0 million and$473.6 million , respectively, and net gain from the sale of theFrance business and eight months of operating activity, totaled$175.8 million in 2018, and net income of$10.6 million was included in discontinued operations in 2017, respectively. For a discussion of the accounting for the sale of theFrance based IT business, see Note 1 and Note 5 to the consolidated financial statements included in Item 15 of this Form 10-K. As disclosed in our Form 8-K datedMarch 31, 2017 , onMarch 24, 2017 , certain wholly owned subsidiaries of the Company executed a definitive securities purchase agreement (the "Purchase Agreement") with certain special purpose companies formed byHilco 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 includes 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. andMisco Solutions B.V. (collectively, the "SARL Businesses"). The SARL Businesses were reported within the Company'sEuropean Technology Products Group ("ETG") segment. The sale of the SARL business met the "strategic shift with major impact" criteria as described above. Net sales of the SARL Businesses included in discontinued operations totaled$117.0 million for 2017. Net income included in discontinued operations totaled$0.2 million in 2018, and net loss of$28.2 million in 2017. For a discussion of the accounting for the sale of the SARL Businesses, see Note 1 and Note 5 to the consolidated financial statements included in Item 15 of this Form 10-K. Also included in Discontinued Operations is the Company's former North American Technologies Group, which was sold inDecember 2015 and has been winding down operations since then. The sale of the NATG business inDecember 2015 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 remaining retail stores. Accordingly, these components and the results of operations have been adjusted in the accompanying financial statements to reflect their presentation in discontinued operations. The wind-down was substantially completed in the second quarter of 2016 and the Company continues with settling accounts payable, marketing remaining leased facilities, as well as, settling remaining lease obligations and other contingencies. These wind-down activities continued in 2019 and will continue in 2020. For the years endedDecember 31, 2019 , 2018 and 2017, net loss from the discontinued NATG business totaled$1.5 million ,$0.8 million and$7.5 million , respectively. For a discussion of the accounting and wind-down of the NATG business, see Note 1 and Note 2 to the consolidated financial statements included in Item 15 of this Form 10-K.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 15 of this Form 10-K. Certain accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty, and as a result, actual results could differ materially from those estimates. These judgments are based on historical experience, observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements of the Company accurately reflect management's best estimate of the consolidated results of operations, financial position and cash flows of the Company for the years presented. We identify below a number of policies that entail significant judgments or estimates, the assumptions and/or judgments used to determine those estimates and the potential effects on reported financial results if actual results differ materially from these estimates. 30
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Leases
OnJanuary 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. 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, atJanuary 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 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 endedDecember 31, 2019 , the Company recorded$1.9 million of sublease income in continuing and discontinued operations.
Revenue Recognition
The Company recognizes revenue from contracts with its customers utilizing the following steps: • Identifying the contract with the customer
• Identifying the performance obligations under the contract
• Determine the transaction price
• Allocate transaction price to performance obligations, if necessary
• Recognizing revenue as performance obligations are satisfied
The Company's invoice, and the terms and conditions of sale contained therein,
constitutes the evidence of an arrangement and is a 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.
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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 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 $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.
Allowance for Doubtful Accounts Receivable
We record an allowance for doubtful accounts to reflect our estimate of the collectability of our trade accounts receivable. Our allowance for doubtful accounts policy contains assumptions and judgments made by management related to collectability of aged accounts receivable and chargebacks from credit card sales. We evaluate the collectability of accounts receivable based on a combination of factors, including an analysis of the age of customer accounts and our historical experience with accounts receivable write-offs. The analysis also includes the financial condition of specific customers or industry, and general economic conditions. In circumstances where we are aware of customer credit card charge-backs or a specific customer's inability to meet its financial obligations, a specific reserve for bad debts applicable to amounts due to reduce the net recognized receivable to the amount management reasonably believes will be collected is recorded. Our estimates for the years endedDecember 31, 2019 , 2018 and 2017 have not been materially different than our actual experience. While bad debt allowances have been within expectations, there can be no assurance that we will continue to experience the same allowance rate we have in the past particularly if business or economic conditions change or actual results deviate from historical trends.
Inventory Valuation
We value our inventories at the lower of cost or net realizable value; cost being determined on the first-in, first-out method. Excess and obsolete or unmarketable merchandise are written down based on historical experience, assumptions about future product demand and market conditions. If market conditions are less favorable than projected or if technological developments result in accelerated obsolescence, additional write-downs may be required. While obsolescence and resultant markdowns have been within expectations, there can be no guarantee that we will continue to experience the same level of markdowns we have in the past. Our inventory reserve policy contains assumptions and judgments made by management related to inventory aging, obsolescence, credits that we may obtain for returned merchandise, shrink and customer demand. Our inventory reserve estimates for the years endedDecember 31, 2019 , 2018 and 2017 have not been materially different than our actual experience. However, if in the future our estimates are materially different than our actual experience we could have a material loss adjustment.
Our business acquisition activity results in the recording of goodwill and intangible assets as part of the purchase price allocation process. We apply the provisions of relevant accounting guidance in our valuation of goodwill, trademarks, domain names, client lists and other intangible assets. Relevant accounting guidance requires that goodwill and indefinite lived intangibles be reviewed at least annually for impairment or more frequently if indicators of impairment exist. 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.
On
In the fourth quarter of 2018, the Company determined that it would no longer be using the trademark or domain name ofC&H Distributors and wrote off the unamortized balance of that definite lived intangible asset of approximately$1.9 million . We have approximately, in aggregate,$7.2 million in goodwill and intangible assets atDecember 31, 2019 . We do not believe it is reasonably likely that the estimates or assumptions used to determine whether any of our remaining goodwill or intangible assets 32 --------------------------------------------------------------------------------
are impaired will change materially in the future. However, there can be no assurances that we will not incur impairment charges that are material in the future.
Long-lived Assets Management exercises judgment in evaluating our long-lived assets for impairment and in their depreciation and amortization methods and lives including evaluating undiscounted cash flows. The impairment analysis for long lived assets requires management to make judgments about useful lives and to estimate fair values of long-lived assets. It may also require us to estimate future cash flows of related assets using a discounted cash flow model. Our estimates of future cash flows involve assumptions concerning future operating performance and economic conditions. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations. We have not made any material changes to our long-lived assets policy in the past four years and we do not anticipate making any material changes to this policy in the future.
We do not believe it is reasonably likely that the estimates and assumptions used to determine long lived asset impairment will vary materially in the future. However, if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.
Income Taxes
We are subject to taxation from federal, state and foreign jurisdictions and the determination of our tax provision is complex and requires significant management judgment.
We conduct operations in numerousU.S. states and several foreign locations. Our effective tax rate depends upon the geographic distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of our pre-tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We are also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due. These examinations include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. We establish as needed, and periodically reevaluate, an estimated income tax reserve on our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While management believes that we have identified all reasonably identifiable exposures and whether or not a reserve is appropriate, it is possible that additional exposures exist and/or that exposures may be settled at amounts different than the amounts reserved. The determination of deferred tax assets and liabilities and any valuation allowances that might be necessary requires management to make significant judgments concerning the ability to realize net deferred tax assets. The realization of our net deferred tax assets is significantly dependent upon the generation of future taxable income. In estimating future taxable income there are judgments and uncertainties related to the development of forecasts of future results that may not be reliable. Significant management judgment is also necessary to evaluate the operating environment and economic conditions that exist to develop a forecast for a reporting unit. Where management has determined that it is more likely than not that some portion or the entire deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made. We have not made any material changes to our income tax policy in the past four years and we do not anticipate making any material changes to this policy in the near future. We do not believe it is reasonably likely that the estimates or assumptions used to determine our deferred tax assets and liabilities and related valuation allowances will change materially in the future. However, if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplemental Data, of this Annual Report on Form 10-K.
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