QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-13792
Global Industrial Company
(Exact name of registrant as specified in its charter)
Delaware
11-3262067
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
11 Harbor Park Drive
Port Washington, New York11050
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (516) 608-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock ($.01 par value)
GIC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
The number of shares outstanding of the registrant’s Common Stock as of July 30, 2021 was 37,736,866.
We maintain an internet web site at investors.globalindustrial.com. We file reports with the Securities and Exchange Commission (“SEC”) and make available free of charge on or through this website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including all amendments to those reports. These are available as soon as is reasonably practicable after they are filed with the SEC. All reports mentioned above are also available from the SEC’s website (www.sec.gov). The information on our website is not part of this or any other report we file with, or furnish to, the SEC.
Our Board of Directors has adopted the following corporate governance documents with respect to the Company (the “Corporate Governance Documents”):
•Corporate Ethics Policy for officers, directors and employees
•Charter for the Audit Committee of the Board of Directors
•Charter for the Compensation Committee of the Board of Directors
•Charter for the Nominating/Corporate Governance Committee of the Board of Directors
•Corporate Governance Guidelines and Principles
In accordance with the corporate governance rules of the New York Stock Exchange, each of the Corporate Governance Documents is available on our Company web site, investors.globalindustrial.com.
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
$
41.6
$
58.1
Restricted cash (1)
1.1
0.0
Cash, cash equivalents and restricted cash
$
42.7
$
58.1
(1)The Company has restricted cash collateralizing letters of credit outstanding of $1.1 million, which are recorded in Other assets in the accompanying Condensed Consolidated Balance Sheets.
Supplemental disclosures of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
2.6
$
4.1
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.Basis of Presentation
The accompanying condensed consolidated financial statements of Global Industrial Company, formerly known as Systemax Inc., with its subsidiaries, (the "Company") are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. All significant intercompany accounts and transactions have been eliminated in consolidation.
Global Industrial Company, through its operating subsidiaries, is a value-added industrial distributor. Global Industrial Company operates and is internally managed in one reportable business segment. The Company sells a wide array of industrial and maintenance, repair and operations ("MRO") products, markets the Company has served since 1949. Because of the large number of products and product categories the Company offers, providing information on the amount of revenue derived from transactions with external customers for each product or groupings of product is impractical.
The Company's discontinued operations include its former North American Technology Group business, which was sold in December 2015 and has been winding down its operations since then. For the three and six month periods ended June 30, 2021, net income from discontinued operations totaled $0.9 million and $10.6 million, respectively (see Note 4, Discontinued Operations and Special (Gains) Charges). For the three and six month periods ended June 30, 2020, net income from discontinued operations totaled $1.1 million and $1.0 million, respectively.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2021 and the results of operations for the three and six month periods ended June 30, 2021 and 2020, statements of comprehensive income (loss) for the three and six month periods ended June 30, 2021 and 2020, cash flows for the six month periods ended June 30, 2021 and 2020 and changes in shareholders’ equity for the three and six month periods ended June 30, 2021 and 2020. The December 31, 2020 Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2020 and for the year then ended included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The results for the six month period ended June 30, 2021 are not necessarily indicative of the results for the entire year.
Global Industrial Company manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation herein, fiscal years and quarters are referred to as if they ended on the traditional calendar month. The actual fiscal second quarter ended on July 3, 2021 and June 27, 2020. The second quarters of both 2021 and 2020 included 13 weeks and the first six months of both 2021 and 2020 included 26 weeks.
Related Party Transactions
For the six months ended June 30, 2021, the Company recorded approximately $3.0 million in professional fee expense from a law firm which employs an immediate family member of one of the Company's Vice Chairmen. These fees were contingent fees paid upon receipt of $15.0 million in restitution received in the Company's discontinued operations. Amounts outstanding at June 30, 2021 were de minimis and are recorded in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
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.
On January 1, 2021 the Company adopted 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. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
On January 1, 2021, the Company adopted ASU 2020-10, Codification Improvements. This ASU amends a variety of topics in the Codification to improve consistency and clarify the guidance. The effective date of this ASU is for fiscal years and interim periods beginning after December 15, 2020. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
The Company believes its presentation of revenue by geography most reasonably depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic and industry factors, including fluctuations in exchange rates between the U.S. and Canada. The following table presents the Company's revenue, from continuing operations, by geography for the three and six months ended June 30, 2021 and 2020, respectively (in millions):
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
2021
2020
Net sales:
United States
$
253.6
$
226.0
$
487.1
$
441.3
Canada
19.0
16.1
36.6
28.1
Consolidated
$
272.6
$
242.1
$
523.7
$
469.4
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 June 30, 2021 and December 31, 2020.
The Company’s trade accounts receivable is one portfolio comprised of commercial businesses operating in the U.S. and to a much lesser extent, Canada. The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its receivables, considering customer financial condition, historical loss experience with its customers, current market economic conditions and forecasts of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected. For the balance of its trade receivables, the Company uses a loss rate method to estimate its credit loss reserve. Historical loss experience rates are calculated using receivable write offs over a trailing twelve-month period and comparing that to the average receivable balances over the same period. That rate is applied to the current accounts receivable portfolio, excluding accounts that have been specifically reserved. Any write offs incurred are recorded against the established reserves.
The Company grants credit to commercial business customers using an electronic application process that evaluates the customer's detailed credit report, reference responses, availability under credit facilities, existing liens, tenure of management and business history, among other factors. Credit terms are typically net 30 days payment required with larger businesses eligible for up to net 90 day terms, if qualified.
The following is a rollforward of the allowances for credit losses related to trade accounts receivable for June 30, 2021 (in millions):
June 30, 2021
Balance at beginning of period
$
1.7
Current period provision
1.2
Write-offs - trade accounts receivable
(0.9)
Balance at end of period
$
2.0
The following is a rollforward of the allowances for credit losses related to trade receivables for the year ended December 31, 2020 (in millions):
December 31, 2020
Balance at beginning of period
$
6.8
Current period provision
1.2
Write-offs - trade accounts receivable
(0.7)
Write-offs - notes and other receivables*
(5.6)
Balance at end of period
$
1.7
*$5.6 million of reserves related to notes and other receivables originated in 2016 and this balance was written off in the second quarter of 2020.
4.Discontinued Operations and Special (Gains) Charges
In the second quarter ended June 30, 2021, the Company's discontinued operations recorded a de minimis amount of special charges and recorded approximately $1.8 million in benefit from settlement of payable accounts offset by operating expenses of approximately $0.4 million and approximately $0.5 million of income tax expense. For the six months ended June 30, 2021, the Company's discontinued operations received approximately $15.0 million in restitution receipts, recorded $2.3 million in benefit from settlement of payable accounts and received approximately $0.1 million in vendor settlements. Offsetting these amounts for the six months ended June 30, 2021 was approximately $3.0 million of professional fees related to the ongoing restitution proceedings, operating expenses of approximately $0.4 million and approximately $3.4 million of income tax expense. The Company expects that total additional exit charges related to discontinued operations after this quarter may aggregate up to $0.5 million.
In the second quarter ended June 30, 2020, the Company's discontinued operations received approximately $1.9 million in restitution receipts and $0.1 million in vendor settlements offset by approximately $0.4 million of professional fees and recorded approximately $0.5 million of income tax expense. For the six months ended June 30, 2020, the Company's discontinued operations received approximately $1.9 million in restitution receipts and $0.1 million in vendor settlements offset by approximately $0.5 million of professional fees and recorded approximately $0.5 million of income tax expense.
The following table details liabilities related to the exit costs of the sold businesses that remain as of June 30, 2021 (in millions):
Accrued exit costs
Balance January 1, 2021
$
2.8
Charged to expense
0.2
Paid or otherwise settled
(0.3)
Balance June 30, 2021
$
2.7
The following table details liabilities related to the exit costs of the sold businesses that remained for 2020 (in millions):
Net income per common share - basic was calculated based upon the weighted average number of common shares outstanding during the respective periods presented using the two-class method of computing earnings per share. The two-class method was used as the Company has outstanding restricted stock with rights to dividend participation for unvested shares. Undistributed net income is allocated between common shares outstanding and participating securities to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. Undistributed net losses are not allocated to our participating securities as these participating securities do not have a contractual obligation to share in losses. 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 following table presents the computation of basic and diluted net income per share under the two-class method for the three and six months ended June 30, 2021 and 2020 (in millions, except for per share amounts):
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
2021
2020
Net income from continuing operations
$
21.1
$
15.3
$
26.6
$
23.6
Less: Distributed net income available to participating securities
0.0
0.0
0.0
(0.3)
Less: Undistributed net income available to participating securities
(0.1)
(0.1)
(0.1)
0.0
Numerator for basic net income per share:
Undistributed and distributed net income available to common shareholders
$
21.0
$
15.2
$
26.5
$
23.3
Add: Undistributed net income allocated to participating securities
0.1
0.1
0.1
0.0
Less: Undistributed net income reallocated to participating securities
(0.1)
(0.1)
(0.1)
0.0
Numerator for diluted net income per share:
Undistributed and distributed net income available to common shareholders
$
21.0
$
15.2
$
26.5
$
23.3
Denominator:
Weighted average shares outstanding for basic net income per share
37.7
37.5
37.7
37.6
Effect of dilutive securities
0.2
0.1
0.2
0.2
Weighted average shares outstanding for diluted net income per share
37.9
37.6
37.9
37.8
Net income per share from continuing operations:
Basic
$
0.56
$
0.41
$
0.70
$
0.62
Diluted
$
0.55
$
0.40
$
0.70
$
0.62
Net income from discontinued operations
$
0.9
$
1.1
$
10.6
$
1.0
Less: Undistributed net income available to participating securities
Undistributed and distributed net income available to common shareholders
$
0.9
$
1.1
$
10.5
$
1.0
Add: Undistributed net income allocated to participating securities
0.0
0.0
0.1
0.0
Less: Undistributed net income reallocated to participating securities
0.0
0.0
(0.1)
0.0
Numerator for diluted net income per share:
Undistributed and distributed net income available to common shareholders
$
0.9
$
1.1
$
10.5
$
1.0
Net income per share from discontinued operations:
Basic
$
0.02
$
0.03
$
0.28
$
0.03
Diluted
$
0.02
$
0.03
$
0.28
$
0.03
Net income per share:
Basic
$
0.58
$
0.44
$
0.98
$
0.65
Diluted
$
0.57
$
0.43
$
0.98
$
0.65
Potentially dilutive securities
0.1
0.6
0.1
0.6
Potentially dilutive securities attributable to outstanding stock options, restricted stock units, and performance share units excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of Global Industrial Company's common stock, and their inclusion would be anti-dilutive.
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 Company is in the process of renewing this facility on similar terms and expects to extend the term of the agreement for five years before its expiration in October 2021. 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 June 30, 2021, eligible collateral under the credit agreement was $75.0 million, total availability and excess availability was $72.5 million, and there were no outstanding borrowings. The Company has restricted cash collateralizing letters of credit outstanding of $1.1 million at June 30, 2021 recorded within Other assets on the accompanying Condensed Consolidated Balance Sheets. The Company was in compliance with all of the covenants of the credit agreement as of June 30, 2021.
7.Fair Value Measurements
Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value standards establish the fair value hierarchy to prioritize the inputs used in valuation techniques. There are three levels to the fair value hierarchy (Level 1 is the highest priority and Level 3 is the lowest priority):
Level 1 -
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 -
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
Level 3 -
Unobservable inputs which are supported by little or no market activity
Financial instruments consist primarily of investments in cash, trade accounts receivable, debt and accounts payable. The Company determines the fair value of financial instruments based on interest rates available to the Company. At June 30, 2021 and December 31, 2020, 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 fair value with respect to goodwill, non-amortizing intangibles and long-lived assets is measured in connection with the Company’s annual impairment testing. 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.
Long-lived assets are assets used in the Company’s operations and include definite-lived intangible assets, leasehold improvements, warehouse and similar property used to generate sales and cash flows. Long-lived assets are tested for impairment utilizing a recoverability test. The recoverability test compares the carrying value of an asset group to the undiscounted cash flows directly attributable to the asset group over the life of the primary asset. If the undiscounted cash flows of an asset group is less than the carrying value of the asset group, the fair value of the asset group is then measured. If the fair value is also determined to be less than the carrying value of the asset group, the asset group is impaired.
In July 2018 the Company's Board of Directors approved a share repurchase program with a repurchase authorization of up to two million shares of the Company's common stock. During the first six months of 2021, no shares were repurchased.
During the second quarter of 2020, the Company repurchased 50,201 common shares for approximately $0.9 million and for the six months ended June 30, 2020, the Company repurchased approximately 283,450 common shares for approximately $4.8 million under its shares repurchase authorization.
9.Legal Proceedings
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 discontinued operations are also being audited by an entity representing 27 states seeking recovery of “unclaimed property” and has received separate demands from 19 states requesting payments of their claimed amounts. The Company has complied with the unclaimed property audit, has provided requested information and has corresponded with the states regarding possible further discussions. The Company intends to vigorously defend these matters and believes it has strong defenses.
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 June 30, 2021 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 June 30, 2021 any reasonably possible losses in excess of the amounts accrued would be material to the financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Risk Factors.
This report contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. Any such statements that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on management’s estimates, assumptions and projections and are not guarantees of future performance. Forward-looking statements may include, but are not limited to statements regarding: i) projections or estimates of revenue, income or loss, exit costs, cash flow needs and capital expenditures; ii) fluctuations in general economic conditions; iii) future operations, such as risks regarding strategic business initiatives, plans relating to new distribution facilities, plans for utilizing alternative sources of supply in response to government tariff and trade actions and/or due to supply chain disruptions arising from the Coronavirus pandemic, and plans for new products or services; iv) plans for acquisition or sale of businesses, including expansion or restructuring plans; v) financing needs, and compliance with financial covenants in loan agreements; vi) assessments of materiality; vii) predictions of future events and the effects of pending and possible litigation; and viii) assumptions relating to the foregoing. In addition, when used in this report, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” and “plans” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements in this report are based on the Company’s beliefs and expectations as of the date of this report and are subject to risks and uncertainties which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain and undue reliance should not be placed on them. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.
Other factors that may affect our future results of operations and financial condition include, but are not limited to, unanticipated developments in any one or more of the following areas, as well as other factors which may be detailed from time to time in our Securities and Exchange Commission filings:
•general economic conditions, such as customer inventory levels, interest rates, borrowing ability and economic conditions in the manufacturing and/or distribution industries generally, as well as government spending levels will continue to impact our business;
•the temporary closing of many businesses, and reduced business activity, during the Coronavirus pandemic has negatively impacted the general economy, and decreased customer purchasing volume, generally, which negatively affected our business and may do so in future quarters until general business activity reaches pre-pandemic levels;
•additionally governmental mandated shutdowns of or restrictions on entities deemed to be non-essential businesses has negatively impacted sales of our products to those businesses and will continue to impact our sales as long as these restrictions are in place;
•the extent to which the Coronavirus pandemic continues to impact our operations and financial results will depend on numerous evolving factors including: the duration of the pandemic, our ability to keep our distribution centers operating productively and with minimal down time for Coronavirus safety and remediation efforts, governmental actions such as “stay at home” or “shelter in place” regulations or guidelines, that have been and continue to be taken in response to the pandemic, the impact, duration and severity of the pandemic on economic activity, how long it will take to return to more historic levels of economic growth, and the effect of the economic downturn on our customers and customer demand for our products;
•factors affecting the global supply chain and the shipping and distribution of products imported to the United States by us or our domestic vendors, such as extreme weather conditions, global availability of shipping containers, port congestion, and freight and fuel costs have adversely impacted our results and could continue to do so;
•these increases in freight and shipping costs have from time to time impacted our margins to the extent the increases could not be passed along to customers in a timely manner and may impact our margins again in the future;
•our reliance on common carrier delivery services for shipping inventoried merchandise to customers and our reliance on drop ship deliveries directly to customers by our product vendors for products we do not hold in inventory has also been adversely affected by these supply chain challenges;
•delays in the timely availability of products from our suppliers could delay receipt of needed product and result in lost sales;
•in this regard, global supply chains and the timely availability of products, particularly products, or product components used in domestic manufacturing, imported from China and other Asian nations as well as from other countries, have been, and in the future could continue to be adversely affected by allocation restrictions of difficult to source products by our vendors;
•the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, have caused us to raise the prices on certain of our products and seek alternate sources of supply, which could negatively impact our sales or disrupt our operations if we are not able to mitigate these measures;
•our use of alternate sources of supply, such as utilizing new vendors in additional countries, entails various risks, such as identifying, vetting and managing new business relationships, reliance on new vendors and maintaining quality control over their products, and protecting our intellectual property rights;
•quarantines, factory slowdowns or shutdowns, border closings and travel restrictions resulting from the Coronavirus pandemic have in the past and could in the future adversely affect the timely availability of products resulting in delayed or lost sales;
•liquidity constraints on our vendors or customers;
•our ability to maintain available capacity in our distribution operations for stocked inventory and to enable on time shipment and deliveries, such as by timely implementing additional temporary or permanent distribution resources, whether in the form of additional facilities we operate or by outsourcing certain functions to third party distribution and logistics partners;
•we compete with other companies for recruiting, training, integrating and retaining talented and experienced employees, particularly in markets where we and they have central distribution facilities; and this aspect of competition is aggravated by the current tight labor market in the U.S. for such jobs and at a time this market is undergoing competitive changes due to the Coronavirus pandemic;
•risks involved with e-commerce, including possible loss of business and customer dissatisfaction if outages or other computer-related problems should preclude customer access to our products and services;
•our information systems and other technology platforms supporting our sales, procurement and other operations are critical to our operations and disruptions or delays have occurred and could occur in the future, and if not timely addressed could have a material adverse effect on us;
•a data security breach due to our e-commerce, data storage or other information systems being hacked by those seeking to steal Company, vendor, employee or customer information, or due to employee error, resulting in disruption to our operations, litigation and/or loss of reputation or business;
•managing various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights from our vendors;
•meeting credit card industry compliance standards in order to maintain our ability to accept credit cards;
•rising interest rates, increased borrowing costs or limited credit availability, including our own ability to maintain satisfactory credit agreements and to renew credit facilities, could impact both our and our customers’ ability to fund purchases and conduct operations in the ordinary course; and
•pending or threatened litigation and investigations, and other government actions, such as anti-dumping, unclaimed property, or trade and customs actions by U.S. or foreign governmental authorities, have occurred in the past and although had no material impact to our business, could adversely affect our business and results of operation in the future.
Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Statements in this report, particularly in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Condensed Consolidated Financial Statements, as well as information under the heading “Risk Factors” in our Annual Report on Form 10-K for fiscal year 2020, describe certain factors, among others, that could contribute to or cause such differences.
Overview
Continuing Operations
Global Industrial Company, through its operating subsidiaries, is a value-added industrial distributor of more than a million industrial and maintenance, repair and operations ("MRO") products, in North America going to market through a system of branded e-commerce websites and relationship marketers. These industrial and MRO products are manufactured by other companies. Some products are manufactured for us as a white label product and some are manufactured to our own design:
these products are marketed as private label under the trademarks: GlobalTM, GlobalIndustrial.comTM, NexelTM, ParamountTM and InterionTM..
See Note 2 of Notes to Condensed Consolidated Financial Statements for additional financial information about our business' geographic operations.
Discontinued Operations
See Note 1 and Note 4 of Notes to Condensed Consolidated Financial Statements for further detail on discontinued operations.
Operating Conditions
The North American industrial products market is highly fragmented and we compete against 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.
The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements, the factors that we believe may affect our future results and financial condition as well as information about how certain accounting policies and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the condensed consolidated financial statements included herein and in conjunction with the audited financial statements as of December 31, 2020 and the other information provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
The Company had a continued strong top line performance in the second quarter as revenue increased 12.6% to $272.6. million, its fourth consecutive quarter of double digit growth. Sales reflect a strong pricing environment as well as growth in most core categories. Sales of pandemic related products and supplies declined substantially on both a year over year and sequential basis as businesses reopened and safety measures were eased across our selling markets. Weekly revenue accelerated as we moved through the quarter, however, as our prior year sales improved into June, our rate of growth slowed from 30% plus in April, to low single digits in May and June. Gross margin, including both product and freight margin improved substantially on both a year over year and sequential basis. Freight margin pressures in the first quarter were largely transitional as we moved to a new third party logistics ("3PL") partner, and we completed that transition earlier than previously anticipated. Most of those costs did not recur during the second quarter. Product margins also showed improvement primarily associated with an improved mix into fulfillment of in stock and private label goods, as well as incremental price capture more than offsetting product cost increases taken in the quarter. In the period, the timing of cost and price increases, including the benefit of selling through lower cost first in, first out ("FIFO") inventory provided a premium to our gross margin. This timing benefit will not be as impactful in future quarters, but the company's goal is to maintain a price and cost balance as we navigate this inflationary market, while at the same time offering a competitive price position.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to Consolidated Financial Statements of the Company’s 2020 Annual Report on Form 10-K.
Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations, require management’s most difficult, subjective and complex judgments, and involve uncertainties. The accounting policies that have been identified as critical to our business operations and understanding the results of operations pertain to leases, revenue recognition; accounts receivable and allowance for credit losses; inventory valuation; goodwill and intangible assets; long-lived assets; and income taxes. The application of each of these critical accounting policies and estimates was discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes in the application of critical accounting policies or estimates during 2021. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the condensed consolidated financial statements of the Company accurately reflect management’s best estimate of the consolidated results of operations, financial position and cash flows of the Company for the periods presented. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. We are not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect the Company’s financial condition or results of operations.
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. See Note 1 of Notes to Condensed Consolidated Financial Statements, Recent Accounting Pronouncements.
The discussion of our results of operations and financial conditions that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the condensed consolidated financial statements included herein.
•Consolidated sales increased 12.6% to $272.6 million for the second quarter of 2021 compared to $242.1 million last year. Consolidated sales increased 11.6% to $523.7 million compared to $469.4 million last year for the six months ended June 30, 2021.
•Consolidated operating income from continuing operations increased 22.9% to $24.7 million for the second quarter of 2021 compared to $20.1 million last year. Consolidated operating income decreased 0.9% to $31.3 million compared to $31.6 million last year for the six months ended June 30, 2021.
•Net income per diluted share from continuing operations increased 37.5% to $0.55 for the second quarter of 2021 compared to $0.40 last year and increased 12.9% to $0.70 for the six months ended June 30, 2021 compared to $0.62 last year. Net income per diluted share from continuing operations was benefited in the quarter and year to date by approximately $0.09 per share as the result of the reversal of valuation allowances against the Company's Canadian net operating losses and other deferred tax assets.
Three and Six Months Ended June 30, 2021 compared to the Three and Six Months Ended June 30, 2020(1)
Key Performance Indicators* (in millions):
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
% Change
2021
2020
% Change
Net sales of continuing operations:
Consolidated net sales
$272.6
$242.1
12.6%
$523.7
$469.4
11.6%
Consolidated gross profit
$98.0
$84.8
15.6%
$175.3
$161.5
8.5%
Consolidated gross margin
36.0%
35.0%
1.0%
33.5%
34.4%
(0.9)%
Consolidated SD&A costs
$73.3
$64.7
13.3%
$144.0
$129.9
10.9%
Consolidated SD&A costs as a % of net sales
26.9%
26.7%
0.2%
27.5%
27.7%
(0.2)%
Operating income from continuing operations:
Consolidated operating income
$24.7
$20.1
22.9%
$31.3
$31.6
(0.9)%
Consolidated operating margin from continuing operations
9.1%
8.3%
0.8%
6.0%
6.7%
(0.7)%
Effective income tax rate**
14.2%
23.9%
(9.7)%
14.5%
24.8%
(10.3)%
Net income from continuing operations
$21.1
$15.3
37.9%
$26.6
$23.6
12.7%
Net margin from continuing operations
7.7%
6.3%
1.4%
5.1%
5.0%
0.1%
Net income per diluted share from continuing operations
$0.55
$0.40
37.5%
$0.70
$0.62
12.9%
Net income from discontinued operations
$0.9
$1.1
(18.2)%
$10.6
1.0
960.0%
*excludes discontinued operations (See Note 4 of Notes to Condensed Consolidated Financial Statements).
**During the second quarter of 2021, the Company reversed approximately $3.4 million, or $0.09 per diluted share, in valuation allowances against the net operating losses and deferred tax assets of its Canadian subsidiary.
1
Global Industrial Company manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation, 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 July 3, 2021 and June 27, 2020. The second quarter of both 2021 and 2020 included 13 weeks and the first six months of both 2021 and 2020 included 26 weeks.
Management’s discussion and analysis that follows will include current operations and discontinued operations.
NET SALES
The Company's net sales increased 12.6% during the quarter ended June 30, 2021 as the Company's sales reflect strong sales of seasonal products, a beneficial pricing environment, and strong customer demand for our private label products. Total customer demand in the second quarter outpaced our realized growth rate of 12.6% as open orders increased as we moved through the period due to supply chain constraints which delayed our ability to fulfill select orders. Demand accelerated as we moved through the quarter on an absolute basis, however, our rate of growth slowed to approximately 3% in June due to both the previously mentioned increase in open orders as well as the fact that our prior year comparatives showed improvement due to the surge of demand for safety and other personal protective equipment ("PPE") product last year. For the six months ended June 30, 2021, net sales increased 11.6% reflecting a continued recovery in core categories and solid customer demand for our private label products.
U.S. sales increased 12.2% in the quarter ended June 30, 2021 compared to the same period in 2020 and Canada sales were up approximately 18.0%, 4.9% in local currency. Consolidated average daily sales increased 12.6% compared to the same period last year. For the six months ended June 30, 2021, U.S. sales increased 10.4% compared to the same period in 2020 and Canada sales were up approximately 30.2%, 19.0% in local currency. Consolidated average daily sales for the six months ended June 30, 2021 increased 10.8% compared to the same period last year.
There were 64 selling days in the United States in the second quarter of 2021 and 2020 and 129 selling days in the first six months of 2021 compared to 128 selling days in 2020. In Canada there were 63 selling days in the second quarter of 2021 and 2020 and 126 selling days in the first six months of 2021 and 2020.
GROSS MARGIN
Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, vendor volume rebates, freight pricing decisions including the use of free or other promotional freight plans, freight cost inflation including both domestic outbound freight as well as international inbound ocean freight, inventory valuation and obsolescence and other variables, any or all of which have in the past and may in the future result in fluctuations in gross margin. The Company expects to see continued margin variability due to the current economic environment, inflationary pressures on both transportation and raw material costs, changes in mix as a result of the normalization of our customer’s demand of PPE and other related products, and historical seasonality.
Gross margin improved by 100 basis points in the second quarter of 2021 as compared to the second quarter of 2020 and improved by 520 basis points sequentially as compared to the first quarter of 2021. Improvement on a year over year basis was primarily the result of mix between in stock and private label products, as well as price capture which provided a net margin benefit as sell price was realized in advance of selling through higher cost inventory. These changes also contributed to the sequential quarterly improvement, but were supplemented by a reduction in transportation costs as we completed our 3PL conversion early in May, as well as a significantly reduced impact of changes to our inventory reserve that were recognized in the first quarter related to the write down of certain PPE products. Gross margin declined approximately 90 basis points for the six months ended June 30, 2021 attributable to multiple factors including an inventory write-down of $2.7 million related to certain PPE products, transitional costs incurred when moving to our 3PL partner and continued ocean freight pricing pressures partially offset by favorable product margins as the private label offering captured a larger share of our sales mix. Margin variability is still likely period to period as inflationary pressures in product costs, domestic transportation, and ocean freight rates continue to be a risk to the business.
SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (“SD&A”)
SD&A costs as a percentage of sales increased 20 basis points compared to the second quarter of 2020. In the second quarter of 2021, the significant cost increases primarily reflect the increased marketing investment of approximately $2.5 million to support customer demand shift to core product lines and private label and away from PPE, partially offset by fixed cost leverage as sales volume grew. Other cost increases include increased salary, healthcare and other employee related costs of approximately $1.8 million, increased consulting and professional fees of approximately $1.2 million related to our continuing customer centric strategy initiatives and our e-commerce optimization project, and increased temporary labor costs of approximately $0.9 million as distribution center labor availability remains tight. Additional increased rent and related costs of approximately $0.6 million and increased dues and subscription fees of approximately $0.4 million.
SD&A costs as a percentage of sales decreased 20 basis points compared to the six months ended June 30, 2020. This improved SD&A leverage reflects fixed cost leverage resulting from the sales growth in the period. Significant cost increases include approximately $3.7 million of increased salary, healthcare and other employee related costs, approximately $2.1 million of increased temporary help/help wanted advertising spend in certain of our warehouses and back office functions, $2.3 million of increased net internet advertising spend to support customer demand shift to core product lines and private label products, $1.0 million of increased rent and related costs offset by an insurance recovery of approximately $0.4 million.
DISCONTINUED OPERATIONS AND SPECIAL CHARGES
In the second quarter ended June 30, 2021, the Company's discontinued operations recorded a de minimis amount of special charges and recorded approximately $1.8 million in benefit from settlement of payable accounts offset by operating expenses of $0.4 million and approximately $0.5 million of income tax expense. For the six months ended June 30, 2021, the Company's discontinued operations received approximately $15.0 million in restitution receipts, recorded $2.3 million in benefit from settlement of payable accounts and received approximately $0.1 million in vendor settlements. Offsetting these amounts for the six months ended June 30, 2021 was approximately $3.0 million of professional fees related to the ongoing restitution proceedings, operating expenses of approximately $0.4 million and approximately $3.4 million of income tax expense. The Company expects that total additional exit charges related to discontinued operations after this quarter may aggregate up to $0.5 million.
In the second quarter ended June 30, 2020, the Company's discontinued operations received approximately $1.9 million in restitution receipts and $0.1 million in vendor settlements offset by approximately $0.4 million of professional fees and recorded approximately $0.5 million of income tax expense. For the six months ended June 30, 2020, the Company's discontinued operations received approximately $1.9 million in restitution receipts and $0.1 million in vendor settlements offset by approximately $0.5 million of professional fees and recorded approximately $0.5 million in income tax expense.
OPERATING MARGIN
Operating margin for the three months ended June 30, 2021 improved by 80 basis points compared to the second quarter in 2020. As discussed above, this improvement was driven by improved gross margins, partially offset by a slight increase in SD&A expense as a percentage of sales.
Operating margin for the six months ended June 30, 2021 declined by 70 basis points compared to the same period in 2020. This decline was driven by primarily by gross margins, partially offset by a slight decrease in SD&A expense as a percentage of sales.
INTEREST AND OTHER (INCOME) EXPENSE, NET
Interest and other (income) expense, net from continuing operations was $0.1 million in the second quarter of 2021 and a de minimis amount in the second quarter of 2020. For the six months ended June 30, 2021 and 2020, interest and other (income) expense, net from continuing operations was $0.2 million, which primarily related to interest and foreign currency exchange losses.
INCOME TAXES
In the three month period ended June 30, 2021, the Company reported income taxes in continuing operations of approximately $3.5 million. The second quarter 2021 tax rate was benefited by the reversal of valuation allowances against the Company's Canadian net operating losses and other deferred tax assets of approximately $3.4 million, or $0.09 per diluted share, as well as excess benefits from stock option exercises of approximately $0.1 million. The Company reversed these valuation allowances as it now believes it is more likely than not that the net operating losses and deferred tax assets of its Canadian subsidiary will be realized. In the six month period ended June 30, 2021, the Company reported income taxes in continuing operations of approximately $4.5 million. The six month 2021 tax rate was benefited by the above mentioned reversal of valuation allowances of approximately $3.4 million, or $0.09 per diluted share, as well as excess benefits from stock option exercises of approximately $0.5 million.
In the three month period ended June 30, 2020, the Company reported income taxes in continuing operations of approximately $4.8 million related to its U.S. and India operations including tax expense for certain U.S. states. The second quarter 2020 tax rate was benefited by pre-tax income in Canada of approximately $1.2 million. For Canadian tax purposes, the Company has full valuation allowances against the deferred tax assets, including net operating losses, of its Canadian subsidiary and taxable
income is fully offset by these net operating losses. In the six month period ended June 30, 2020, the Company reported income taxes in continuing operations of approximately $7.8 million related to its U.S. and India operations including tax expense for certain U.S. states.
Financial Condition, Liquidity and Capital Resources
The following tables present selected liquidity data and historical cash flows (in millions):
Selected liquidity data
June 30, 2021
December 31, 2020
$ Change
Cash and cash equivalents
$
41.6
$
22.4
$
19.2
Accounts receivable, net
$
111.2
$
102.3
$
8.9
Inventories
$
131.4
$
132.3
$
(0.9)
Prepaid expenses and other current assets
$
8.1
$
6.8
$
1.3
Accounts payable
$
130.1
$
125.4
$
4.7
Accrued expenses and other current liabilities
$
50.1
$
50.7
$
(0.6)
Operating lease liabilities
$
10.1
$
10.3
$
(0.2)
Working capital
$
102.0
$
77.4
$
24.6
Historical Cash Flows
Six Months Ended June 30,
2021
2020
Net cash provided by operating activities from continuing operations
$
20.5
$
13.4
Net cash provided by operating activities from discontinued operations
$
11.8
$
1.0
Net cash used in investing activities from continuing operations
$
(2.1)
$
(0.4)
Net cash used in financing activities from continuing operations
$
(11.5)
$
(53.0)
Effects of exchange rates on cash
$
0.0
$
(0.1)
Net increase (decrease) in cash and cash equivalents
$
18.7
$
(39.1)
Our primary liquidity needs are to support working capital requirements in our business and to fund recently declared and any future dividends, funding capital expenditures, continuing investment in upgrading and expanding our technological capabilities and information technology infrastructure specifically related to our e-commerce shopping experience, and sales force productivity and automation, continuing investment in upgrading and expanding our distribution footprint, and funding acquisitions. We rely principally upon operating cash flow to meet these needs. We currently believe that current cash on hand and cash flow from operations will be sufficient to fund our working capital and other cash requirements for at least the next twelve months inclusive of a continuation of current business conditions. We also 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 $24.6 million primarily related to increased cash, accounts receivable, and reduced accrued expenses and other current liabilities partially offset by increased accounts payable balances. Accounts receivable days outstanding were 36.4 in 2021 compared to 38.0 in 2020. Inventory turns were 5.4 in 2021 and 2020 and accounts payable days outstanding were 67.5 in 2021 compared to 71.9 in 2020. We expect that future accounts receivable, inventory and accounts payable balances will fluctuate with net sales and the product mix of our net sales.
Net cash provided by operating activities from continuing operations was $20.5 million compared to $13.4 million resulting from changes in our working capital accounts, which used $7.9 million in cash in 2021 compared to $14.9 million used in 2020, primarily the result of changes in inventory, accounts receivable, income taxes and accounts payable balances. Cash generated from net income adjusted by other non-cash items provided $28.4 million compared to $28.3 million in 2020 primarily due to higher net income generated in the six months ended June 30, 2021 offset by the reversal of the valuation allowances against the net operating losses and deferred tax assets of our Canadian subsidiary. Net cash provided by operating activities from discontinued operations was $11.8 million for the six months ended June 30, 2021 and $1.0 million for the six months ended June 30, 2020.
Investing Activities
Net cash used in investing activities totaled $2.1 million and was primarily for warehouse machinery and equipment for the recent expansion of our New Jersey distribution center. Net cash used in investing activities in 2020 totaled $0.4 million primarily for leasehold improvements, warehouse machinery and equipment and molds.
Financing Activities
Net cash used in financing activities totaled $11.5 million in 2021 primarily related to the regular quarterly dividend of $0.16 per share, which totaled approximately $12.5 million. Proceeds from the issuance of common stock from stock option exercises, net of payments for payroll taxes through shares withheld totaled $0.5 million and proceeds from the issuance of common stock from our employee stock purchase plan totaled $0.5 million. Net cash used in financing activities in 2020 totaled $53.0 million primarily related to the special dividend of $1.00 declared in February 2020 and the regular quarterly dividends of $0.14 per share, which totaled approximately $48.6 million and repurchases of treasury shares of $4.8 million. Proceeds from the issuance of common stock from employee stock purchase plan was $0.4 million and proceeds from stock option exercises was $0.3 million, offset by payments of payroll taxes on stock-based compensation through shares withheld of $0.3 million.
The Company maintains a $75.0 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 Company is in the process of renewing this facility on similar terms and expects to extend the term of the agreement for five years before its expiration in October 2021. 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 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 June 30, 2021, eligible collateral under the credit agreement was $75.0 million, total availability and excess availability was $72.5 million and there were no outstanding borrowings. The Company has restricted cash collateralizing letters of credit outstanding of $1.1 million at June 30, 2021 recorded within Other assets on the accompanying Condensed Consolidated Balance Sheets. The Company was in compliance with all of the covenants of the credit agreement as of June 30, 2021.
We also have certain obligations with various parties that include commitments to make future payments. Our principal commitments at June 30, 2021 consisted of payments under operating leases for certain of our real property and equipment and payments under employment, product and other service agreements. For the six months ended June 30, 2021, the Company entered into a lease for new office space, additional warehouse space, and renewed warehouse and two office space leases. Right of Use assets recorded related to these transactions were approximately $2.6 million.
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 where the need to adjust prices to gain or hold market share is prevalent.
Macroeconomic conditions, such as business and consumer sentiment, may affect our revenues, cash flows or financial condition. However, we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues, cash flows or financial condition. We are not currently interest rate sensitive, as we have no debt.
The expenses and capital expenditures described above will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources. In 2021 we anticipate capital expenditures in the range of $5.0 to $7.0 million, though at this time we are not contractually committed to incur these expenditures.
Historically 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 in debt, which could have an adverse effect on our earnings. We believe that cash balances and future cash flows from operations will be sufficient to fund our working capital and other cash requirements for 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 of June 30, 2021, we had no investments with maturities of greater than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. At June 30, 2021 cash balances held in foreign subsidiaries totaled approximately $5.7 million. These balances are held in local country banks. The Company had in excess of $109 million of liquidity (cash, restricted cash and undrawn line of credit) in the U.S. as of June 30, 2021.
Off-balance Sheet Arrangements.
The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Canadian dollars) as measured against the U.S. dollar and each other.
The translation of the financial statements of our operations outside of the United States is impacted by movements in foreign currency exchange rates. Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect income statement, balance sheet and cash flows as expressed in U.S. dollars. We have limited involvement with derivative financial instruments and do not use them for trading purposes. We may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of June 30, 2021 we had no outstanding option or forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable rate debt consists of short-term borrowings under our credit facilities. As of June 30, 2021, there were no outstanding balances under our variable rate credit facility. A hypothetical change in average interest rates of one percentage point is not expected to have a material effect on our financial position, results of operations or cash flows.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2021. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarterly period ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
