UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2018~~2019



☐	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

Systemax Inc.

(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 York 11050

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (516) 608-7000

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 ~~checkmark~~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 ☒

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)	SYX	New York Stock Exchange

The number of shares outstanding of the registrant’s Common Stock as of ~~October 31, 2018~~July 30, 2019 was ~~37,260,129.~~37,485,837.

TABLE OF CONTENTS



Available Information

Part I	Financial Information
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1817
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3126
Item 4.	Controls and Procedures	3227

Part II	Other Information
Item 1.	Legal Proceedings	33
~~Item 1A.~~	~~Risk Factors~~	34
~~Item 5.~~	~~Issuer Purchases of Equity Securities~~	3428
Item 6.	Exhibits	3529

	Signatures	3630

Available Information

We maintain an internet web site at www.systemax.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, www.systemax.com.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Systemax Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(In millions)


	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
ASSETS:
Current assets:
Cash	$	302.8		$	184.5		$	90.8		$	295.4
Accounts receivable, net	87.9			73.1			96.2			84.1
Inventories	91.2			88.2			101.4			107.3
Prepaid expenses and other current assets	8.7			3.3			4.7			10.6
Current assets of discontinued operations	0.0			145.0
Total current assets	490.6			494.1			293.1			497.4

Property, plant and equipment, net	14.3			14.0			15.3			14.9
Operating lease right-of-use assets							63.4			0.0
Deferred income taxes	12.5			20.1			9.1			8.9
Goodwill and intangibles	9.9			10.6			7.3			7.7
Other assets	1.0			1.1			1.3			1.1
Long term assets of discontinued operations	0.0			11.5
Total assets	$	528.3		$	551.4		$	389.5		$	530.0

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	105.2		$	108.1		$	116.8		$	101.1
Dividend payable	0.0			55.7			0.0			243.5
Accrued expenses and other current liabilities	38.7			38.5			39.7			35.0
Current liabilities of discontinued operations	0.0			113.5
Operating lease liabilities							11.4			0.0
Total current liabilities	143.9			315.8			167.9			379.6
Deferred income tax liability							0.1			0.1
Other liabilities	13.1			20.0			2.6			12.6
Long term liabilities of discontinued operations	0.0			3.8
Operating lease liabilities							62.8			0.0
Total liabilities	157.0			339.6			233.4			392.3

Commitments and contingencies

Shareholders’ equity:
Preferred stock	0.0			0.0			0.0			0.0
Common stock	0.4			0.4			0.4			0.4
Additional paid-in capital	186.5			186.5			188.1			187.0
Treasury stock	(25.7		)	(21.8		)	(23.2		)	(25.1		)
Retained earnings	206.9			44.8			(12.3		)	(27.6		)
Accumulated other comprehensive income	3.2			1.9			3.1			3.0
Total shareholders’ equity	371.3			211.8			156.1			137.7
Total liabilities and shareholders’ equity	$	528.3		$	551.4		$	389.5		$	530.0

See Notes to Condensed Consolidated Financial Statements.

Systemax Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(In millions, except per share amounts)


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017			2019			2018		2019			2018
Net sales	$	235.8		$	204.4	$	679.2		$	597.3		$	248.6		$	231.2	$	480.8		$	443.4
Cost of sales	153.6			133.2		444.5			389.4			162.6			151.2		314.5			290.9
Gross profit	82.2			71.2		234.7			207.9			86.0			80.0		166.3			152.5
Selling, distribution & administrative expenses	62.9			58.6		186.0			173.1			66.0			61.7		133.1			123.1
Special charges	0.9			0.1		0.9			0.3
Operating income from continuing operations	18.4			12.5		47.8			34.5			20.0			18.3		33.2			29.4
Interest and other (income) expense, net	(0.3		)	0.2		(0.2		)	(0.2		)	(0.1		)	0.0		(0.1		)	0.1
Income from continuing operations before income taxes	18.7			12.3		48.0			34.7			20.1			18.3		33.3			29.3
Provision for income taxes	3.6			1.0		10.8			1.8			5.2			4.9		8.4			7.2
Net income from continuing operations	15.1			11.3		37.2			32.9			14.9			13.4		24.9			22.1
Income (loss) from discontinued operations, net of tax	163.7			0.0		174.4			(26.3		)	(0.3		)	4.8		(0.6		)	10.7
Net income	$	178.8		$	11.3	$	211.6		$	6.6		$	14.6		$	18.2	$	24.3		$	32.8

Net income per common share from continuing operations:
Basic	$	0.41		$	0.31	$	1.00		$	0.89		$	0.40		$	0.36	$	0.66		$	0.59
Diluted	$	0.40		$	0.30	$	0.98		$	0.88		$	0.39		$	0.35	$	0.66		$	0.58
Net income (loss) per common share from discontinued operations:
Basic	$	4.40		$	0.00	$	4.69		$	(0.71	)	$	(0.01	)	$	0.13	$	(0.02	)	$	0.29
Diluted	$	4.32		$	0.00	$	4.59		$	(0.70	)	$	(0.01	)	$	0.13	$	(0.02	)	$	0.28
Net income per common share:
Basic	$	4.81		$	0.31	$	5.69		$	0.18		$	0.39		$	0.49	$	0.64		$	0.88
Diluted	$	4.72		$	0.30	$	5.57		$	0.18		$	0.38		$	0.48	$	0.64		$	0.87

Weighted average common and common equivalent shares:
Basic	37.2			37.0		37.2			37.0			37.5			37.2		37.4			37.2
Diluted	37.9			37.7		38.0			37.4			37.9			37.9		37.9			37.9

Dividends declared	$	0.11		$	0.10	$	1.33		$	0.25		$	0.12		$	1.11	$	0.24		$	1.22

See Notes to Condensed Consolidated Financial Statements.

Systemax Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In millions)


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017		2019		2018			2019		2018
Net income	$	178.8		$	11.3	$	211.6		$	6.6	$	14.6	$	18.2		$	24.3	$	32.8
Other comprehensive income:
Other comprehensive income (loss):
Foreign currency translation	(0.5		)	2.1		(2.8		)	6.9		0.1		(3.7		)	0.1		(2.3		)
Total comprehensive income	$	178.3		$	13.4	$	208.8		$	13.5	$	14.7	$	14.5		$	24.4	$	30.5

See Notes to Condensed Consolidated Financial Statements.

Systemax Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)


	Nine Months Ended September 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Cash flows from operating activities:
Income from continuing operations	$	37.2		$	32.9		$	24.9		$	22.1
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	3.3			3.5			2.0			2.2
Provision for returns and doubtful accounts	0.2			1.0			0.3			0.0
Compensation expense related to equity compensation plans	0.5			1.1
Stock-based compensation							2.8			0.8
Provision for deferred taxes	0.6			0.5			(0.2		)	0.2
Gain on disposition and abandonment	0.0			(0.1		)	0.1			0.0
Changes in operating assets and liabilities:
Accounts receivable	(15.8		)	(13.1		)	(12.8		)	(10.4		)
Inventories	(3.2		)	(2.4		)	6.0			(1.5		)
Prepaid expenses and other current assets	(3.1		)	(0.6		)
Prepaid expenses and other assets							(1.2		)	(2.2		)
Income taxes payable	4.5			0.3			5.9			5.5
Accounts payable	(2.7		)	8.2			15.4			3.2
Accrued expenses, other current liabilities and other liabilities	(6.3		)	6.7
Accrued expenses, other current and non current liabilities							6.9			(1.9		)
Net cash provided by operating activities from continuing operations	15.2			38.0			50.1			18.0
Net cash used in operating activities from discontinued operations	(35.1		)	(4.6		)
Net cash (used in) provided by operating activities	(19.9		)	33.4
Net cash provided by (used in) operating activities from discontinued operations							0.1			(1.7		)
Net cash provided by operating activities							50.2			16.3

Cash flows from investing activities:
Purchases of property, plant and equipment	(2.9		)	(1.4		)	(2.4		)	(1.1		)
Proceeds from disposals of property, plant and equipment	0.0			0.1
Net cash used in investing activities from continuing operations	(2.9		)	(1.3		)	(2.4		)	(1.1		)
Net cash provided by (used in) investing activities from discontinued operations	249.6			(0.3		)
Net cash provided by (used in) investing activities	246.7			(1.6		)
Net cash used in investing activities from discontinued operations							0.0			(0.3		)
Net cash used in investing activities							(2.4		)	(1.4		)

Cash flows from financing activities:
Dividends paid	(105.2		)	(9.2		)	(252.5		)	(101.1		)
Proceeds from issuance of common stock	4.2			1.6			0.6			0.9
Payment of payroll taxes on stock-based compensation through shares withheld	(1.4		)	(0.3		)	(0.8		)	(1.3		)
Repayments of capital lease obligations	0.0			(0.1		)
Repurchase of treasury shares	(9.1		)	0.0
Proceeds from the issuance of common stock from employee stock purchase plan							0.4			0.0
Net cash used in financing activities	(111.5		)	(8.0		)	(252.3		)	(101.5		)

Effects of exchange rates on cash	3.0			2.5			(0.1		)	(1.0		)

Net increase in cash	118.3			26.3
Net decrease in cash							(204.6		)	(87.6		)
Cash – beginning of period	184.5			149.7			295.4			184.5
Cash – end of period	$	302.8		$	176.0		$	90.8		$	96.9

Supplemental disclosures of non-cash investing and financing activities:
Acquisition of equipment through capital leases	$	0.0		$	0.3
Supplemental disclosures of non-cash operating and investing activities:
Right-of-use assets obtained in exchange for lease obligations:
Operating leases							$	14.7		$	0.0

See Notes to Condensed Consolidated Financial Statements.

Systemax Inc.

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(In millions)


	Common Stock																			Common Stock
	Number of Shares Outstanding		Amount		Additional Paid-in Capital			Treasury Stock, At Cost			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity			Number of Shares Outstanding		Amount		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total Equity
Balances, January 1, 2018	37,094		$	0.4	$	186.5		$	(21.8	)	$	44.8		$	1.9		$	211.8		37,094		$	0.4	$	186.5		$	(21.8	)	$	44.8		$	1.9		$	211.8
Stock-based compensation expense					2.4												2.4							0.4												0.4
Issuance of restricted stock	107				(1.3		)	1.3									0.0			38				(0.5		)	0.5									0.0
Stock withheld for employee taxes	(45	)			(0.8		)	(0.6		)							(1.4		)	(31	)			(0.5		)	(0.4		)							(0.9		)
Proceeds from issuance of common stock	337				(0.3		)	4.5									4.2			72				(0.1		)	0.9									0.8
Dividends declared											(49.5		)				(49.5		)											(4.1		)				(4.1		)
Repurchase of treasury shares	(233	)						(9.1		)							(9.1		)
Discontinued France operations cumulative translation adjustment														4.1			4.1
Change in cumulative translation adjustment														(2.8		)	(2.8		)														1.4			1.4
Net income											211.6						211.6													14.6						14.6

Balances, September 30, 2018	37,260		$	0.4	$	186.5		$	(25.7	)	$	206.9		$	3.2		$	371.3
Balances March 31, 2018																				37,173		$	0.4	$	185.8		$	(20.8	)	$	55.3		$	3.3		$	224.0
Stock-based compensation expense																								0.4												0.4
Issuance of restricted stock																				19				(0.2		)	0.2									0.0
Stock withheld for employee taxes																				(10	)			(0.3		)	$	(0.1	)							(0.4		)
Proceeds from issuance of common stock																				10							$	0.1								0.1
Dividends declared																														(41.3		)				(41.3		)
Change in cumulative translation adjustment																																	(3.7		)	(3.7		)
Net income																														18.2						18.2
Balances, June 30, 2018																				37,192		$	0.4	$	185.7		$	(20.6	)	$	32.2		$	(0.4	)	$	197.3



	Common Stock
	Number of Shares Outstanding		Amount		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income		Total Equity
Balances, January 1, 2019	37,335		$	0.4	$	187.0		$	(25.1	)	$	(27.6	)	$	3.0	$	137.7
Stock-based compensation expense					1.5											1.5
Issuance of restricted stock	103				(1.8		)	1.8								0.0
Stock withheld for employee taxes	(34	)						(0.8		)						(0.8		)
Proceeds from issuance of common stock	3															0.0
Issuance of shares under employee stock purchase plan	21				0.4											0.4
Dividends declared											(4.5		)			(4.5		)
Change in cumulative translation adjustment														0.0		0.0
Net income											9.7					9.7
Balances, March 31, 2019	37,428		$	0.4	$	187.1		$	(24.1	)	$	(22.4	)	$	3.0	$	144.0
Stock-based compensation expense					1.3											1.3
Issuance of restricted stock	6															0.0
Stock withheld for employee taxes	(1	)														0.0
Proceeds from issuance of common stock	53				(0.3		)	0.9								0.6
Dividends declared											(4.5		)			(4.5		)
Change in cumulative translation adjustment														0.1		0.1
Net income											14.6					14.6
Balances, June 30, 2019	37,486		$	0.4	$	188.1		$	(23.2	)	$	(12.3	)	$	3.1	$	156.1

See Notes to Condensed Consolidated Financial Statements.

Systemax Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)


1.	Basis of Presentation

The accompanying condensed consolidated financial statements of Systemax Inc., with its subsidiaries, (the "Company") are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. All significant intercompany accounts and transactions have been eliminated in consolidation.

OnAs previously disclosed, in August ~~31,~~ 2018 the Company ~~closed on the sale of~~sold its France-based IT ~~value added reseller business to Bechtle AG. The sale was denominated on a cash-free, debt-free basis and included normalized working capital adjustments. The Company recorded a pre-tax book gain on~~business. With the sale of the France business, which was reported within the discontinued operations of the Company's European Technology Products Group ("ETG") segment, of approximately $178.2 million. The pre-tax book gain included proceeds from the sale of approximately $267.3 million offset by the $82.5 million of net assets sold and by expenses related to the sale of approximately $6.6 million. These expenses included $5.1 million of deal transaction costs and $1.5 million for accelerated amortization expense of restricted stock units and stock options. Of the expenses mentioned, $5.1 million of deal transaction costs required or will require the use of cash. The Company is providing limited transition services to the France business for a period of up to six months, following the closing, under a transition services agreement.

On March 24, 2017, certain wholly owned subsidiaries of the Company executed a definitive securities purchase agreement (the “Purchase Agreement”) with certain special purpose companies formed by Hilco Capital Limited (“Hilco” and together with its management team partners, “Purchaser”). Pursuant to the Purchase Agreement, Purchaser acquired all of the Company’s interests in Systemax Europe SARL, which included its subsidiaries, Systemax Business Services K.F.T., Misco UK Limited, Systemax Italy S.R.L., Misco Iberia Computer Supplies S.L., Misco AB, Global Directmail B.V. and Misco Solutions B.V. (collectively, the “SARL Businesses”). The Company retained its France technology value added reseller business, which is conducted through its subsidiary, Inmac Wstore S.A.S., which was not partcompletion of the sale, ~~transaction. The SARL Businesses were reported within the Company's European Technology~~Systemax operates and is internally managed in one reportable business segment, its Industrial Products Group ~~("ETG"~~(“IPG”), which includes its former Corporate and other segment. ~~The transaction closed immediately upon execution of the Purchase Agreement.~~

~~The SARL Businesses were sold~~IPG focuses on ~~a cash-free, debt-free basis; proceeds were nominal. As part of the transaction,~~industrial supplies and MRO (maintenance, repair and operations) markets the Company retained a 5% residual equity position in the Purchaser’s acquiring entity, HUK 77 Limited, which was accounted for on the cost method, to which no value was ascribed, a $3.3 million note receivable ($2.2 million balance at December 31, 2017 which was paid in full in January 2018) and provided limited transition services to Purchaser through December 19, 2017 under a transition services agreement. The note receivable was included in accounts receivable, net in the Condensed Consolidated Balance Sheet at December 31, 2017.has served since 1949.

The sale of the France based IT business, ~~and SARL Businesses~~which had been included in the Company's former European Technology Products segment, met the “strategic shift with major impact” criteria as defined under Accounting Standards Update ~~(“ASU”~~("ASU") 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an ~~Entity~~Entity"., which requires disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under ASU 2014-08 in order for a disposal to qualify for discontinued operations presentation in the financial statements, the disposal must be a “strategic shift” with a major impact for the reporting entity. If the entity meets this threshold, and other requirements, only the components that were in operation at the time of disposal are presented as discontinued operations. Therefore, the ~~current and~~ prior year results of the ~~France~~France-based IT business ~~and SARL Businesses~~ are included in discontinued operations in the accompanying ~~condensed consolidated financial statements.~~

On September 2, 2016, the Company sold certain assets of its Misco Germany operations which had been reported as part of its ETG segment. As this disposition was not a strategic shift with a major impact as defined under ASU 2014-08, any current and prior year results of the German operations are presented within continuing operations in the condensed consolidated financial statements. ~~With~~For the ~~sale~~three and six month periods ended June 30, 2019, there were no net sales or net income/loss of the France business included in ~~August~~discontinued operations. For the three and six month periods ended June 30, 2018, ~~these results are now presented~~net sales of the France business included in discontinued operations totaled $131.9 million and $274.9 million, respectively, and net income of the ~~"Corporate~~France business included in discontinued operations totaled $4.4 million and ~~other" segment.~~ $9.9 million, respectively.

~~On December 1, 2015,~~As previously disclosed, in March 2017 the Company sold Systemax Europe SARL and its subsidiaries (the “SARL Businesses”) which had been included in the Company's former European Technology Products segment. The sale of the SARL Businesses met the “strategic shift with major impact” criteria as described above. For the three and six month periods ended June 30, 2019, there were no net sales or net income/loss of the SARL Businesses included in discontinued operations. For the three and six month periods ended June 30, 2018, there were no net sales of the SARL Businesses included in discontinued operations. For the three and six month periods ended June 30, 2018, net income of the SARL Businesses included in discontinued operations totaled $0.4 million and $0.2 million, respectively.

Also included in discontinued operations is the Company’s former North American Technology Group ("NATG") ~~operating businesses~~business, which was sold in December 2015 and ~~began the wind-down of~~is winding down its ~~remaining NATG~~ operations. The sale of the NATG business had a major impact on the Company and therefore certain components met the strategic shift criteria as defined under ASU 2014-08. ~~The NATG components in operation at the time of the sale were the B2B and Ecommerce businesses and three retail stores.~~ Accordingly, these components and any related results of operations ~~will be~~are reflected in discontinued operations. ~~The Company has financial obligations related to leased facilities~~For the three and six month periods ended June 30, 2019 and 2018, there were no net sales of ~~its former~~the NATG business ~~of approximately $17.5 million. Some of these leased facilities have been sublet~~included in discontinued operations. Net loss from the NATG business was $0.3 million and ~~others are being marketed~~$0.6 million, respectively, for ~~sublet. The Company has engaged nationally recognized real estate firms to market these facilities~~the three and ~~to assist in establishing~~six month periods ended June 30, 2019, and net income from the ~~reserves~~NATG business was zero for the ~~Company carries for these lease obligations. As of September~~three months ended June 30, 2018 ~~the Company has a reserve of $6.7~~and $0.6 million for ~~these lease obligations. The reserves established consider~~ the total lease obligations of $17.5 million, current sublet income streams and projected sublet income streams. On a quarterly basis these reserves are re-evaluated particularly related to the projected sublease income streams. In the third quarter of 2018, the Company recorded lease reserves of approximately $2.6 million for these leased facilities, of which $0.8 million was recorded within continuing operations and $1.8 million within discontinued operations and for the ninesix months ended ~~September~~June 30, 2018, the Company recorded lease reserves of $2.5 million, of which $0.8 million was recorded within continuing operations and $1.7 million was recorded within discontinued operations. The Company expects that further adjustment may be needed in the future for the remaining facilities if current sublease assumptions do not materialize.2018.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of ~~September~~June 30, ~~2018~~2019 and the results of operations for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, statements of comprehensive income (loss) for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, cash flows for the ~~nine~~six month periods ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 and changes in shareholders’ equity for the ~~nine~~three and six month ~~period~~periods ended ~~September~~June 30, 2019 and 2018. The December 31, ~~2017~~2018 Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, ~~2017~~2018 and for the year then ended included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018. The results for the ~~nine~~six month period ended ~~September~~June 30, ~~2018~~2019 are not necessarily indicative of the results for the entire year.

Systemax manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation herein, fiscal years and quarters are referred to as if they ended on the traditional calendar month. The actual fiscal ~~third~~second quarter ended on ~~September~~June 29, ~~2018~~2019 and ~~September~~June 30, ~~2017.~~2018. The ~~third~~second quarters of both ~~2018~~2019 and ~~2017~~2018 included 13 weeks and the first ~~nine~~six months of both 2019 and 2018 ~~and 2017~~ included 3926 weeks.

Recent Accounting Pronouncements

Public companies in the United States are subject to the accounting and reporting requirements of various authorities, including the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). These authorities issue numerous pronouncements, most of which are not applicable to the Company’s current or reasonably foreseeable operating structure.

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~, which amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The new revenue recognition standard is effective for interim and annual periods beginning on January 1, 2018. The new standard was required to be adopted using either a full-retrospective or a modified-retrospective approach. The Company adopted the new standard using the modified-retrospective approach beginning on January 1, 2018. There was no material impact to total revenues in our consolidated statements of income, accounting policies, business processes, internal controls or disclosures. See Note 2 of the Notes to condensed consolidated financial statements.

~~In July 2018, the FASB issued ASU 2018-11,~~ ~~Leases (Topic 842) Targeted Improvements,~~ ~~whichprovides entities with an additional (and optional)~~transition method, in addition to the existing transition method, the modified retrospective approach, to adopt the new leases standard by allowing entities to initially apply the new leases standard, ASU 2016-02, ~~Leases (Topic 842),~~ at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This additional transition method changes only when an entity is required to initially apply the transition requirements of the new leases standard; it does not change how those requirements apply. An entity's reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP. ASU 2016-02 related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding

right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently in the process of evaluating which method to adopt. The Company believes the adoption of the new leasing standard will have a material impact on the consolidated financial statements as the estimated increase of right-of-use assets and lease liabilities on the consolidated balance sheets is expected to exceed $50 million. The ultimate impact, however, will depend on the Company's lease portfolio as of the adoption date.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted after adoption of ASU 2014-09. The Company ~~is evaluating~~adopted this standard beginning January 1, 2019 and its adoption did not materially impact the ~~effect~~Company's consolidated financial position or results of ~~adopting this pronouncement.~~operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements, which eliminates, adds or modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted to adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company is evaluating the effect of adopting this pronouncement.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted, including adoption in any interim period. The Company is evaluating the effect of adopting this pronouncement.

In ~~March 2017,~~June 2016, the FASB ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as modified by subsequently issued ASU ~~2017-04,~~ ~~Intangibles-Goodwill and Other: Simplifying the Test~~2018-19. This ASU requires estimating credit losses for ~~Goodwill Impairment.~~ which eliminates the second step from the goodwill impairment test. An entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceedscertain financial instruments, including trade receivables, held at the reporting ~~unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit.~~date based on historical experience, current conditions and reasonable forecasts. This ASU is effective for fiscal years ~~and interim periods within those fiscal years,~~ beginning after December 15, 2019, ~~with early adoption permitted.~~including interim periods within that fiscal year. The Company is evaluating the effect of adopting this pronouncement.

2. Leases

~~In May 2017,~~On January 1, 2019, the ~~FASB issued~~Company adopted ASU ~~2017-09,~~ 2016-02, "~~Compensation - Stock Compensation~~Leases" (Topic ~~718) Scope~~842). This ASU requires all companies to record their operating and finance leases that meet certain criteria under the standard as Right of ~~Modification Accounting,~~ ~~which clarifies when changes to~~Use ("ROU") assets with the ~~terms or conditions of a share-based payment award must be accounted for~~corresponding lease obligations recorded as ~~modifications. This new guidance will be applied prospectively to awards modified on or after the adoption date. This standard is effective for annual periods,~~short term and ~~interim periods within those annual periods, beginning after December 15, 2017.~~long term liabilities. The Company adopted this standard ~~beginning~~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. Leases with a term of one year or less are not considered to be ROU assets. 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, at January 1, ~~2018~~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 unused space we lease in the United States and ~~its adoption did not materially impact~~Germany. For the three and six month periods ended June 30, 2019, the Company recorded $0.4 million and $1.0 million, respectively, of sublease income in continuing and discontinued operations.

In April 2019, the Company entered into a lease agreement for a portion of a distribution facility located in Texas for approximately 490,000 square feet and a lease term of 125 months. The total lease obligation is approximately $19.8 million. The Company is separately charged for real estate taxes, insurance and common area maintenance. The Company recorded an ROU asset and related lease liability of approximately $14.7 million during the second quarter of 2019.

The following table details the Company's ~~consolidated financial position or results~~ROU asset operating lease cost, included in continuing operations, for the three and six months ended June 30, 2019 (in millions):



	Three Months Ended June 30,		Six Months Ended June 30,
	2019		2019
Operating lease cost	$	3.0	$	5.7

The following tables detail the Company's ROU asset activity for continuing and discontinued operations as of ~~operations when implemented in~~June 30, 2019.



	Six Months Ended June 30,
	2019
Weighted Average Remaining Lease Term
Operating leases	8.5 years

Weighted Average Discount Rate
Operating leases	5.7	%

Maturities of lease liabilities were as follows (in millions):



Year Ending December 31	Operating Leases
2019 (remaining six months)	$	5.4
2020	13.9
2021	10.9
2022	9.9
2023	9.8
Thereafter	45.0
Total lease payments	94.9
Less: interest	(20.7		)
Total present value of lease liabilities	$	74.2

The Company currently leases its headquarters office facility from an entity owned by the ~~first quarter of 2018.~~

Company’s principal shareholders.


2.3.	Revenue

~~As a result of the sale of the Company's France business, the~~The Company’s revenue generated by its operating subsidiaries is ~~now~~ comprised of sales of ~~maintenance, repair and operational (“MRO”)~~MRO products as well as other industrial and business supplies that are sold by the ~~Industrial Products Group ("IPG"). Information and communications technology (“ICT”) products that were sold by ETG are now reported within discontinued operations.~~IPG segment. IPG also has revenues from related activities, such as freight and, to a lesser extent, services.

The Company recognizes revenue when a sales arrangement with a customer exists through the Company’s invoicing or a contract, the performance obligations have been identified, the transaction price is fixed or determinable and the Company has satisfied its performance obligations. The Company’s standard terms, provided on its invoices as well as on its websites, are included in communications with the customer and have standard payment terms of 30 days. Certain customers may have extended payment terms that have been pre-approved by the Company’s credit department, but generally none extend longer than 120 days.

The Company’s performance obligation is primarily a single obligation to deliver products. The Company’s performance obligations are satisfied when products are transferred to a customer in accordance with agreed upon shipping terms. Certain sales may include product and/or services that are distinct and accounted for as separate performance obligations. The Company’s performance obligations for services are satisfied when the services are rendered. The Company’s total service revenue is immaterial as it accounted for less than 1% of total revenue for the ~~third~~second quarter and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019 and 2018, respectively.

The Company’s revenue is shown as “Net sales” in the accompanying Condensed Consolidated Statements of Operations and is measured as the determined transaction price, net of any variable consideration consisting primarily of rights to return product. The Company has elected to treat shipping and handling revenues as activities to fulfill its performance obligation. Billings for freight and shipping and handling are recorded in net sales and costs of freight and shipping and handling are recorded in cost of sales in the accompanying Condensed Consolidated Statements of Operations.

The Company records a contract liability in cases where customers pay in advance of the Company satisfying its performance obligation. The Company did not have any material unsatisfied performance obligations or liabilities as of ~~September~~June 30, 2019 and December 31, 2018.

The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates isits sales returns liability quarterly, based upon its historical returns rates, as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately ~~$2.3~~$2.1 million and $1.8 million at ~~September~~June 30, 2019 and December 31, 2018, respectively, and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets.

Disaggregation of Revenues

IPG serves customers in diverse geographies, which are subject to different economic and industry factors. The Company's presentation of revenue by geography most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and industry factors. Revenue is attributed to countries based on the location of the selling subsidiary.

The following table presents the Company's revenue by ~~reportable segment and by~~ geography for the three and ~~nine~~six months ~~periods~~ ended ~~September~~June 30, ~~2018:~~2019 and 2018 (in millions):


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended June 30,				Six Months Ended June 30,
	2018		2018		2019		2018		2019		2018
Net sales:
IPG MRO products and industrial supplies-United States	$	225.1	$	647.5
IPG MRO products and industrial supplies-Canada	10.7		31.7
MRO products and industrial supplies-United States					$	236.7	$	220.4	$	457.5	$	422.4
MRO products and industrial supplies-Canada					11.9		10.8		23.3		21.0
Consolidated	$	235.8	$	679.2	$	248.6	$	231.2	$	480.8	$	443.4


3.4.	~~Dispositions~~Discontinued Operations and Special Charges (Gains)

The Company’s discontinued operations include the results of the France business sold in August 2018, the SARL Businesses sold in March 2017 and the NATG business sold in December 2015 (See Note 1).

In the ~~third~~second quarter ~~and for~~ended June 30, 2019, the ~~nine months ended September 30, 2018, the Company recorded a pre-tax book gain on the sale of the France business, which was reported within the~~Company's NATG discontinued operations of the Company's ETG segment, of approximately $178.2 million. The pre-tax book gain included proceeds from the sale of approximately $267.3 million offset by the $82.5 million of net assets sold and by expenses related to the sale of approximately $6.6 million. These expenses

included $5.1 million of deal transaction costs and $1.5 million for accelerated amortization expense of restricted stock units and stock options. Of the expenses mentioned, $5.1 million of deal transaction costs required or will require the use of cash.

In the third quarter of 2018, there were a de minimis amount of legal and professional fees incurred related to the wind down of the SARL Businesses. For the nine months ended September 30, 2018, the Company recordedreceived approximately $0.2 million in ~~recoveries of escrow funds,~~vendor settlements and for the six months ended June 30, 2019, the Company's received approximately $0.2 million in vendor settlements and recorded approximately $0.1 million of ~~accelerated depreciation charges and $0.1 million for legal and~~ professional fees related to the wind down of the SARL Businesses, within discontinued operations. The impact of the previously mentioned charges and recoveries related to the wind down of the SARL Businesses for the nine months ended September 30, 2018, net to zero. Of the previously mentioned charges, legal and professional fees required the use of cash.fees. The Company expects that total additional charges related to the ~~wind down of the SARL businesses will be less than $1.0 million.~~

In the third quarter of 2018, the Company's NATG discontinued operations received $0.3 million in restitution receipts from a former executive of NATG, recorded approximately $0.1 million in favorable accrual adjustments related to the ongoing restitution proceedings and recorded $1.8 million in lease reserve adjustments related to their leased facilities, within discontinued operations. For the nine months ended September 30, 2018, the Company's NATG discontinued operations received $1.0 million in restitution receipts from a former executive of NATG, recorded lease reserves adjustments of approximately $1.7 million related to their leased facilities, received $0.1 million in vendor settlements and recorded legal and professional fees, related to the ongoing restitution proceedings, of $0.1 million. The impact of the previously mentioned charges and recoveries related to the NATG discontinued operations totaled $0.7 million for the nine months ended September 30, 2018. The Company expects that total additional charges related to the sale of the NATG business after this quarter will ~~be less than~~approximately $1.0 million and that these charges will be presented in discontinued operations. Additional costs may be incurred in NATG for outstanding leased facilities if current sublease assumptions do not materialize (see Note 1). Most of these anticipated costs will require the use of cash. Amounts that are unpaid at September 30, 2018 are recorded in Accrued expenses and other current liabilities and Other liabilities (long term) in the accompanying Condensed Consolidated Balance Sheets.

In the ~~third~~second quarter ended June 30, 2018, the Company recorded, within discontinued operations, net recoveries of $0.1 million related to the wind-down of the SARL Businesses. The Company received escrow funds of approximately $0.2 million and ~~for~~recorded approximately $0.1 million of accelerated depreciation on fixed assets. For the ~~nine~~six months ended ~~September~~June 30, 2018, the Company recorded $0.2 million recoveries of escrow funds, $0.1 million of accelerated depreciation and $0.1 million for legal and professional fees.

In the second quarter ended June 30, 2018, the Company's NATG ~~continuing~~discontinued operations received $0.1 million in vendor settlements, recorded ~~approximately $0.8~~$0.1 million ~~of special charges for updating our future~~in lease ~~cash flows expectations~~reserve adjustments related to ~~previously~~their exited ~~retail stores~~leased facilities and ~~a warehouse.~~

~~In the third quarter and for the nine months ended September 30, 2018, the Company's German continuing operations~~ recorded approximately $0.1 million of ~~special charges for updating future~~legal and professional fees. For the six months ended June 30, 2018, the Company received $0.7 million in restitution receipts, received $0.1 million in vendor settlements, recorded approximately $0.2 million of legal and professional fees and recorded $0.1 million in favorable lease ~~cash flows expectations~~reserve adjustments related to ~~a previously exited lease obligation.~~their leased facilities.

Below is a summary of the impact on net sales, net income (loss) and net income (loss) per share from discontinued operations for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017. A reconciliation of pretax~~2018.

Pretax income (loss) of Discontinued operations to the Net Income (loss) of discontinued operations is as follows (in millions):

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Net sales $ 77.1
$ 114.9
$ 352.0
$ 454.5
Cost of sales 66.2
96.5
295.8
385.4
Gross profit 10.9
18.4
56.2
69.1
Selling, distribution & administrative expenses 6.7
15.3
36.0
59.8
Pre-tax book gain on sale of France business (178.2 ) 0.0
(178.2 ) 0.0
Special charges 1.4
0.3
0.7
28.6
Operating income (loss) from discontinued operations 181.0
2.8
197.7
(19.3 )
Interest and other (income) expenses, net 0.1
0.4
(0.2 ) 1.0
Income (loss) from discontinued operations before income taxes 180.9
2.4
197.9
(20.3 )
Provision for income taxes 17.2
2.4
23.5
6.0
Net income (loss) from discontinued operations $ 163.7
$ 0.0
$ 174.4
$ (26.3 )
Net income (loss) per share – basic $ 4.40
$ 0.00
$ 4.69
$ (0.71 )
Net income (loss) per share – diluted $ 4.32
$ 0.00
$ 4.59
$ (0.70 )

Total special charges incurred, within discontinued operations, in the third quarter of 2017 totaled approximately $0.3 million, of which $0.2 million related to the discontinued operations of the SARL business related to a transitional services agreement and, within NATG discontinued operations, approximately $0.1 million of professional costs were incurred related to the ongoing restitution proceedings against certain former NATG executives.

Total special charges incurred, within discontinued operations, for the nine months ended September 30, 2017 totaled approximately $28.6 million. The combined loss on the sale of the SARL Businesses totaled $24.4 million, which included an $8.2 million loss on the sale of net assets, $14.4 million of translation adjustments, and $1.0 million of legal, professional and other costs, $0.3 million of severance and other personnel costs and $0.3 million of accelerated depreciation charges and $0.2 million related to a transitional services agreement. In addition, NATG discontinued operations incurred special charges of $4.2 million, which included approximately $3.5 million primarily related to updating our future lease cash flows and $0.7 million related to the ongoing restitution proceedings against certain former NATG executives.

Total special charges incurred, within continuing operations, in the third quarter of 2017 and nine months ended September 30, 2017 totaled $0.1 million and $0.3 million, respectively. These charges related to updating our future lease cash flows expectations related to our previously exited retail stores.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net sales	$	0.0		$	131.9		$	0.0		$	274.9
Cost of sales	0.0			110.8			0.0			229.6
Gross profit	0.0			21.1			0.0			45.3
Selling, distribution & administrative expenses	0.4			13.7			0.8			29.3
Special charges (gains)	(0.2		)	0.0			(0.1		)	(0.7		)
Operating (loss) income from discontinued operations	(0.2		)	7.4			(0.7		)	16.7
Interest and other (income) expenses, net	0.0			(0.1		)	0.0			(0.3		)
Income (loss) from discontinued operations before income taxes	(0.2		)	7.5			(0.7		)	17.0
Provision (benefit) for income taxes	0.1			2.7			(0.1		)	6.3
Net income (loss) from discontinued operations	$	(0.3	)	$	4.8		$	(0.6	)	$	10.7
Net income (loss) per share – basic	$	(0.01	)	$	0.13		$	(0.02	)	$	0.29
Net income (loss) per share – diluted	$	(0.01	)	$	0.13		$	(0.02	)	$	0.28

The following table details liabilities related to the sold NATG segment’s ~~leases and other costs and liabilities~~non-lease components that remain ~~from the sold Misco Germany business (Corporate)~~ as of ~~September~~June 30, ~~2018~~2019 (in millions):

Corporate – Lease
liabilities and
other costs

NATG – Lease
liabilities and
other exit costs
Total
Balance January 1, 2018 $ 1.2
$ 19.0
$ 20.2
Charged to expense (income) 0.1
2.5
2.6
Paid or otherwise settled (0.2)
(14.8 ) (15.0 )
Balance September 30, 2018 $ 1.1
$ 6.7
$ 7.8



	NATG – Non-lease components
Balance January 1, 2019	$	2.8
Charged to expense	0.7
Paid or otherwise settled	(0.3		)
Balance June 30, 2019	$	3.2

.On January 1, 2019 the Company reclassified approximately $3.4 million of the opening balance of the NATG exit cost liability to ROU assets and operating lease obligations.


4.5.	Net Income ~~(Loss)~~ per Common Share

Net income per common share - basic was calculated based upon the weighted average number of common shares outstanding during the respective periods presented using the two class method of computing earnings per share. The two class method was used as the Company has outstanding restricted stock with rights to dividend participation for unvested shares. Net income per common share - diluted was calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective periods, including unvested options. The dilutive effect of outstanding options and restricted stock issued by the Company is reflected in net income per share - diluted using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options.

The weighted average number of stock options outstanding included in the computation of diluted earnings per share was ~~0.5~~0.3 million and $0.6 million shares for the three months ended ~~September~~June 30, 2019 and 2018, respectively, and ~~2017,~~0.3 million shares and 0.6 million shares for the six months ended June 30, 2019 and 2018, respectively. The weighted average number of restricted stock awards included in the computation of diluted earnings per share was ~~0.2~~0.1 million and 0.1 million shares for the three months ended ~~September~~June 30, 2019 and 2018, respectively, and ~~2017. The weighted average number of stock options outstanding included in the computation of diluted earnings per share was 0.6~~0.2 million shares and 0.2 million shares for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, and 2017, respectively, and the weighted average number of restricted stock awards included in the computation of diluted earnings per share was 0.2 million shares for the nine months ended September 30, 2018 and 2017.respectively. The weighted average number of stock options outstanding excluded from the computation of diluted earnings per share due to their antidilutive effect was ~~zero shares for the three months ended September 30, 2018 and 2017, and zero shares and~~ 0.2 million shares for the ~~nine~~three and six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017, respectively.~~none for the three and six months ended June 30, 2018.


5.6.	Credit Facilities

The Company maintains a $75 million secured revolving credit facility with one financial institution, which has a five year term, maturing on October 28, 2021 and provides for borrowings in the United States. The credit agreement contains certain operating, financial and other covenants, including limits on annual levels of capital expenditures, availability tests related to payments of dividends and stock repurchases and fixed charge coverage tests related to acquisitions. The revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the Company will be required to maintain a fixed charge coverage ratio (as defined). The borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and the inventory advance rate computed as the lesser of 60% or 85% of the net orderly liquidation value (“NOLV”). Borrowings are secured by substantially all of the Borrower’s assets, as defined, including all accounts, accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral. The interest rate under the amended and restated facility is computed at applicable market rates based on the London interbank offered rate (“LIBOR”), the Federal Reserve Bank of New York (“NYFRB”) or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability. As of ~~September~~June 30, ~~2018,~~2019, eligible collateral under the credit agreement was $75.0 million, total availability was ~~$73.4~~$73.0 million, total outstanding letters of credit were ~~$2.3~~$1.3 million, total excess availability was ~~$71.1~~$71.7 million and there were no outstanding borrowings. The Company was in compliance with all of the covenants of the credit agreement in place as of ~~September~~June 30, ~~2018.~~2019.


6.	~~Segment Information~~

7. Fair Value Measurements

Systemax Inc., through its operating subsidiaries, is a provider of industrial products in North America going to market through a system of branded e-Commerce websites and relationship marketers. Prior to August 31, 2018, the Company operated and was internally managed in two reportable business segments— Industrial Products Group (“IPG”) and Europe Technology Products Group (“ETG”), the Company's France operations. As previously stated, the Company sold its France-based IT value added reseller business on August 31, 2018 and, now, the Company's continuing operations are its IPG businesses in North America, which focus on industrial supplies and MRO (maintenance, repair and operations) markets the Company has served since 1949. Smaller business operations and corporate functions are aggregated and reported as the additional segment – Corporate and Other (“Corporate”).

IPG sells a wide array of maintenance, repair and operational (“MRO”) products, as well as other industrial and general business supplies, which are marketed in North America. Many of these products are manufactured by other companies. Some products are manufactured for us to our own design and marketed on a private label basis.

ETG sold information and communications technology (“ICT”) products. These products were marketed primarily in France and to a much lesser extent Belgium. Substantially all of these products were manufactured by other companies. As previously stated, ETG France business was sold on August 31, 2018. Current and prior year results of these operations, along with the associated gain on the sale, have been classified within discontinued operations.

~~NATG, which was previously its own reportable segment, is included below for operating losses that remain in continuing operations, primarily related to the wind down of certain leases.~~

The Company’s chief operating decision-maker is the Company’s Chief Executive Officer (“CEO”). The CEO, in his role as Chief Operating Decision Maker (“CODM”), evaluates segment performance based on operating income (loss) from continuing operations. The CODM reviews assets and makes significant capital expenditure decisions for the Company on a consolidated basis only. The accounting policies of the segments are the same as those of the Company. Corporate costs not identified with the disclosed segments are grouped as “Corporate and other expenses”.

~~Financial information relating to the Company’s continuing operations by reportable segment was as follows (in millions):~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2018
2017
2018
2017
Net sales:
IPG $ 235.8
$ 204.4
$ 679.2
$ 597.3

Operating income (loss):

IPG $ 23.9
$ 19.8
$ 63.2
$ 55.2
NATG – continuing operations (0.8 ) (0.3 ) (0.8 ) (0.7 )
Corporate and other expenses (4.7 ) (7.0 ) (14.6 ) (20.0 )
Consolidated $ 18.4
$ 12.5
$ 47.8
$ 34.5

~~Financial information relating to the Company’s continuing operations by geographic area was as follows (in millions):~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Net sales:

United States $ 225.1
$ 196.3
$ 647.5
$ 573.5
Canada 10.7
8.1
31.7
23.8
Consolidated $ 235.8
$ 204.4
$ 679.2
$ 597.3

~~Revenue is attributed to countries based on the location of the selling subsidiary.~~


7.	~~Fair Value Measurements~~

Financial instruments consist primarily of investments in cash, trade accounts receivable, debt and accounts payable. The Company estimates the fair value of financial instruments based on interest rates available to the Company. At ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, the carrying amounts of cash, accounts receivable and accounts payable are considered to be representative of their respective fair values due to their short-term nature. Cash is classified as Level 1 within the fair value hierarchy. The Company’s debt is considered to be representative of its fair value because of its variable interest rate.

The fair value ~~of our reporting units~~ with respect to goodwill and non-amortizing intangibles ~~and long-lived~~ assets is measured in connection with the Company’s annual impairment testing. The Company performs a qualitative assessment of goodwill and non-amortizing intangibles to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment shows that the fair value of the reporting unit exceeds its carrying amount, the ~~company~~Company is not required to complete the annual two step goodwill impairment test. If a quantitative analysis is required to be performed for goodwill, the fair value of the reporting unit to which the goodwill has been assigned is determined

using a discounted cash flow model. A discounted cash flow model is also used to determine fair value of indefinite-lived intangibles using projected cash flows of the intangible. Unobservable inputs related to these discounted cash flow models include projected sales growth, gross margin percentages, new business opportunities, working capital requirements, capital expenditures and growth in selling, distribution and administrative expense. Any excess of a reporting unit's carrying amount over fair value would be charged to impairment expense.

Long-lived assets are assets used in the Company’s operations and include definite-lived intangible assets, leasehold improvements, warehouse and similar property used to generate sales and cash flows. Long-lived assets are tested for impairment utilizing a recoverability ~~test.~~test, whenever circumstances indicate that an impairment may have occurred. 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.


8.	~~Income taxes~~

On December 22, 2017, the Tax Cut and Jobs Act ("TCJA") was enacted in the United States. The TCJA significantly changed U.S. corporate tax impacts by, among other things, lowering the corporate tax rate to 21% from 35% effective January 1, 2018, implementing a territorial tax system and imposing a one-time repatriation tax on previously untaxed, accumulated earnings of foreign subsidiaries. As a result of the new tax law, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 allows companies to record the tax impacts of the new law as provisional amounts during a measurement period of up to one year from the enactment date of the new law.

The Company applied SAB 118 when accounting for the enactment-date effects of the TCJA for the year ended December 31, 2017 and recorded provisional amounts related to the one-time transition tax for the repatriation of foreign earnings and the revaluation of deferred tax balances. The Company expects to complete its analysis of the historical earnings and profits of all of its foreign subsidiaries and record any adjustment to the provisional amounts in the fourth quarter of 2018.

As of September 30, 2018, the Company has not completed its 2017 Federal income tax return or the analysis for all of the tax effects of the TCJA and has not recorded any adjustments to the amounts recorded at year-end.


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 is also being audited by an entity representing 2328 states seeking recovery of “unclaimed property” and has received separate demands from 2120 states requesting payments of their claimed amounts. The Company is complying with the unclaimed property audit, is providing requested information and is corresponding with the states regarding possible further discussions. The Company intends to vigorously defend these matters and believes it has strong defenses. In September 2017 the Company and certain subsidiaries comprising its former NATG “Tiger” consumer electronics business were sued in United States District Court, Northern District of California by a software publisher alleging that the NATG subsidiaries violated certain contractual sales channel restrictions resulting in claims of breach of contract and trademark/copyright infringement. ~~The matter is at a very early stage and although~~Although Systemax Inc. has been dismissed from the case, the Company is continuing to assess the remaining claims against and the defenses available to the remaining subsidiary ~~defendants;~~defendants and related possible insurance coverage; the Company cannot predict the outcome of this matter and believes the potential damages, if any, cannot be estimated at this time.

Although the Company does not expect, based on currently available information, that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial position or results of operations, the ultimate outcome is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company regularly assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for its various lawsuits, claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably estimated. At ~~September~~June 30, ~~2018~~2019 the Company has established accruals for certain of its various lawsuits, claims, investigations and proceedings based upon estimates of the most likely outcome in a range of loss or the minimum amounts in a range of loss if no amount within a range is a more likely estimate. The Company does not believe that at ~~September~~June 30, ~~2018~~2019 any reasonably possible losses in excess of the amounts accrued would be material to the financial statements.


~~10.~~	~~Stock Repurchase~~

On July 31, 2018 the Company's Board of Director's approved a share repurchase program with a repurchase authorization of up to two million shares of the Company's common stock. Under the share repurchase program, the Company is authorized to purchase shares from time to time through open market purchases, tender offerings or negotiated purchases, subject to market conditions and other factors. During the third quarter of 2018, the Company repurchased 232,550 common shares for approximately $9.1 million from certain executive officers and directors. Details of the purchase is as follows:

Fiscal Month Total Number of
Shares Purchased Average Price
Paid Per Share Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs

July 232,550 $38.96 232,550 1,767,450

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

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. Statements contained in this report 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, projections or estimates of revenue, income or loss, exit costs, cash flow needs and capital expenditures, ~~statements regarding~~fluctuations in general economic conditions, future operations, plans relating to new distribution facilities, plans for utilizing alternative sources of supply in response to government tariff and trade actions, and plans for new products or services, plans for acquisition or sale of businesses, including expansion or restructuring plans, ~~including~~such as our exit from and winding down of our sold ~~NATG~~North American Technology Group ("NATG") operations and European operations, financing needs, compliance with financial covenants in loan agreements, fluctuations in economic conditions and exchange rates, including factors impacting our international operations, plans for acquisitions or sale of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events and the effects of pending and possible litigation ~~as well as~~and assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward looking statements.

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 industry generally, will continue to impact our business; 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 in the future; 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, and factors affecting the shipping and distribution of products imported to the United States by us or our domestic vendors, such as global availability of shipping containers and fuel costs; our reliance on common carrier delivery services for shipping inventoried merchandise to customers; our reliance on drop ship deliveries directly to customers by our product vendors for products we do not hold in inventory; delays in the timely availability of products from our suppliers could delay receipt of needed product and result in lost sales; 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; this aspect of competition is aggravated by the current tight labor market in the U.S.; 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; ~~the Company’s management~~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 ~~would~~could have a material adverse effect on us; ~~we could suffer~~ a data security breach due to our e-commerce, ~~and~~ data storage or other information systems being hacked by those seeking to steal Company, ~~information,~~ vendor, employee or customer ~~personal~~ information, or due to employee error, resulting in disruption to our operations, litigation and/or loss of ~~information and privacy, legal claims and adverse material impact on~~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 ~~reputation and business;~~vendors; meeting credit card industry compliance standards in order to maintain our ability to accept credit cards; ~~technological change has had~~rising interest rates, increased borrowing costs or limited credit availability, including our own ability to maintain satisfactory credit agreements and ~~can continue~~ to ~~have a material effect on~~renew credit facilities, could impact both our ~~product mix~~and our customers’ ability to fund purchases and conduct operations in the ordinary course; pending or threatened litigation and investigations, as well as anti-dumping and other government trade and customs proceedings, could adversely affect our business and results of operations; ~~general economic conditions will continue~~sales tax laws or government enforcement priorities may be changed which could result in e-commerce and direct mail retailers having to ~~impact our business;~~collect sales taxes in states where the current laws and/or prior interpretations do not require us to do so; and extreme weather conditions could disrupt our product supply chain and our ability to ship or receive products, which would adversely impact sales; our international operations are subject to risks such as fluctuations in currency rates and foreign regulatory requirements or investigations; the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, could require us to raise the prices on certain of our products and/or seek alternate sources of supply, which could negatively impact our sales or disrupt our operations; political uncertainty; and managing various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights.sales.

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. 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 ~~2017,~~2018, describe certain factors, among others, that could contribute to or cause such differences.

Readers are cautioned not to place undue reliance on any forward looking statements contained in this report, which speak only as of the date of this report. 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.

Overview

Systemax Inc., through its operating subsidiaries, is primarily a ~~provider~~direct marketer of brand name and private label industrial ~~products~~and business equipment and supplies in North America going to market through a system of branded ~~e-Commerce~~e-commerce websites and relationship marketers. ~~Prior to August 31, 2018,~~As a result of the Company operated and was internally managed in two reportable business segments— Industrial Products Group (“IPG”) and Europe Technology Products Group (“ETG”), the Company's France operations. As detailed below, the Company soldsale of its France-based IT value added reseller business, ~~on August 31, 2018~~the Company operates and ~~now, the Company's operations are~~is internally managed in one reportable business segment, Industrial Products Group (“IPG”), which includes its former Corporate and other segment. IPG ~~businesses in North America, which focus~~focuses on industrial supplies and MRO (maintenance, repair and operations) markets the Company has served since 1949. ~~Smaller business operations and corporate functions are aggregated and reported as the additional segment – Corporate and Other (“Corporate”).~~

On August 31, 2018, the Company closed on the sale of its France-based IT value added reseller ~~business to Bechtle AG.~~business. The sale was denominated on a cash-free, debt-free basis and included normalized working capital adjustments. The ~~Company recorded a pre-tax book gain on the sale of the~~ France business ~~which was reported within~~ had been included in

the Company's ~~ETG segment, of approximately $178.2 million, within discontinued operations. The pre-tax book gain included proceeds from~~former European Technology Products segment. Initially, the sale of approximately $267.3 million offset by the $82.5 million of net assets sold and by expenses related to the sale of approximately $6.6 million. These expenses included $5.1 million of deal transaction costs and $1.5 million for accelerated amortization expense of restricted stock units and stock options. Of the expenses mentioned, $5.1 million required or will require the use of cash. The Company iswas providing limited transition services to the France business for a period of up to six months, following the closing, under a transition services agreement. This transition services agreement was extended in the first quarter of 2019 for an additional six month period.

On March 24, 2017 ~~certain wholly owned subsidiaries of~~ the Company executed a definitive securities purchase agreement (the “Purchase Agreement”) with certain special purpose companies formed by Hilco Capital Limited (“Hilco” and together with its management team partners, “Purchaser”). Pursuant to the Purchase Agreement, Purchaser acquired all of the Company’s interests insold Systemax Europe SARL ~~which included~~and its subsidiaries ~~Systemax Business Services K.F.T., Misco UK Limited, Systemax Italy S.R.L., Misco Iberia Computer Supplies S.L., Misco AB, Global Directmail B.V. and Misco Solutions B.V. (collectively, the~~(the “SARL Businesses”)~~. The Company retained its France technology value added reseller business, which was conducted through its subsidiary, Inmac Wstore S.A.S.~~, which ~~was not part of~~had been included in the ~~sale transaction. The SARL Businesses were reported within the~~ Company's former European Technology Products ~~Group ("ETG")~~ segment. ~~The transaction closed immediately upon execution of the Purchase Agreement.~~

The SARL Businesses were sold on a cash-free, debt-free basis; proceeds were nominal. As part of the transaction, the Company retained a 5% residual equity position in the Purchaser’s acquiring entity, HUK 77 Limited, which was accounted for on the cost method, to which no value was ascribed, a $3.3 million note receivable ($2.2 million balance at December 31, 2017 which was paid in full in January 2018) and provided limited transition services to Purchaser through December 19, 2017 under a transition services agreement. The note receivable was included in accounts receivable, net in the Condensed Consolidated Balance Sheet at December 31, 2017.

The sale of the France business and SARL Businesses met the “strategic shift with major impact” criteria as defined under Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which allows for dispositions with major impact to be presented in the financial statements as discontinued operations. Therefore, the ~~current year and~~ prior year results of the France business and SARL Businesses are included in discontinued operations in the accompanying condensed consolidated financial statements. For the ~~third quarter and nine~~three months ended ~~September~~June 30, 2019 and 2018, net sales of the France business included in discontinued operations totaled ~~$77.1~~$0 and $131.9 million, respectively, and ~~$352.0~~for the six months ended June 30, 2019 and 2018, net sales totaled $0 and $274.9 million, respectively. ~~In the third quarter of 2018, net gain from the sale of the France business and two month's of operating activity, included within discontinued operations, totaled $165.1 million.~~ For the ~~nine~~three months ended ~~September~~June 30, ~~2018, net gain from the sale of the France business~~2019 and eight month's of operating activity, included within discontinued operations, totaled $175.1 million. For the third quarter and nine months ended September 30, 2017, net sales of the France business included in discontinued operations totaled $114.9 million and $337.5 million, respectively, and2018, net income of the France business included in discontinued operations totaled ~~$2.8~~$0 and $4.4 million, respectively, and ~~$10.8 million, respectively.~~

for the six months ended June 30, 2019 and 2018, net income totaled $0 and $9.9 million. For the ~~third quarter~~three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, there ~~were~~was no ~~net sales of~~activity related to the SARL Businesses ~~included~~in net sales or net income (loss) in discontinued ~~operation~~operations and for the three and six month periods ended June 30, 2018, net income of the SARL Businesses included in discontinued operations totaled $0$0.4 million and $0.2 million, respectively. For the third quarter and nine months ended September 30, 2017, net sales of the SARL Businesses included in discontinued operation totaled $0 and $117.0 million, respectively, and net loss of the SARL Businesses included in discontinued operations totaled $0.2 million and $28.4 million, respectively.

On December 1, 2015, the Company sold its NATG operating businesses and began the wind-down of its remaining NATG operations. The sale of the NATG business had a major impact on the Company and therefore certain components met the strategic shift criteria as defined under ASU 2014-08. The NATG components in operation at the time of the sale were the B2B and Ecommerce businesses and three retail stores. Accordingly, these components and any related results of operations will be reflected in discontinued operations. The Company has financial obligations related to leased facilities of its former NATG business of approximately $17.5 million. Some of these leased facilities have been sublet and others are being marketed for sublet. The Company has engaged nationally recognized real estate firms to market these facilities and to assist in establishing the reserves the Company carries for these lease obligations. As of September 30, 2018, the Company has a reserve of $6.7 million for these lease obligations. The reserves established consider the total lease obligations of $17.5 million, current sublet income streams and projected sublet income streams. On a quarterly basis these reserves are re-evaluated particularly related to the projected sublease income streams. In the ~~third~~second quarter and ~~for the nine~~six months ended ~~September~~June 30, ~~2018, the Company recorded lease reserves of approximately $2.6 million~~2019 and $2.5 million, respectively. Of these previously mentioned charges, $0.8 million was recorded within continuing operations in the third quarter and nine months ended September 30, 2018 and in the third quarter and nine months ended September 30, 2018, $1.8 million and $1.7 million, respectively, was recorded within discontinued operations. The Company expects that further adjustment may be needed in the future for the remaining facilities if current sublease assumptions do not materialize.

~~In the third quarter and nine months ended September 30,~~ 2018, there were no net sales recorded for discontinued NATG operations within continuing or discontinued operations. For the third quarter and nine months ended September 30, 2018, special charges of $0.8 million was recorded within continuing operations related to updating future lease cash flows expectations related to previously exited retail stores and a warehouse. Net loss of NATG included within continuing operations totaled $0.8 million for the third quarter and nine months ended September 30, 2018.

Net loss of NATG included within discontinued operations for the third quarter and nine months ended September 30, 2018 totaled approximately $1.4 million and $0.9 million, respectively. The loss for the quarter primarily related to the lease adjustments of $1.8 million offset by restitution payments received of $0.3 million and $0.1 million of favorable accrual adjustments related to the ongoing restitution proceedings. The loss for the nine months ended September 30, 2018 primarily related to the lease adjustments of $1.7 million related to their leased facilities, $1.0 million received in restitution receipts from a former executive of NATG, $0.1 million received in vendor settlements, $0.1 million of legal and professional costs related to ongoing restitution proceedings against former NATG executives and $0.2 million of ongoing operating expenses.

~~In the third quarter and nine months ended September 30, 2017, there were no net sales of NATG included in continuing or~~ discontinued operations. In the ~~third~~second quarter and ~~nine~~six months ended ~~September~~June 30, ~~2017, NATG~~2019, net loss ~~included in continuing operations was~~totaled $0.3 million and ~~$0.7~~$0.6 million, ~~respectively. Net loss of NATG included in discontinued operations~~respectively, primarily related to operating expenses and legal and professional fees. For the three months ended June 30, 2018, there was no net income recorded for the ~~third~~

~~quarter~~discontinued NATG operations and ~~nine~~for the six months ended ~~September~~June 30, ~~2017~~2018, net income of $0.6 million was ~~$2.6 million and $8.7 million, respectively. In the third quarter and nine months ended September 30, 2017, NATG~~ recorded ~~special charges of $0.1 million and $0.3 million, respectively, within continuing operations and these charges~~primarily related to ~~updating lease reserve adjustments. In the third quarter of 2017, NATG discontinued operations recorded $0.1 million of~~restitution payments and vendor settlements received offset by legal and professional fees ~~related to the ongoing restitution proceedings. For the nine months ended September 30, 2017, NATG discontinued operations recorded $3.5 million of lease reserve adjustments~~ and ~~$0.7 million of legal and professional fees related to the ongoing restitution proceedings.~~operating expenses.

In order to provide more meaningful information to investors, the Company is presenting its operating income ~~(expenses)~~ and operating margin on a non-GAAP basis in the ~~“Supplemental~~“Reconciliation of Consolidated GAAP Operating Income from Continuing Operations ~~- Business Unit Summary Results”~~to Consolidated Non-GAAP Operating Income from Continuing Operations" table. This non-GAAP presentation reflects the Misco Germany operations as discontinued operations for all periods presented. Additional ~~Non-GAAP~~non-GAAP adjustments for executive separation and transition costs, intangible amortization and equity compensation are made to continuing operations. Management’s Discussion and Analysis that follows will include ~~IPG, ETG, Corporate and other~~our current and discontinued operations.

~~Industrial Products~~Continuing Operations

~~IPG~~The Company sells a wide array of ~~MRO products and other~~ 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 operational ("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 marketed under the trademarks: ~~Global®~~Global^TM, ~~GlobalIndustrial.com®~~GlobalIndustrial.com^TM, ~~Nexel®~~Nexel^TM, ~~Relius Elite®, Relius Solutions®, Interion®, Continental Dynamics®,~~ Paramount^TMand ~~Hercules®~~Interion^TM.^. As previously stated, the Company sold its France-based IT value added reseller business on August 31, 2018 and, now, the Company's continuing operations are its IPG businesses in North America. Industrial accounted for 100% of our net sales for the three and nine months periods ended September 30, 2018 and 2017, respectively.

~~Europe Technology Products Group~~

ETG sold ICT products. These products were marketed primarily in France and to a much lesser extent Belgium. Substantially all of these products were manufactured by other companies. The Company sold its France-based IT value added reseller business on August 31, 2018. Prior and current year results of these divested operations, along with the associated gain on the sale, have been reclassified as discontinued operations.

~~Discontinued Operations~~

As disclosed above, the results of France operations sold in August 2018, any results of the SARL Businesses sold in 2017 and NATG B2B and Ecommerce business and the three remaining retail stores in operation at the time of the sale in 2015 are presented in discontinued operations in the accompanying financial statements.

See ~~Notes~~Note 3 ~~and 6~~ to the condensed consolidated financial statements for additional financial information about our ~~business segments as well as information about~~business' geographic operations.

Discontinued Operations

As disclosed above, the operating results of discontinued operations in the accompanying financial statements are primarily from the France business sold in August 2018 and the NATG business sold in 2015.

Operating Conditions

The North American industrial products market is highly fragmented and we compete against multiple distribution channels. ~~IPG segment's~~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 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.

As has been widely reported across the broader marketplace, there are a number of cost pressures that we are proactively navigating, including domestic and ocean freight capacity, increasing freight costs, a tight labor market resulting in employee hiring shortfalls, and tariffs on foreign sourced goods. We are implementing employee recruitment and retention initiatives, including market-based adjustments to our compensation programs; this will result in some cost structure increases within our distribution centers commencing in the fourth quarter. In addition, while we experienced minimal impact from the first two tariff lists thus far in 2018, the third list, which went into effect the last week of September, is more robust. We believe the timing and extent of any financial impact will be gradual as we sell through existing inventory purchased prior to the incremental tariffs, strategically increase prices

to offset the incremental costs on certain products, and shift certain products to alternative sources where available. These cost pressures are not unique to us, and overall we expect selling prices in our market to rise. That said, with solid organic revenue growth and the flexibility in our model, we believe we remain on a path to deliver continued improvements in long term profitability as we further leverage our cost structure. See "~~Risk Factors - Recent Tariff Announcements~~".

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.

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 principles 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, ~~2017~~2018 and the other information provided in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~

2018.

Critical Accounting Policies and Estimates

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 ~~2017~~2018 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 revenue recognition; accounts receivable and allowance for doubtful accounts; ~~inventories;~~inventory valuation; right of use assets; goodwill and intangible assets; long-lived assets; ~~accruals;~~ income taxes; and special charges. 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, ~~2017.~~2018. There have been no significant changes in the application of critical accounting policies or estimates during ~~2018.~~2019. 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.

Highlights from ~~Q3 2018~~Q2 2019 and Year to Date ~~Q3 2018~~Q2 2019

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 ~~15.4%~~7.5% to ~~$235.8~~$248.6 million for the ~~three month period~~second quarter ended ~~September~~June 30, ~~2018~~2019 compared to ~~2017~~$231.2 million in 2018 and increased 8.4% to $480.8 million for the ~~nine month period~~six months ended ~~September~~June 30, ~~2018 consolidated sales increased 13.7% to $679.2 million~~2019 compared to ~~2017.~~$443.4 million in 2018.

On a constant currency basis, average daily sales increased 7.8% for the ~~three and nine month periods~~second quarter ended ~~September~~June 30, ~~2018 15.6% and 13.7%, respectively,~~2019 compared to 2018 and increased 8.7% for the ~~same periods in 2017.~~six months ended June 30, 2019 compared to 2018.

Consolidated operating income grew ~~47.2%~~9.3% to ~~$18.4~~$20.0 million for the ~~three month period~~second quarter ended ~~September~~June 30, ~~2018~~2019 compared to ~~2017~~$18.3 million in 2018 and grew 12.9% to $33.2 million for the ~~nine month period~~six months ended ~~September~~June 30, ~~2018 consolidated operating income increased 38.6% to $47.8 million~~2019 compared to ~~2017.~~$29.4 million in 2018.

Net income per diluted share from continuing operations grew ~~33.3%~~11.4% to ~~$0.40~~$0.39 for the ~~three month period~~second quarter ended ~~September~~June 30, ~~2018~~2019 compared to ~~2017~~$.35 in 2018 and grew ~~11.4%~~13.8% to ~~$0.98~~$0.66 for the ~~nine month period~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~2017.~~

Net income per diluted share from discontinued operations for the third quarter of 2018 and nine month periods ended September 30, 2018 was $4.32 and $4.59, respectively, primarily related to the book gain recognized on the sale of the France business and the inclusion of the 2018 France operating results$0.58 in ~~discontinued operations.~~2018.

GAAP Results of Operations

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 compared to the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018

Key Performance Indicators* (in millions):


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,								Six Months Ended June 30,
	2018			2017			% Change		2018			2017			% Change		2019			2018			% Change		2019			2018			% Change
Net sales of continuing operations:
IPG	$	235.8		$	204.4		15.4	%	$	679.2		$	597.3		13.7	%
Consolidated net sales	$	235.8		$	204.4		15.4	%	$	679.2		$	597.3		13.7	%	$	248.6		$	231.2		7.5	%	$	480.8		$	443.4		8.4	%
Consolidated gross profit	$	82.2		$	71.2		15.4	%	$	234.7		$	207.9		12.9	%	$	86.0		$	80.0		7.5	%	$	166.3		$	152.5		9.0	%
Consolidated gross margin	34.9		%	34.8		%	0.1	%	34.6		%	34.8		%	(0.2	)%	34.6		%	34.6		%	0.0	%	34.6		%	34.4		%	0.2	%
Consolidated SD&A costs**	$	63.8		$	58.7		8.7	%	$	186.9		$	173.4		7.8	%
Consolidated SD&A costs** as a % of net sales	27.1		%	28.7		%	(1.6	)%	27.5		%	29.0		%	(1.5	)%
Operating income from continuing operations by segment:
IPG	$	23.9		$	19.8		20.7	%	$	63.2		$	55.2		14.5	%
Corporate and other	(4.7		)	(7.0		)	32.9	%	(14.6		)	(20.0		)	27.0	%
NATG – continuing operations	(0.8		)	(0.3		)	(166.7	)%	(0.8		)	(0.7		)	(14.3	)%
Consolidated SD&A costs																	$	66.0		$	61.7		7.0	%	$	133.1		$	123.1		8.1	%
Consolidated SD&A costs as a % of net sales																	26.5		%	26.7		%	(0.2	)%	27.7		%	27.8		%	(0.1	)%
Consolidated operating income	$	18.4		$	12.5		47.2	%	$	47.8		$	34.5		38.6	%	$	20.0		$	18.3		9.3	%	$	33.2		$	29.4		12.9	%
Operating margin from continuing operations by segment:
IPG	10.1		%	9.7		%	0.4	%	9.3		%	9.2		%	0.1	%
Consolidated operating margin from continuing operations	7.8		%	6.1		%	1.7	%	7.0		%	5.8		%	1.2	%	8.0		%	7.9		%	0.1	%	6.9		%	6.6		%	0.3	%
Effective income tax rate	19.3		%	8.1		%	11.2	%	22.5		%	5.2		%	17.3	%	25.9		%	26.8		%	(0.9	)%	25.2		%	24.6		%	0.6	%
Net income from continuing operations	$	15.1		$	11.3		33.6	%	$	37.2		$	32.9		13.1	%	$	14.9		$	13.4		11.2	%	$	24.9		$	22.1		12.7	%
Net margin from continuing operations	6.4		%	5.5		%	0.9	%	5.5		%	5.5		%	0.0	%	6.0		%	5.8		%	0.2	%	5.2		%	5.0		%	0.2	%
Net income (loss) from discontinued operations	$	163.7		$	0.0		0.0	%	$	174.4		$	(26.3	)	763.1	%	$	(0.3	)	$	4.8		(106.3	)%	$	(0.6	)	$	10.7		(105.6	)%

*excludes discontinued operations (See Note ~~3 of Notes to Condensed Consolidated Financial Statements).~~

**includes special charges (See Note 34 of Notes to Condensed Consolidated Financial Statements).

SYSTEMAX ~~INC~~.INC.

Reconciliation of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing Operations – Unaudited

(in millions)

Supplemental Continuing Operations
Business Unit Summary Results – Unaudited (In millions)
Industrial Products Group
Quarter Ended September 30, Nine Months Ended September 30,
2018 2017 Change 2018 2017
Sales $ 235.8
$ 204.4
15.4 % $ 679.2
$ 597.3
13.7 %
Average daily sales* $ 3.7
$ 3.2
15.4 % $ 3.6
$ 3.1
13.7 %
Gross profit $ 82.2
$ 71.2
15.4 % $ 234.7
$ 207.9
12.9 %
Gross margin 34.9 % 34.8 % 34.6 % 34.8 %
Operating income (Non-GAAP)**
$ 24.2
$ 20.2
19.8 % $ 64.1
$ 56.2
14.1 %
Operating margin (Non-GAAP) 10.3 % 9.9 % 9.4 % 9.4 %
Corporate & Other
Quarter Ended September 30, Nine Months Ended September 30,
2018 2017 Change 2018 2017
Operating expenses (Non-GAAP)**
$ (4.6 ) $ (6.7 ) 31.3 % $ (14.1 ) $ (18.8 ) 25.0 %
Consolidated ^(1,2)
Quarter Ended September 30, Nine Months Ended September 30,
2018 2017 Change 2018 2017
Sales $ 235.8
$ 204.4
15.4 % $ 679.2
$ 597.3
13.7 %
Gross profit $ 82.2
$ 71.2
15.4 % $ 234.7
$ 207.9
12.9 %
Gross margin 34.9 % 34.8 % 34.6 % 34.8 %
Operating income (Non-GAAP)**
$ 19.6
$ 13.5
45.2 % $ 50.0
$ 37.4
33.7 %
Operating margin (Non-GAAP) 8.3 % 6.6 % 7.4 % 6.3 %



	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
GAAP:	2019			2018			2019 vs. 2018		2019			2018			2019 vs. 2018
Net sales	$	248.6		$	231.2		7.5	%	480.8			443.4			8.4	%
Average daily sales*	3.9			3.6			7.8	%	3.8			3.5			8.7	%
Operating income	20.0			18.3			9.3	%	33.2			29.4			12.9	%
Operating margin%	8.0		%	7.9		%			6.9		%	6.6		%

Non-GAAP adjustments:
Executive separation & transition costs	0.4			0.0					1.0			0.0
Stock based compensation	1.3			0.2					2.4			0.5
Intangible amortization	0.1			0.2					0.1			0.5
Reverse results of Germany included in GAAP continuing operations	0.1			0.0					0.1			0.0
Total Non-GAAP Adjustments:	1.9			0.4					3.6			1.0

Non-GAAP operating income	$	21.9		$	18.7		17.1	%	$	36.8		$	30.4		21.1	%
Non-GAAP Operating Margin %	8.8		%	8.1		%			7.6		%	6.9		%



	*	~~Percentages are~~Average daily sales is calculated ~~using sales data~~based upon the number of selling days in ~~hundreds of thousands.~~each period, converted to US Dollars on a constant currency basis. In Q3Q2 2019 and 2018 ~~and 2017, IPG had 63~~there were 64 selling days in the U.S and for the first ~~nine~~six months of 2019 and 2018 there were 128 selling days. In Canada there were 63 selling days in Q2 2019 and 64 selling days in Q2 2018 and ~~2017, IPG had 191~~for the first six months of 2019 and 2018 there were 126 selling days.



	**	See Reconciliation of Segment and Consolidated GAAP Operating Income (Loss) from Continuing Operations to Segment and Consolidated Non-GAAP Operating Income (Loss) from Continuing Operations – Unaudited



	1		On August 31, 2018, the Company closed on the sale of the France operations. ~~Prior and current year results~~Results of ~~these~~this divested ~~operations, along with the associated gain on the sale,~~business have been classified as discontinued ~~operations.~~operations for all periods presented. On March 24, 2017, the Company closed on the sale of its European Technology Group businesses, other than its operations in France. Prior ~~and current~~ year results of these divested businesses ~~along with the associated loss on the sale recorded in 2017,~~ have been classified as discontinued operations. On December 1, 2015 the Company closed on the sale of certain assets of its North American Technology Group (“NATG”). Pursuant to this transaction, the Company continues to wind down the remaining operations of NATG during ~~2018.~~2019. Costs of the wind down in ~~2018~~the second quarter and ~~2017~~six months ended June 30, 2019 and 2018 are included within ~~continuing and~~ discontinued operations.



	2		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. This non-GAAP presentation reflects the Misco Germany operations as discontinued operations for all periods presented. Additional non-GAAP adjustments for executive separation and transition costs, intangible amortization and equity compensation are made to continuingoperations.



	3		Systemax manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation, 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 ~~September~~June 29, ~~2018~~2019 and ~~September~~June 30, ~~2017.~~2018. The ~~third~~second quarters of both ~~2018~~2019 and ~~2017~~2018 included 13 weeks and the first ~~nine~~six months of ~~both~~2019 and 2018 ~~and 2017~~ included 3926 weeks.

~~SYSTEMAX INC.~~

~~Reconciliation of Segment and Consolidated GAAP Operating Income (Loss) from Continuing Operations to Segment and Consolidated Non-GAAP Operating Income (Loss) from Continuing Operations – Unaudited~~

~~(In millions)~~

Quarter Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Industrial Products $ 23.9
$ 19.8
$ 63.2
$ 55.2
Technology Products - NA (0.8 ) (0.3 ) (0.8 ) (0.7 )
Corporate and Other (4.7 ) (7.0 ) (14.6 ) (20.0 )
GAAP operating income 18.4
12.5
47.8
34.5

Non-GAAP adjustments:
Industrial Products:
Intangible asset amortization 0.3
0.3
0.8
0.8
Stock based compensation 0.0
0.1
0.1
0.2
Total Non-GAAP Adjustments – Industrial Products 0.3
0.4
0.9
1.0

Technology Products - NA:
Reverse results of NATG included in GAAP continuing operations 0.8
0.3
0.8
0.7
Total Non-GAAP Adjustments: Technology Products NA 0.8
0.3
0.8
0.7

Corporate and Other:
Stock based compensation 0.0
0.2
0.4
0.9
Reverse results of Germany included in GAAP continuing operations 0.1
0.1
0.1
0.3
Total Non-GAAP Adjustments: Corporate and Other 0.1
0.3
0.5
1.2

Industrial Products 24.2
20.2
64.1
56.2
Technology Products- NA 0.0
0.0
0.0
0.0
Corporate and Other (4.6 ) (6.7 ) (14.1 ) (18.8 )
Non-GAAP operating income $ 19.6
$ 13.5
$ 50.0
$ 37.4

Management’s discussion and analysis that follows will include ~~IPG, Corporate and Other~~current operations and discontinued operations. The discussion is based upon the GAAP Results of Operations table.

NET SALES

~~SEGMENTS~~

The ~~IPG segment~~Company's net sales benefited during the ~~third~~ quarter ~~and nine months~~ ended ~~September~~June 30, ~~2018~~2019 from continued strong demand across the business with solid performance ~~in our~~across sales channels, specifically managed sales, ~~channels, as well as continued generation of new customers through our targeted digital marketing efforts. Sales of our core~~where we continue to invest in sales productivity and training initiatives. Revenue performance was broad based across product categories, ~~including material handling, storage~~with growth continuing to be led by newer product lines where we are investing in subject matter expertise, sales training and shelving, janitorial and maintenance and business furniture delivered low double digit gains, and its other smaller categories within its offering grew at a faster pace in aggregate, consistent with ouran expanding product ~~strategy and focus. IPG net~~offering. Net sales also benefited from above market growth in ~~its~~our Canada business which delivered its ~~seventh~~tenth consecutive quarter of double digit growth. Canada sales were up approximately ~~32.2%, 38.1%~~16% in local currency on ~~a constant currency~~an average daily sales basis for the quarter and six months ended ~~September~~June 30, ~~2018~~2019 compared to the same period in ~~2017 and increased 33.0%, 31.3% on a constant currency basis for the nine months ended September 30, 2018 compared to the same period of 2017.~~2018. U.S. revenue was up ~~14.7% and 12.9%, respectively,~~7.5% in the quarter ~~and nine month period~~ ended ~~September~~June 30, ~~2018~~2019 compared to the same period in ~~2017.~~2018 and up 8.4% for the six months ended June 30, 2019. On a constant currency basis, ~~IPG~~ average daily sales increased ~~15.6%~~7.8% for the ~~third~~second quarter of ~~2018~~2019 compared to the same period in ~~2017~~2018 and increased ~~13.7%~~8.7% for the ~~nine~~six months ended ~~September~~June 30, 2019. In the U.S., there were 64 selling days in the second quarter of 2019 and 2018 ~~compared to 2017. IPG segment had~~and 128 selling days for the six months ended June 30, 2019 and 2018. In Canada there were 63 selling days in the ~~third~~second quarter of 2019 and 64 selling days in the second quarter of 2018 and ~~2017 and~~126 selling days for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017, IPG had 191 selling days.~~

2018.

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 to 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.

~~The IPG segment gross~~Gross margin ~~increased 10 basis points~~was unchanged in the ~~third~~second quarter of ~~2018 from the third quarter of 2017 reflecting continued positive product and selling channel mix. Gross margin improved 30 basis points~~2019 compared to the second quarter of ~~2018. For~~2018 reflecting proactive management of our inventory, purchasing and sell prices as the ~~nine months ended~~Company addressed the 10% tariffs, enacted in September ~~30,~~ 2018, ~~IPG gross~~which were levied by the U.S. on products imported from China. Gross margin ~~decreased~~increased 20 basis points asfor the six months ended June 30, 2019 compared to 2018. The Company is managing the ~~same period~~latest round of tariffs which increased to 25% in ~~2017. As has historically been~~June 2019 in a similar fashion to how it managed the ~~case, fourth quarter gross margin is expected~~initial tariffs. The Company continues to believe that any impact will be ~~slightly lower than~~gradual as it monitors sell prices in the ~~second or third quarter margin primarily the result of product mix.~~market, continues to work with suppliers to mitigate costs, and actively reviews its supply chain.

SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (“SD&A”)~~, EXCLUDING SPECIAL CHARGES~~

~~The IPG segment~~ SD&A costs as a percentage of sales was 26.5% in the second quarter of 2019 compared to 26.7% for the same period in 2018. Included in the second quarter of 2019 was approximately $0.4 million of executive separation and transition expense. Excluding these expenses, SD&A improved 30 basis points as a percentage of sales compared to the prior year. This improvement was primarily the result of improved efficiencies across our operations, including marketing spend. In the second quarter of 2019, the significant cost increases were increased salary and related costs of approximately $3.0 million, of which $0.4 million related to executive separation and transition costs previously mentioned and increased net internet advertising spend of approximately $1.0 million and increased contract services costs of approximately $0.2 million and approximately $0.4 million of costs associated with our new distribution center offset by savings in telephony and consulting fees of approximately $0.2 million. For the six months ended June 30, 2019 SD&A costs as a percentage of sales was 27.7% compared to 27.8% for the same period in 2018. Included in the first six months of 2019 was approximately $1.0 million of executive separation and transition costs and $0.6 million of equity compensation expense related to the repricing of stock options. Excluding these expenses, SD&A for the first six months of 2019 improved 40 basis points as a percentage of sales compared to the same period in 2018. The significant cost increases for the six months ended June 30, 2019 were increased salary and related costs of approximately $6.8 million, of which $1.6 million related to executive separation and transition costs previously mentioned, increased net internet advertising spend of approximately $1.5 million, increased contract services costs of approximately $0.7 million and approximately $0.4 million of costs associated with our new distribution center.

DISCONTINUED OPERATIONS AND SPECIAL CHARGES (GAINS)

Total special charges and gains included in discontinued operations totaled $0.2 million gain for the second quarter of 2019, $0.1 million gain for the six months ended June 30, 2019 and a $0.7 million gain for the six months ended June 30, 2018.

OPERATING MARGIN

Operating margin for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018 as~~2019 increased by 10 basis points and 30 basis points, respectively, compared to the ~~third quarter of 2017 primarily~~same period in 2018. The increase was driven by increased sales and freight margin, improved leverage within our fixed cost structure and good spend discipline in regards to marketing and general operating expenses. In total, the IPG segment SD&A as a percentage of sales decreased by 40 basis points in the third quarter and 30 basis points for the nine months ended September 30, 2018 compared to the same periods of 2017. In the third quarter of 2018, the IPG segment incurred increased salary and related costs of approximately $3.0 million, increased net internet advertising spend of approximately $0.7 million and increased contract services and IT costs of approximately $1.6 million. For the nine months ended September 30, 2018, the IPG segment incurred increased salary and related costs of approximately $6.9 million, increased net internet advertising spend of approximately $4.5 million and increased contract services and IT costs of approximately $4.4 million.

Corporate and other segment costs decreased approximately $2.3 million and $5.4 million, respectively, in the third quarter and nine months ended September 30, 2018 as compared to the same periods of 2017 primarily related to decreased incentive compensation costs, legal and professional fees and the recovery of VAT escrow funds of $0.4 million.

~~SPECIAL GAINS AND CHARGES, CONTINUING AND DISCONTINUED OPERATIONS~~

In the third quarter and for the nine months ended September 30, 2018 the Company recorded a pre-tax book gain on the sale of the France business, which was reported within the discontinued operations of the Company's ETG segment, of approximately $178.2 million. The pre-tax book gain included proceeds from the sale of approximately $267.3 million offset by the $82.5 million of net assets sold and by expenses related to the sale of approximately $6.6 million. These expenses included $5.1 million of deal transaction costs and $1.5 million for accelerated amortization expense of restricted stock units and stock options. Of the expenses mentioned, $5.1 million of deal transaction costs required or will require the use of cash.

In the third quarter of 2018, there were a de minimis amount of legal and professional fees incurred related to the wind down of the SARL Businesses. For the nine months ended September 30, 2018, the Company recorded approximately $0.2 million in recoveries of escrow funds, $0.1 million of accelerated depreciation charges and $0.1 million for legal and professional fees related to the wind down of the SARL Businesses, within discontinued operations. The impact of the previously mentioned charges and recoveries related to the wind down of the SARL Businesses for the nine months ended September 30, 2018, net to zero. Of the previously mentioned charges, legal and professional fees required the use of cash. The Company expects that total additional charges related to the wind down of the SARL businesses will be less than $1.0 million.

In the third quarter of 2018, the Company's NATG discontinued operations received $0.3 million in restitution receipts from a former executive of NATG, recorded approximately $0.1 million in accrual adjustments related to the ongoing restitution proceedings and recorded $1.8 million in lease reserve adjustments related to their leased facilities, within discontinued operations. For the nine months ended September 30, 2018, the Company's NATG discontinued operations received $1.0 million in restitution receipts from a former executive of NATG, recorded lease reserves adjustments of approximately $1.7 million related to their leased facilities, received $0.1 million in vendor settlements and recorded legal and professional fees, related to the ongoing restitution proceedings, of $0.1 million. The impact of the previously mentioned charges and recoveries related to the NATG discontinued operations totaled $0.7 million for the nine months ended September 30, 2018. The Company expects that total additional charges related to the sale of the NATG business after this quarter will be less than $1.0 million and that these charges will be presented in discontinued operations. Additional costs may be incurred in NATG for outstanding leased facilities as they are settled or sublet (see Note 1). Most of these anticipated costs will require the use of cash. Amounts that are unpaid at September 30, 2018 are recorded in Accrued expenses and other current liabilities and Other liabilities (long term) in the accompanying Condensed Consolidated Balance Sheets.

In the third quarter and for the nine months ended September 30, 2018, the Company's NATG continuing operations recorded approximately $0.8 million of special charges for updating our future lease cash flows expectations related to previously exited retail stores and a warehouse.

In the third quarter and for the nine months ended September 30, 2018, the Company's German continuing operations recorded approximately $0.1 million of special charges for updating future lease cash flows expectations related to a previously exited lease obligation.

~~Total special charges incurred, within discontinued operations, in the third quarter of 2017 totaled approximately $0.3 million,~~

of which, $0.2 million related to the discontinued operations of the SARL business related to a transitional services agreement and, within NATG discontinued operations, approximately $0.1 million of professional costs were incurred related to the ongoing restitution proceedings against certain former NATG executives.

~~OPERATING MARGIN~~

IPG’s operating margin for the three and nine months period ended September 30, 2018 increased by 40 and 10 basis points, respectively, compared to the same periods in 2017. The increase was driven by improved leverage within our fixed cost structure and good spend discipline in regards to marketing and general operating expenses. This increase was partially offset by an increase in distribution center staffing levels in an effort to keep up with increasing demand on in-stock items.

The decrease in Corporate and other expenses for the third quarter and year to date 2018 primarily resulted from decreased salary costs, legal and professional fees and the recovery of VAT escrow funds of $0.4 million.

INTEREST AND OTHER (INCOME) EXPENSE, NET

Interest and other (income) expense, net from continuing operations was ~~$0.3~~$0.1 million income in the second quarter and six months ended June 30, 2019 compared to ~~$0.2~~$0.0 and $0.1 million expense in the ~~third~~second quarter ~~of 2018~~ and ~~2017, respectively, primarily attributable to the interest earned on our short term investments from the cash repatriated to the United States from the sale of the France business. For the nine~~six months ended ~~September~~June 30, 2018 and 2017, interest and other (income) expense, net from continuing operations was approximately $0.2 million, primarily attributable to the interest earned on our short term investments from the cash repatriated to the United States from the sale of the France business offset by unused line of credit fees.2018.

INCOME TAXES

InFor the ~~nine month period~~quarter ended ~~September~~June 30, ~~2018,~~2019 the Company recorded income taxes in continuing operations of approximately $5.2 million, for an effective tax rate of 25.9%. For the first six months of 2019 the Company reported income taxes in continuing operations of approximately ~~$10.8~~$8.4 million, for an effective tax rate of 25.2%. Tax expense is related to ~~its~~the Company's U.S. and India operations ~~as well as tax expense for~~and certain U.S. states. The Company's tax expense for ~~2018~~the first six months of 2019 was favorably impacted by tax benefits of approximately ~~$1.7~~$0.3 million related to stock-based compensation.

For Canadian tax purposes, the Company ~~has~~continues to carry a full valuation ~~allowances~~allowance against its deferred tax assets in Canada in 2019, including its net operating losses, and no ~~benefit for loss is~~tax expense has been recorded.

Financial Condition, Liquidity and Capital Resources

The following tables present selected liquidity data and historical cash flows (in millions):

Selected liquidity data



	June 30, 2019		December 31, 2018		$ Change
Cash	$	90.8	$	295.4	$	(204.6	)
Accounts receivable, net	$	96.2	$	84.1	$	12.1
Inventories	$	101.4	$	107.3	$	(5.9	)
Prepaid expenses and other current assets	$	4.7	$	10.6	$	(5.9	)
Accounts payable	$	116.8	$	101.1	$	15.7
Dividend payable	$	0.0	$	243.5	$	(243.5	)
Accrued expenses and other current liabilities	$	39.7	$	35.0	$	4.7
Operating lease liabilities	$	11.4	$	0.0	$	11.4
Working capital	$	125.2	$	117.8	$	7.4

Historical Cash Flows



	Six Months Ended June 30,
	2019			2018
Net cash provided by (used in) operating activities from continuing operations	$	50.1		$	18.0
Net cash provided by (used in) provided by operating activities from discontinued operations	$	0.1		$	(1.7	)
Net cash used in investing activities from continuing operations	$	(2.4	)	$	(1.1	)
Net cash used in investing activities from discontinued operations	$	0.0		$	(0.3	)
Net cash used in financing activities from continuing operations	$	(252.3	)	$	(101.5	)
Effects of exchange rates on cash	$	(0.1	)	$	(1.0	)
Net decrease in cash and cash equivalents	$	(204.6	)	$	(87.6	)

Our primary liquidity needs are to support working capital requirements in our business, including the ~~wind-down activities~~start up costs for our new Texas distribution center anticipated to commence operations in the third quarter of ~~the sold NATG businesses,~~2019, funding ~~the~~ recently declared and any future dividends, funding capital expenditures, continued investment in upgrading and expanding our technological capabilities and information technology infrastructure and funding acquisitions. We rely principally upon operating cash flow 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 may seek to raise additional capital. We believe that, if needed, we can access public or private funding alternatives to raise additional capital.

~~Selected liquidity data (in millions):~~

September 30, 2018 December 31, 2017 $ Change
Cash $ 302.8
$ 184.5
$ 118.3
Accounts receivable, net $ 87.9
$ 73.1
$ 14.8
Inventories $ 91.2
$ 88.2
$ 3.0
Prepaid expenses and other current assets $ 8.7
$ 3.3
$ 5.4
Accounts payable $ 105.2
$ 108.1
$ (2.9 )
Dividend payable $ 0.0
$ 55.7
$ (55.7 )
Accrued expenses and other current liabilities $ 38.7
$ 38.5
$ 0.2
Working capital $ 346.7
$ 178.3
$ 168.4

Our working capital increased ~~$168.4~~$7.4 million primarily related to net income in the ~~proceeds from the sale~~first six months of ~~the France business~~2019, increased accounts receivable balances offset by decreasing balances in inventory, prepaid and other current assets compared to increased balances in accounts payable and dividends paid in 2019. accrued expenses and the ~~payment~~recording of ~~our regular and special dividends during the nine months ended September 30, 2018 totaling $49.5 million.~~$11.4 million of current operating lease liabilities. Accounts receivable days outstanding were ~~33.7~~35.2 in ~~2018~~2019 compared to ~~38.4~~34.0 in ~~2017.~~2018. Inventory turns were ~~6.5~~6.0 in ~~2018~~2019 and ~~2017~~6.3 in 2018 and accounts payable days outstanding were ~~69.2~~64.6 in ~~2018~~2019 compared to ~~75.7~~72.8 in ~~2017.~~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.

Net cash provided by continuing operations was ~~$15.2~~$50.1 million resulting from changes in our working capital accounts, which ~~used $26.6~~provided $20.2 million in cash compared to ~~$0.9~~$7.3 million used in ~~2017,~~2018, primarily the result of the changes in ~~open accounts receivable and~~ accounts payable balances and additional changes in inventory balances, accrued expenses and other current ~~liabilities~~ and non-current ~~liabilities balances.~~liabilities. Cash generated from net income adjusted by other non-cash items provided ~~$41.8~~$29.9 million compared to ~~$38.9~~$25.3 million provided by these items in ~~2017,~~2018, primarily related to the net income from continuing operations and increased stock-based compensation expense in ~~2018.~~2019. In the first quarter of 2019, the Company repriced approximately 0.6 million shares of outstanding stock options and recorded approximately $0.6 million of related compensation expense. Net cash ~~used in~~provided by operating activities from discontinued operations was ~~$35.1~~$0.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018 compared to $4.6~~2019 and $1.7 million used for the ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively.~~

2018.

Net cash used in investing activities from continuing operations totaled ~~$2.9~~$2.4 million, primarily ~~for a~~related to the Company's new distribution center in Texas and other warehouse ~~lighting project,~~projects including wire decking, in-rack sprinkler systems and warehouse ~~lift trucks and batteries, information technology equipment and leasehold improvements for the IPG segment.~~lighting. Net cash used in investing activities in ~~2017~~2018 totaled ~~$1.3~~$1.1 million primarily for warehouse and ~~included warehouse pick modules~~information technology equipment and ~~mobile sales application software for the IPG segment.~~leasehold improvements. Net cash ~~provided by~~used in investing activities from discontinued operations was ~~$249.6~~zero and $0.3 million for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, primarily from cash received on the sale of the France business of $250.0 million, net of cash sold of $17.3 million, offset by $0.4 million of fixed asset purchases from the France business during the first eight months of 2018 compared to $0.3 million used in 2017.respectively.

Net cash used in financing activities totaled ~~$111.5~~$252.3 million primarily related to the ~~special dividend and regular quarterly dividend payments in total~~payment of ~~$105.2 million. These payments included $55.7 million~~the special dividend declared in December ~~2017 but paid in January~~ 2018 ~~the special dividend~~ of ~~$37.2~~$243.5 million ~~paid in June 2018~~ and the regular quarterly dividends of ~~$4.1~~$4.5 million ~~for each~~each. Proceeds from the issuance of ~~the three quarters of 2018. Proceeds~~common stock from employee stock purchase plan was $0.4 million and proceeds from stock option exercises ~~of $4.2~~was $0.6 million, ~~that are~~ offset by payments of payroll taxes on stock based compensation through shares withheld of ~~$1.4~~$0.8 million. In ~~2017,~~2018, cash used in financing activities totaled ~~$8.0~~$101.5 million and included approximately ~~$9.2~~$101.1 million for dividends paid, ~~$0.1 million used to repay outstanding capital lease obligations, $1.6~~$0.9 million in stock option exercises offset by payments of payroll taxes on stock based compensation through shares withheld of ~~$0.3~~$1.3 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 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, 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 ~~September~~June 30, ~~2018,~~2019, eligible collateral under the credit agreement was $75.0 million, total availability was ~~$73.4~~$73.0 million, total outstanding letters of credit were ~~$2.3~~$1.3 million, excess availability was ~~$71.1~~$71.7 million and there were no outstanding borrowings. The Company was in compliance with all of the covenants of credit agreement in place as of ~~September~~June 30, ~~2018.~~2019.

We also have certain obligations with various parties that include commitments to make future payments. Our principal commitments at ~~September~~June 30, ~~2018~~2019 consisted of payments under operating leases for certain of our real property and equipment and payments under employment, product and other service agreements.

Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, distribution and administrative costs as a percentage of sales, 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.

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 ~~Company has financial obligations related to leased facilities of its former NATG business of approximately $17.5 million. Some of these leased facilities have been sublet~~expenses and others are being marketed for sublet. The Company has engaged nationally recognized real estate firms to market these facilities and to assist in establishing the reserves the Company carries for these lease obligations. As of September 30, 2018, the Company has a reserve of $6.7 million for these lease obligations. The reserves established consider the total lease obligations of $17.5 million, current sublet income streams and projected sublet income streams. On a quarterly basis these reserves are re-evaluated particularly related to the projected sublease income streams. In the third quarter of 2018, the Company recorded lease reserves of approximately $2.6 million for these leased facilities, of which $0.8 million was recorded within continuing operations and $1.8 million within discontinued operations and for the nine months ended September 30, 2018, the Company recorded lease reserves adjustments of $2.5 million, of which $0.8 million was recorded within continuing operations and $1.7 million was recorded within discontinued operations. The Company expects that further adjustment may be needed in the future for the remaining facilities if current sublease assumptions do not materialize.

~~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 ~~2018~~2019 we anticipate capital expenditures in the range of up$5.0 to ~~$8.0~~$7.0 million, ~~though at this time~~of which we are ~~not~~ contractually committed to incur approximately $1.5 to $2.0 million of these expenditures.

Over the past several years 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 shares of our common stock, which could have a dilutive effect on our earnings per share. We believe that cash flows from operations and our availability under credit facilities 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 ~~September~~June 30, ~~2018,~~2019, 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 ~~September~~June 30, ~~2018~~2019 cash balances held in foreign subsidiaries totaled approximately ~~$3.5~~$4.2 million. These balances are held in local country banks. The Company intends to repatriate excess foreign cash balances when available and when it is tax efficient. The Company had in excess of ~~$370~~$158 million of liquidity (cash and undrawn line of credit) in the U.S. as of ~~September~~June 30, ~~2018,~~2019, which is sufficient to fund its U.S. operations and capital needs, including dividend payments, for the foreseeable future.

Off-balance Sheet ~~Arrangements and Contractual Obligations.~~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.

The following table updates the contractual obligations of the Company for future principal payments on our debt, minimum rental payments on our non-cancelable operating leases and minimum payments on our other purchase obligations as of September 30, 2018 to reflect the sale of our France business and the termination agreement for the lease on the Jefferson warehouse (in millions):

Contractual Obligations: Total
Less than
1 year
1 - 3 years 3 - 5 years
More than
5 years

Capital lease obligations $ 0.2
$ 0.1
$ 0.1
$ 0.0
$ 0.0

Non-cancelable operating leases, net of subleases 93.2
15.6
31.7
21.1
24.8

Purchase & other obligations 23.6
4.4
10.1
9.1
0.0

Total contractual obligations $ 117.0
$ 20.1
$ 41.9
$ 30.2
$ 24.8

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 ~~(Canadian~~(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 ~~September~~June 30, ~~2018~~2019 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 ~~September~~June 30, ~~2018,~~2019, 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 ~~September~~June 30, ~~2018.~~2019. 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 ~~September~~June 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. 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 is also being audited by an entity representing 2328 states seeking recovery of “unclaimed property” and has received separate demands from 20 states requesting payments of their claimed amounts. The Company is complying with the unclaimed property audit, is providing requested information and is corresponding with the states regarding possible further discussions. The Company intends to vigorously defend these matters and believes it has strong defenses. In September 2017 the Company and certain subsidiaries comprising its former NATG “Tiger” consumer electronics business were sued in United States District Court, Northern District of California by a software publisher alleging that the NATG subsidiaries violated certain contractual sales channel restrictions resulting in claims of breach of contract and trademark/copyright infringement. ~~The matter is at a very early stage and although~~Although Systemax Inc. has been dismissed from the case, the Company is continuing to assess the remaining claims against and the defenses available to the remaining subsidiary ~~defendants;~~defendants and related possible insurance coverage; the Company cannot predict the outcome of this matter and believes the potential damages, if any, cannot be estimated at this time.

~~Item 1A. Risk Factors~~

In addition to the other information set forth in this report, you should carefully consider the factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”), which could materially affect our business, financial condition or future results. There have been no material changes in our risk factors from those disclosed in our Annual Report, except for the risk factors set forth below.

~~Recent Tariff Announcements~~

Significant tariffs or other restrictions recently placed on imports from China, as well as any retaliatory trade measures taken by China or other trading partners, could materially adversely impact our revenue and results of operations.

Our industry is subject to risks associated with U.S. and foreign laws relating to importing products, including quotas, duties, tariffs or taxes, as well as other restrictions, which could adversely affect our ability to import products at desired cost or volume levels.

As has been widely reported across the broader marketplace, during 2018 the United States enacted three sets of tariffs on a variety of foreign sourced goods. While we experienced minimal impact from the first two tariff lists during 2018, the third list, which went into effect at the end of the third quarter of 2018, imposes tariffs on a more robust set of products and does impact a subset of the products we carry and source directly from China. These tariffs have the potential to increase our costs of procurement, both directly as a result of the tariffs, and indirectly as a result of this action's effect on the general economy. We believe the timing and extent of any financial impact of the announced tariffs will be gradual as we sell through existing inventory purchased prior to the tariffs being implemented, strategically increase prices to offset the incremental costs on certain products and shift certain products to alternative sources where available. There can be no assurances that we will be able to effectively or expeditiously mitigate these challenges which would result in an adverse effect on our financial results. However, we do not believe that we will be disproportionately impacted by these costs and we will continue to evaluate marketplace conditions and implement other actions or strategies as the need arises.

Furthermore, we cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports will be imposed in the future and if so, what effect such actions would have on our costs of operations.

~~Item 5. Issuer Purchases of Equity Securities~~

Fiscal Month
Total Number of
Shares Purchased

Average Price
Paid Per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs

July 232,550 $38.96 232,550 1,767,450

Item 6. Exhibits



10.1	Lease Agreement, dated April 18, 2019, by and between Global Industrial Distribution Inc. (tenant) and HLIT II CTC 3, L.P. (landlord) (DeSoto, TX facility) (exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K).

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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.



	SYSTEMAX INC.

Date: ~~November 7, 2018~~August 6, 2019	By:	/s/ ~~Lawrence Reinhold~~Barry Litwin
		~~Lawrence Reinhold~~Barry Litwin
		President and Chief Executive Officer

SIGNATURES

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.



	SYSTEMAX INC.

Date: ~~November 7, 2018~~August 6, 2019	By:	/s/ Thomas Clark
		Thomas Clark
		Vice President and Chief Financial Officer

3731



	Corporate – Lease liabilities and other costs		NATG – Lease liabilities and other exit costs			Total
Balance January 1, 2018	$	1.2	$	19.0		$	20.2
Charged to expense (income)	0.1		2.5			2.6
Paid or otherwise settled	(0.2)		(14.8		)	(15.0		)
Balance September 30, 2018	$	1.1	$	6.7		$	7.8



Fiscal Month	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

July	232,550	$38.96	232,550	1,767,450



Supplemental Continuing Operations Business Unit Summary Results – Unaudited (In millions)
Industrial Products Group
	Quarter Ended September 30,								Nine Months Ended September 30,
	2018			2017			Change		2018			2017
Sales	$	235.8		$	204.4		15.4	%	$	679.2		$	597.3		13.7	%
Average daily sales*	$	3.7		$	3.2		15.4	%	$	3.6		$	3.1		13.7	%
Gross profit	$	82.2		$	71.2		15.4	%	$	234.7		$	207.9		12.9	%
Gross margin	34.9		%	34.8		%			34.6		%	34.8		%
Operating income (Non-GAAP)**	$	24.2		$	20.2		19.8	%	$	64.1		$	56.2		14.1	%
Operating margin (Non-GAAP)	10.3		%	9.9		%			9.4		%	9.4		%
Corporate & Other
	Quarter Ended September 30,								Nine Months Ended September 30,
	2018			2017			Change		2018			2017
Operating expenses (Non-GAAP)**	$	(4.6	)	$	(6.7	)	31.3	%	$	(14.1	)	$	(18.8	)	25.0	%
Consolidated ^(1,2)
	Quarter Ended September 30,								Nine Months Ended September 30,
	2018			2017			Change		2018			2017
Sales	$	235.8		$	204.4		15.4	%	$	679.2		$	597.3		13.7	%
Gross profit	$	82.2		$	71.2		15.4	%	$	234.7		$	207.9		12.9	%
Gross margin	34.9		%	34.8		%			34.6		%	34.8		%
Operating income (Non-GAAP)**	$	19.6		$	13.5		45.2	%	$	50.0		$	37.4		33.7	%
Operating margin (Non-GAAP)	8.3		%	6.6		%			7.4		%	6.3		%



	Quarter Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Industrial Products	$	23.9		$	19.8		$	63.2		$	55.2
Technology Products - NA	(0.8		)	(0.3		)	(0.8		)	(0.7		)
Corporate and Other	(4.7		)	(7.0		)	(14.6		)	(20.0		)
GAAP operating income	18.4			12.5			47.8			34.5

Non-GAAP adjustments:
Industrial Products:
Intangible asset amortization	0.3			0.3			0.8			0.8
Stock based compensation	0.0			0.1			0.1			0.2
Total Non-GAAP Adjustments – Industrial Products	0.3			0.4			0.9			1.0

Technology Products - NA:
Reverse results of NATG included in GAAP continuing operations	0.8			0.3			0.8			0.7
Total Non-GAAP Adjustments: Technology Products NA	0.8			0.3			0.8			0.7

Corporate and Other:
Stock based compensation	0.0			0.2			0.4			0.9
Reverse results of Germany included in GAAP continuing operations	0.1			0.1			0.1			0.3
Total Non-GAAP Adjustments: Corporate and Other	0.1			0.3			0.5			1.2

Industrial Products	24.2			20.2			64.1			56.2
Technology Products- NA	0.0			0.0			0.0			0.0
Corporate and Other	(4.6		)	(6.7		)	(14.1		)	(18.8		)
Non-GAAP operating income	$	19.6		$	13.5		$	50.0		$	37.4



	September 30, 2018		December 31, 2017		$ Change
Cash	$	302.8	$	184.5	$	118.3
Accounts receivable, net	$	87.9	$	73.1	$	14.8
Inventories	$	91.2	$	88.2	$	3.0
Prepaid expenses and other current assets	$	8.7	$	3.3	$	5.4
Accounts payable	$	105.2	$	108.1	$	(2.9	)
Dividend payable	$	0.0	$	55.7	$	(55.7	)
Accrued expenses and other current liabilities	$	38.7	$	38.5	$	0.2
Working capital	$	346.7	$	178.3	$	168.4



Contractual Obligations:	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

Capital lease obligations	$	0.2	$	0.1	$	0.1	$	0.0	$	0.0

Non-cancelable operating leases, net of subleases	93.2		15.6		31.7		21.1		24.8

Purchase & other obligations	23.6		4.4		10.1		9.1		0.0

Total contractual obligations	$	117.0	$	20.1	$	41.9	$	30.2	$	24.8