UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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For the quarterly period ended September 30, 2007March 31, 2008
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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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 |
| (I.R.S. Employer |
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| Identification No.) |
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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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as definedor a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).Act. (Check one):
Large accelerated filer o |
| Accelerated filer x |
Non-accelerated filer o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
The number of shares outstanding of the registrant’s Common Stock as of NovemberMay 1, 20072008 was 36,089,04036,628,782
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
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 web site 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 web site (www.sec.gov). The information on our web site 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) or can be obtained by writing to Systemax Inc., Attention: Board of Directors (Corporate Governance), 11 Harbor Park Drive, Port Washington, NY 11050.
3
PART I —- FINANCIAL INFORMATION
Systemax Inc.
Condensed Consolidated Balance Sheets
(In thousands)
|
| September 30, |
| December 31, |
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| March 31, |
| December 31, |
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| 2007 |
| 2006 |
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| 2008 |
| 2007 |
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| (Unaudited) |
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| (Unaudited) |
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ASSETS: |
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Current assets: |
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Cash and cash equivalents |
| $ | 97,784 |
| $ | 86,964 |
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| $ | 98,731 |
| $ | 128,021 |
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Accounts receivable, net |
| 181,259 |
| 164,615 |
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| 215,654 |
| 206,940 |
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Inventories, net |
| 234,877 |
| 233,136 |
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| 269,238 |
| 250,222 |
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Prepaid expenses and other current assets |
| 26,952 |
| 26,919 |
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| 16,284 |
| 14,455 |
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Deferred income tax assets, net |
| 7,779 |
| 7,727 |
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| 9,362 |
| 9,360 |
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Total current assets |
| 548,651 |
| 519,361 |
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| 609,269 |
| 608,998 |
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Property, plant and equipment, net |
| 49,356 |
| 48,586 |
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| 51,069 |
| 47,580 |
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Deferred income tax assets, net |
| 13,515 |
| 14,041 |
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| 18,764 |
| 18,652 |
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Other assets |
| 2,022 |
| 2,173 |
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Goodwill, intangibles and other assets |
| 30,911 |
| 1,150 |
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Total assets |
| $ | 613,544 |
| $ | 584,161 |
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| $ | 710,013 |
| $ | 676,380 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY: |
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Current liabilities: |
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Short-term borrowings, including current portions of long-term debt |
| $ | 494 |
| $ | 12,788 |
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| $ | 2,110 |
| $ | 4,302 |
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Accounts payable |
| 220,977 |
| 201,486 |
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| 262,952 |
| 248,673 |
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Accrued expenses and other current liabilities |
| 74,271 |
| 75,688 |
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| 80,278 |
| 81,670 |
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Dividends payable |
| 37,126 |
| — |
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Total current liabilities |
| 295,742 |
| 289,962 |
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| 382,466 |
| 334,645 |
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Long-term debt |
| 259 |
| 483 |
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| 347 |
| 254 |
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Other liabilities |
| 6,373 |
| 4,226 |
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| 5,624 |
| 5,646 |
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Total liabilities |
| 302,374 |
| 294,671 |
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| 388,437 |
| 340,545 |
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Commitments and contingencies |
| — |
| — |
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Shareholders’ equity: |
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Preferred stock |
| — |
| — |
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| — |
| — |
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Common stock |
| 383 |
| 383 |
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| 387 |
| 383 |
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Additional paid-in capital |
| 172,098 |
| 172,983 |
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| 176,248 |
| 173,381 |
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Treasury stock |
| (26,147 | ) | (26,324 | ) | |||||||||
Retained earnings |
| 152,504 |
| 144,074 |
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| 157,619 |
| 176,684 |
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Accumulated other comprehensive income |
| 12,711 |
| 7,181 |
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| 13,469 |
| 11,711 |
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Treasury stock |
| (26,526 | ) | (35,131 | ) | |||||||||
Total shareholders’ equity |
| 311,170 |
| 289,490 |
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| 321,576 |
| 335,835 |
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Total liabilities and shareholders’ equity |
| $ | 613,544 |
| $ | 584,161 |
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| $ | 710,013 |
| $ | 676,380 |
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See notes to condensed consolidated financial statements.
4
Systemax Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands,thousands, except per share amounts)
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| Three Months Ended |
| Nine Months Ended |
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| September 30, |
| September 30, |
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| Three Months Ended |
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| 2007 |
| 2006 |
| 2007 |
| 2006 |
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| 2008 |
| 2007 |
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Net sales |
| $ | 687,317 |
| $ | 575,041 |
| $ | 2,010,541 |
| $ | 1,697,191 |
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| $ | 724,737 |
| $ | 676,122 |
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Cost of sales |
| 576,664 |
| 483,527 |
| 1,703,896 |
| 1,437,544 |
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| 610,057 |
| 579,448 |
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Gross profit |
| 110,653 |
| 91,514 |
| 306,645 |
| 259,647 |
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| 114,680 |
| 96,674 |
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Selling, general & administrative expenses |
| 84,847 |
| 72,349 |
| 239,233 |
| 209,030 |
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| 87,147 |
| 75,137 |
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Operating income |
| 25,806 |
| 19,165 |
| 67,412 |
| 50,617 |
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| 27,533 |
| 21,537 |
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Interest and other income, net |
| (1,113 | ) | (343 | ) | (2,811 | ) | (7,111 | ) |
| (728 | ) | (742 | ) | ||||||||
Income before income taxes |
| 26,919 |
| 19,508 |
| 70,223 |
| 57,728 |
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| 28,261 |
| 22,279 |
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Provision for income taxes |
| 9,275 |
| 7,057 |
| 24,922 |
| 20,614 |
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| 10,200 |
| 8,384 |
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Net income |
| $ | 17,644 |
| $ | 12,451 |
| $ | 45,301 |
| $ | 37,114 |
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| $ | 18,061 |
| $ | 13,895 |
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Net income per common share: |
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Basic |
| $ | .49 |
| $ | .36 |
| $ | 1.26 |
| $ | 1.06 |
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| $ | .50 |
| $ | .39 |
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Diluted |
| $ | .47 |
| $ | .33 |
| $ | 1.20 |
| $ | .99 |
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| $ | .48 |
| $ | .37 |
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Weighted average common and common equivalent shares: |
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Weighted average shares outstanding: |
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Basic |
| 36,055 |
| 35,054 |
| 35,928 |
| 34,887 |
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| 36,206 |
| 35,718 |
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Diluted |
| 37,734 |
| 37,967 |
| 37,667 |
| 37,666 |
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| 37,628 |
| 37,701 |
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Dividends declared |
| $ | — |
| $ | — |
| $ | 1.00 |
| $ | — |
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Dividends declared per common share |
| $ | 1.00 |
| $ | 1.00 |
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See notes to condensed consolidated financial statements.
5
Systemax Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
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| Nine Months Ended |
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| September 30, |
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| Three Months Ended |
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| 2007 |
| 2006 |
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| 2008 |
| 2007 |
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Cash flows from operating activities: |
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Net income |
| $ | 45,301 |
| $ | 37,114 |
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| $ | 18,061 |
| $ | 13,895 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 6,675 |
| 6,035 |
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| 2,282 |
| 2,132 |
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Provision for deferred income taxes |
| 580 |
| 2,743 |
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Provision for returns and doubtful accounts |
| 2,856 |
| 2,391 |
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Provision (benefit) for deferred income taxes |
| (252 | ) | 715 |
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Provision (reduction) for returns and doubtful accounts |
| (894 | ) | 1,222 |
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Compensation expense related to equity compensation plans |
| 2,934 |
| 1,659 |
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| 863 |
| 832 |
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(Gain) loss on dispositions |
| 1 |
| (7,760 | ) | |||||||||
(Gain) loss on dispositions and abandonment |
| 13 |
| (3 | ) | |||||||||
Changes in operating assets and liabilities: |
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Accounts receivable |
| (12,165 | ) | (13,158 | ) |
| (2,664 | ) | (18,064 | ) | ||||
Inventories |
| 1,440 |
| (14,313 | ) |
| (17,813 | ) | (13,784 | ) | ||||
Prepaid expenses and other current assets |
| 577 |
| (8,418 | ) |
| (338 | ) | 7,896 |
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Accounts payable, accrued expenses and other current liabilities |
| 15,221 |
| (10,032 | ) |
| 9,895 |
| 23,859 |
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Net cash provided by (used in) operating activities |
| 63,420 |
| (3,739 | ) | |||||||||
Net cash provided by operating activities |
| 9,153 |
| 18,700 |
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Cash flows from investing activities: |
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Purchase of CompUSA |
| (30,400 | ) | — |
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Purchases of property, plant and equipment |
| (6,064 | ) | (4,566 | ) |
| (6,059 | ) | (1,238 | ) | ||||
Proceeds from disposals of property, plant and equipment |
| 13 |
| 19,080 |
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| 43 |
| — |
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Net cash provided by (used in) investing activities |
| (6,051 | ) | 14,514 |
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Net cash used in investing activities |
| (36,416 | ) | (1,238 | ) | |||||||||
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Cash flows from financing activities: |
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Repayments of borrowings from banks |
| (12,487 | ) | (8,123 | ) |
| (2,344 | ) | (742 | ) | ||||
Repayments of long-term debt and capital lease obligations |
| (278 | ) | (12,394 | ) | |||||||||
Dividends paid |
| (36,588 | ) | — |
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Proceeds from issuance of common stock |
| 2,645 |
| 751 |
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Repurchase of treasury stock |
| (1,860 | ) | — |
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Proceeds from (repayments of)long-term debt and capital lease obligations, net |
| 80 |
| (138 | ) | |||||||||
Proceeds from issuance of common stock, net of repurchases |
| 887 |
| 878 |
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Excess tax benefit from exercises of stock options |
| 1,810 |
| 294 |
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| 1,182 |
| 1,579 |
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Net cash provided by (used in) financing activities |
| (46,758 | ) | (19,472 | ) |
| (195 | ) | 1,577 |
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Effects of exchange rates on cash |
| 209 |
| (558 | ) |
| (1,832 | ) | (57 | ) | ||||
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Net increase (decrease) in cash and cash equivalents |
| 10,820 |
| (9,255 | ) |
| (29,290 | ) | 18,982 |
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Cash and cash equivalents — beginning of period |
| 86,964 |
| 63,291 |
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Cash and cash equivalents — end of period |
| $ | 97,784 |
| $ | 54,036 |
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Cash and cash equivalents – beginning of period |
| 128,021 |
| 86,964 |
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Cash and cash equivalents – end of period |
| $ | 98,731 |
| $ | 105,946 |
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Supplemental disclosures of non-cash investing and financing activities: |
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Acquisitions of equipment through capital leases |
| $ | 148 |
| $ | 602 |
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| $ | 255 |
| $ | — |
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See notes to condensed consolidated financial statements.
6
Systemax Inc.
Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)
(In thousands)
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| Accumulated |
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| Common Stock |
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| Other |
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| Common Stock |
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| Other |
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| Number of |
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| Additional |
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| Comprehensive |
| Treasury |
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| Number of |
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| Treasury |
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| Comprehensive |
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| Shares |
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| Paid-in |
| Retained |
| Income, |
| Stock, |
| Comprehensive |
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| Shares |
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| Paid-in |
| Stock, |
| Retained |
| Income, |
| Comprehensive |
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| Outstanding |
| Amount |
| Capital |
| Earnings |
| Net of Tax |
| At Cost |
| Income |
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| Outstanding |
| Amount |
| Capital |
| At Cost |
| Earnings |
| Net of Tax |
| Income |
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Balances, January 1, 2007 |
| 35,341 |
| $ | 383 |
| $ | 172,983 |
| $ | 144,074 |
| $ | 7,181 |
| $ | (35,131 | ) |
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Balances, January 1, 2008 |
| 36,092 |
| $ | 383 |
| $ | 173,381 |
| $ | (26,324 | ) | $ | 176,684 |
| $ | 11,711 |
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Stock-based compensation expense |
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| 2,784 |
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| 863 |
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Issuance of restricted stock |
| 309 |
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| (2,203 | ) |
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| 3,626 |
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Exercise of stock options |
| 528 |
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| (3,554 | ) |
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| 6,199 |
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| 437 |
| 4 |
| 706 |
| 177 |
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Repurchase of treasury stock |
| (104 | ) |
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| (640 | ) |
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| (1,220 | ) |
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Income tax benefit on stock-based compensation |
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| 2,728 |
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| 1,298 |
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Cumulative effect of adoption of FIN 48 |
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| (283 | ) |
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Change in cumulative translation adjustment, net |
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| 5,530 |
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| 5,530 |
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| 1,758 |
| $ | 1,758 |
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Dividends paid |
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| (36,588 | ) |
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Dividends declared |
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| (37,126 | ) |
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Net income |
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| 45,301 |
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| 45,301 |
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| 18,061 |
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| 18,061 |
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Total comprehensive income |
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| $ | 50,831 |
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| $ | 19,819 |
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Balances, September 30, 2007 |
| 36,074 |
| $ | 383 |
| $ | 172,098 |
| $ | 152,504 |
| $ | 12,711 |
| $ | (26,526 | ) |
|
| ||||||||||||||||||||||
Balances, March 31, 2008 |
| 36,529 |
| $ | 387 |
| $ | 176,248 |
| $ | (26,147 | ) | $ | 157,619 |
| $ | 13,469 |
|
|
| ||||||||||||||||||||||
See notes to condensed consolidated financial statements.
7
Systemax Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of the Company and its wholly-owned subsidiaries 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. Certain prior year amounts have been reclassified to conform to current year presentation.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2007March 31, 2008 and the results of operations for the three and nine month periods ended September 30,March 31, 2008 and 2007, and 2006, cash flows for the ninethree month periods ended September 30,March 31, 2008 and 2007 and 2006 and changes in shareholders’ equity for the ninethree month period ended September 30, 2007.March 31, 2008. The December 31, 20062007 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 year ended December 31, 2006.2007.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 20062007 and for the year then ended included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.2007. The results for the three and nine months ended September 30, 2007March 31, 2008 are not necessarily indicative of the results for an 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 quarter ended on March 29, 2008. The first quarters of both 2008 and 2007 included 13 weeks.
2. AdoptionAcquisition of New Accounting StandardCompUSA
EffectiveOn January 1, 20075, 2008, the Company, adoptedthrough various subsidiaries, entered into an asset purchase agreement with CompUSA Inc., a Delaware corporation. Pursuant to the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. At January 1, 2007,Purchase Agreement, the Company had a liabilityacquired certain assets and liabilities related to the
e-commerce business of CompUSA Inc., certain intellectual property rights owned by CompUSA, and the E-Commerce Business for unrecognized tax benefits of $3,379,000 (including interest and penalties of $731,000) of which $284,000 was charged to retained earnings at January 1, 2007. Of this total, $2,586,000 (net$18.9 million in cash. The Company completed its acquisition of the federal benefitE-Commerce Business on state issues) representsJanuary 10, 2008. Pursuant to the amountPurchase Agreement, the Company also acquired sixteen retail leases from CompUSA Inc. and certain fixtures located at these locations. The closing of unrecognized tax benefits that,the acquisition of each lease was subject to the receipt of the consent of the landlord, if recognized, would favorably affectrequired, under the effective income tax rateterms of a lease. During February and March 2008 the Company completed the acquisition of these sixteen store leases and fixtures for an aggregate purchase price of approximately $11.5 million. This acquisition accelerates the Company’s planned expansion into the retail market place and gives the Company 28 retail storefronts operating in any future periods.North America and Puerto Rico.
A preliminary purchase price allocation has been completed and the Company has recorded assets of approximately $17.0 million for Trademarks and Trade Names, $8.0 million for Domain Names, $.4 million for Client Lists, $.9 million for fixed assets and $4.1 million for Goodwill. The Company or one ofexpects to amortize its subsidiaries file U.S. federal income tax returnsClient Lists over a 5 year period and tax returns in various state and foreign jurisdictions in Canada and Western Europe. The Company’s U.S. federal income tax returns have been examined by the Treasury Department through 2001. State and local tax returns have been examined through various dates from 2001 to 2005 with ongoing tax examinations pending in several states. Included in the Company’s FIN 48 liability isdepreciate its fixed assets over a current liability of $2,264,000 for the expected taxes and interest and penalties relating to pending state tax examinations involving disputed allocations of income; no issues have been raised to date with respect to thesimilar period. All other pending state tax examinations. The Company has classified this as a current liability because payment of cash is anticipated within one year. The income tax returns of the Company’s principal foreign subsidiaries have been audited by local taxing authorities for years ended in 2001 through 2004.assets are indefinite lived.
WithThe Company was assigned the exceptionrights and prospective obligations of the current liabilitytenant for each of $2,264,000, the Company’s remaining tax liabilities and interest with respect to unrecognized tax benefits have been reclassified to other non-current liabilities on16 retail stores acquired. The following table details the balance sheet because payment of cash is not anticipated within one year. This amount at January 1, 2007 aggregates to approximately $1,115,000, including $305,000 for interest and penalties. The Company’s continuing practice is to record interest and penaltiescontractual obligations related to tax positions the assigned leases (in income tax expense in its consolidated statement of operations.thousands):
During the nine months ended September 30, 2007, the Company resolved a state tax increase issue by paying an assessment of approximately $1,901,000 (including $169,000 in interest) to a state taxing authority. As of September 30, 2007 the Company’s liability for unrecognized tax benefits was approximately $1,539,000 (including interest and penalties of approximately $624,000).
|
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| After 2012 |
| ||||||
Retail store operating leases |
| $ | 4,115 |
| $ | 4,633 |
| $ | 4,311 |
| $ | 3,671 |
| $ | 3,373 |
| $ | 13,849 |
|
8
The impact of FIN 48 on the results for the three months ended September 30, 2007 was not material.
Other than the aforementioned FIN 48 adoption, since the date of the Company’s annual report on Form 10-K there have been no material changes to the Company’s significant accounting policies.
2. 3.Stock-based Compensation Plans
Pre-tax stock-based employee stock option compensation expense for the ninethree months ended September 30,March 31, 2008 and 2007 was $720,000 and 2006 was approximately $2,353,000 and $1,228,000$689,000 respectively.
The Company continues to use the simplified method for determining expected life as permitted in SEC Staff Accounting Bulletin 110 for options qualifying for treatment (“plain-vanilla” options) due to the limited history the Company currently has with option exercise activity.
3.4. Net Income 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. 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. The dilutive effect of outstanding options 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 excluded from the computation of diluted earnings per share was 100,000649,000 and 23,000zero shares for the three months ended September 30,March 31, 2008 and 2007, and 2006 and zero and 53,000 shares for the nine months ended September 30, 2007 and 2006, respectively, due to their antidilutive effect.
4.5. Comprehensive Income
Comprehensive income consists of net income and foreign currency translation adjustments, net of tax, and is included in the Condensed Consolidated Statement of Shareholders’ Equity. For the three month periods ended September 30,March 31, 2008 and 2007, and 2006, comprehensive income was $20,847,000$19,819,000 and $12,218,000, respectively. For the nine month periods ended September 30, 2007 and 2006, comprehensive income was $50,831,000 and $41,351,000,$14,388,000, respectively.
5.6. Credit Facilities
The Company maintains a $120 million (which may be increased by up to $30 million, subject to certain conditions) secured revolving credit agreement with a group of financial institutions which provides for borrowings in the United States and United Kingdom. The borrowings are secured by all of the Company’s domestic and United Kingdom accounts receivable, the domestic inventories of the Company, general intangibles and the Company’s shares of stock in its domestic subsidiaries and the Company’s United Kingdom headquarters building. The credit facility expires and the outstanding borrowings thereunder are due on October 26, 2010. The revolving credit agreement contains certain financial and other covenants, including maintaining a minimum level of availability and restrictions on capital expenditures and payments of dividends. The Company was in compliance with all of the covenants as of September 30, 2007.March 31, 2008. As of September 30, 2007,March 31, 2008, eligible collateral under the agreement was $120$118.7 million, and total availability was $110.2 million. There$107.7 million and there were outstanding letters of credit of $9.8$11.0 million and there were no outstanding advances, as of September 30, 2007.advances.
The Company’s Netherlands subsidiary maintains a €5.0 million ($7.17.9 million at the September 30, 2007March 31, 2008 exchange rate) credit facility with a local financial institution. At September 30, 2007March 31, 2008 there were no€1.1 million ($1.7 million) of borrowings outstanding.outstanding with interest payable at a rate of 7.05%. Borrowings under the facility are secured by the subsidiary’s accounts receivable and are subject to a borrowing base limitation of 85% of the eligible accounts. The facility expires in September 2008.
9
6.Accrued Restructuring Costs
The Company periodically assesses its operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs. During the years ended December 31, 2005 and 2004, management approved and implemented restructuring actions which included workforce reductions and facility consolidations.
The following table summarizes the components of the accrued restructuring charges and the movements within these components during the nine months ended September 30, 2007 (in thousands).
|
| Nine months ended |
| |
Balance, beginning of year |
| $ | 89 |
|
Amounts paid |
| (89 | ) | |
Balance, end of period |
| $ | — |
|
7.Product Warranties
Provisions for estimated future expenses relating to product warranties for the Company’s assembled personal computersPCs are recorded as cost of sales when revenue is recognized. Liability estimates are determined based on management judgment considering such factors as the number of units sold, historical and anticipated rates of warranty claims and the likely current cost of corrective action. The changes in accruedaccrue product warranties were as follows (in thousands):follows:
9
|
| Nine months ended |
| |
Balance, beginning of year |
| $ | 1,061 |
|
Charged to expense |
| 1,066 |
| |
Deductions |
| (1,162 | ) | |
Balance, end of period |
| $ | 965 |
|
Three months | |||
Balance, beginning of year | $ 914 | ||
Charged to expense | 279 | ||
Deductions | (341 | ) | |
Balance, end of period | $852 |
8. Segment Information
The Company operatesSystemax is primarily a direct marketer of brand name and is internally managedprivate label products. Our operations are organized in three operating segments-reportable business segments – Technology Products, Industrial Products and Hosted Software. Our Technology Products segment sales include computer,sells computers, computer supplies and consumer electronics.electronics which are marketed in North America and Western Europe. Most of these products are manufactured by other companies. We assemble PCsour own personal computers (“PCs”) and sell them under the trademarks Systemax™ and Ultra™. In addition, we market andWe also sell computers, computer supplies and consumer electronicscertain computer-related products manufactured by other leading companies.for us to our own design under the trademark Ultra™. Technology Products accounted for 92% of our net sales in 2007. Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial products.items which are marketed in North America. Most of these products are manufactured by other companies. Some products are manufactured for us to our own design and marketed under the trademarks Global™, GlobalIndustrial.com™ and Nexel™. Industrial products accounted for 8% of our net sales in 2007. In both of these segments we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service. Our Hosted Software segment, which became a reportable segment in 2006, participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS Profitability SuiteProfitCenter Software™ of hosted software.application.
The Company’s chief operating decision-maker is itsthe Company’s Chief Executive Officer. The Company evaluates segment performance based on revenues, operating income, before net interest, foreign exchange gains and losses, restructuring and other charges and income taxes. Corporate costs not identified with the disclosed segments and restructuring and other charges are grouped as “Corporate and other expenses.” The chief operating decision-maker reviews assets and makes capital expenditure decisions for the Company on a consolidated basis only. The accounting policies of each of the segments are the same as those of the Company.
10
Financial information relating to the Company’s operations by reportable segment was as follows (in thousands):
|
| Three Months Ended |
| ||||
|
| 2008 |
| 2007 |
| ||
Net sales: |
|
|
|
|
| ||
Technology products |
| $ | 667,297 |
| $ | 624,167 |
|
Industrial products |
| 57,362 |
| 51,874 |
| ||
Hosted software |
| 78 |
| 81 |
| ||
Consolidated |
| $ | 724,737 |
| $ | 676,122 |
|
|
|
|
|
|
| ||
Operating income: |
|
|
|
|
| ||
Technology products |
| $ | 30,323 |
| $ | 21,249 |
|
Industrial products |
| 5,501 |
| 4,591 |
| ||
Hosted Software |
| (4,122 | ) | (3,017 | ) | ||
Corporate and other expenses |
| (4,169 | ) | (1,286 | ) | ||
Consolidated |
| $ | 27,533 |
| $ | 21,537 |
|
10
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||||
|
| September 30 |
| September 30 |
| |||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| |||||||
Net sales: |
|
|
|
|
|
|
|
|
| |||||||
Technology products |
| $ | 625,683 |
| $ | 522,661 |
| $ | 1,840,922 |
| $ | 1,550,096 |
| |||
Industrial products |
| 61,523 |
| 52,351 |
| 169,232 |
| 147,006 |
| |||||||
Hosted software |
| 111 |
| 29 |
| 387 |
| 89 |
| |||||||
Consolidated |
| $ | 687,317 |
| $ | 575,041 |
| $ | 2,010,541 |
| $ | 1,697,191 |
| |||
|
|
|
|
|
|
|
|
|
| |||||||
Operating income (loss): |
|
|
|
|
|
|
|
|
| |||||||
Technology products |
| $ | 23,731 |
| $ | 17,281 |
| $ | 63,629 |
| $ | 48,145 |
| |||
Industrial products |
| 6,592 |
| 4,543 |
| 16,759 |
| 9,619 |
| |||||||
Hosted software |
| (5,308 | ) | (2,268 | ) | (10,983 | ) | (5,922 | ) | |||||||
Corporate and other expenses |
| 791 |
| (391 | ) | (1,993 | ) | (1,225 | ) | |||||||
Consolidated |
| $ | 25,806 |
| $ | 19,165 |
| $ | 67,412 |
| $ | 50,617 |
| |||
Financial information relating to the Company’s operations by geographic area was as follows (in thousands):
|
| Three Months Ended |
| ||||
|
| 2008 |
| 2007 |
| ||
Net sales: |
|
|
|
|
| ||
United States: |
|
|
|
|
| ||
Industrial products |
| $ | 57,362 |
| $ | 51,874 |
|
Technology products |
| 365,917 |
| 351,220 |
| ||
Hosted software |
| 78 |
| 81 |
| ||
United States total |
| 423,357 |
| 403,175 |
| ||
Other North America |
| 48,999 |
| 37,214 |
| ||
North America total |
| 472,356 |
| 440,389 |
| ||
Europe |
| 252,381 |
| 235,733 |
| ||
Consolidated |
| $ | 724,737 |
| $ | 676,122 |
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
| ||||
United States: |
|
|
|
|
|
|
|
|
| ||||
Technology products |
| $ | 356,642 |
| $ | 309,773 |
| $ | 1,045,283 |
| $ | 920,845 |
|
Industrial products |
| 61,523 |
| 52,351 |
| 169,232 |
| 147,006 |
| ||||
Hosted software |
| 111 |
| 29 |
| 387 |
| 89 |
| ||||
United States total |
| 418,276 |
| 362,153 |
| 1,214,902 |
| 1,067,940 |
| ||||
Other North America |
| 41,191 |
| 33,388 |
| 116,033 |
| 94,373 |
| ||||
North America total |
| 459,467 |
| 395,541 |
| 1,330,935 |
| 1,162,313 |
| ||||
Europe |
| 227,850 |
| 179,500 |
| 679,606 |
| 534,878 |
| ||||
Consolidated |
| $ | 687,317 |
| $ | 575,041 |
| $ | 2,010,541 |
| $ | 1,697,191 |
|
Revenues are attributed to countries based on the location of the selling subsidiary. |
Revenues are attributed to countries based on the location of the selling subsidiary.
9. Recent Accounting PronouncementsContingencies
Litigation – Kevin Vukson v. TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc.
In September 2006,On October 18, 2007, Kevin Vukson filed a class action complaint in U.S. District Court (E.D.N.Y.) against TigerDirect, Inc., OnRebate.com Inc. and Systemax Inc. on behalf of himself and all OnRebate customers whose rebates were denied or delayed. (OnRebate.com Inc. is a rebate processing company owned by Systemax.) Vukson’s Complaint alleges that since 2004 Systemax, TigerDirect and OnRebate have conducted a deceptive and unlawful enterprise by failing to pay rebates that should have been paid and delaying unnecessarily the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157 “Fair Value Measurements” which is effectivepayment of other rebates that were paid. Vukson alleges claims arising under Florida’s Unfair, Deceptive Trade Practice Act, the federal RICO statute, along with claims for fiscal years beginning after November 15, 2007. This statement was issuedbreach of contract, conspiracy to increase consistencycommit fraud and comparability in fair value measurementsunjust enrichment. Systemax, TigerDirect and OnRebate have moved to dismiss the Complaint and to transfer the matter to the Southern District of Florida. The Court has not yet ruled on these motions and has not yet certified a class. The Company intends to vigorously defend this case. State of Florida, Office of the Attorney General Subpoena
On January 2, 2008 the Company received a subpoena for expanded disclosures about fair value measurements.documents from the Florida Attorney General’s Office relating to the payment and processing of rebates by the Company. On January 30, 2008 the Company received a second subpoena for additional documents. The Company is currently evaluating the potential impact, if any, of this pronouncement.
In February 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (including an amendment of FASB Statement No. 115)” which is effective for fiscal years beginning after November 15, 2007. This interpretation was issued to improve financial reporting by providing entitiescooperating with the opportunityFlorida Attorney General’s Office to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently evaluatingprovide the potential impact, if any, of this pronouncement.requested documents.
11
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. Forward looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, financing needs, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and 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 assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,”“intends”, “plans” and variations thereof and similar expressions are intended to identify forward looking statements.
11
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, 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.
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 20062007 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, long-lived assets, income taxes and restructuring charges and accruals. 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, 2006.2007. There have been no significant changes in the application of critical accounting policies or estimates during 2007, with the exception of any tax estimates or adjustments related to the adoption of FIN 48.2008. 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 its financial condition or results of operations.
12
Overview
We areSystemax is primarily a direct marketer of brand name and private label products. Our operations are organized in three primary reportable business segments —– Technology Products, Industrial Products and Hosted Software. Our Technology Products segment markets personal desktopsells computers, notebook computerscomputer supplies and computer related productsconsumer electronics which are marketed in North America and Western Europe. Most of these products are manufactured by other companies. We assemble our own PCs and sell them under our own trademarks which we believe gives us a competitive advantage.Systemax™ and Ultra™. We also sell personal computers, computer supplies and consumer electronicscertain computer-related products manufactured by other leading companies.for us to our own design under the trademark Ultra™. Technology products accounted for 92% of our net sales in the first quarter of 2008. Our Industrial Products segment marketssells a wide array of material handling equipment, storage equipment and consumable industrial items which are marketed in North America. We offer more than 100,000Most of these products are manufactured by other companies. Some products are manufactured for us to our own design and continuously update our product offerings to addressmarketed under the needstrademarks Global™, GlobalIndustrial.com™ and Nexel™. Industrial products accounted for 8% of our net sales in the first quarter of 2008. In both of these product groups, we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service. Our Hosted Software segment, which include large, mid-sized and small businesses, educational and government entities as well as individual consumers. We reach customers by multiple channels, utilizing relationship marketers, e-commerce web sites, mailed catalogues and retail outlet stores. We also participatebecame a reportable segment in 2006, participates in the emerging market for on-demand, web-based business software applications through the marketing of our PCS Profitability Suite™ of hosted software, which we began during 2004, and in which we have not yet recognized sizable revenues and have incurred considerable lossesProfitCenter Software™ application. See Note 8 to date. For the nine months ended September 30, 2007, Technology Products account for 92% ofconsolidated financial statements additional financial information about our net sales, and,business segments as a result, we are dependent on the general demand for such products. The Technology Products segment has historically experienced seasonal fluctuations in sales, with the first and fourth calendar quarters experiencing higher product demand than the second and third quarters.well as information about our geographic operations.
The market for Technology Productscomputer products and consumer electronics is subject to intense price competition and is characterized by narrow gross profit margins. The North American industrial products market is highly fragmented and we compete against multiple distribution channels. Distribution of information technology and our industrial products is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of leasing warehouse space, maintaining inventory and inventory management systems, and employing personnel to perform the associated tasks. We
12
supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stocking 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, and employee benefits. We have made substantial reductions in our workforce and closed or consolidated several facilities over the past several years. Our restructuring actions and other cost savings measures implemented over the last several years resulted in reducing our consolidated selling, general and administrative expenses. We will continue to monitor our costs and evaluate the need for additional actions.
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.
13
Results of Operations
Three and Nine Months Ended September 30, 2007March 31, 2008 compared to the Three and Nine Months Ended September 30, 2006March 31, 2007
Key Performance Indicators (in thousands):
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, |
| September 30, |
|
| Three Months Ended |
| ||||||||||||||||||
|
| 2007 |
| 2006 |
| % Change |
| 2007 |
| 2006 |
| % Change |
|
| 2008 |
| 2007 |
| % Change |
| ||||||
Net sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Technology products |
| $ | 625,683 |
| $ | 522,661 |
| 19.7 | % | $ | 1,840,922 |
| $ | 1,550,096 |
| 18.8 | % |
| $ | 667,297 |
| $ | 624,167 |
| 6.9 | % |
Industrial products |
| 61,523 |
| 52,351 |
| 17.5 | % | 169,232 |
| 147,006 |
| 15.1 | % |
| 57,362 |
| 51,874 |
| 10.6 | % | ||||||
Hosted software |
| 111 |
| 29 |
| 282.8 | % | 387 |
| 89 |
| 334.8 | % |
| 78 |
| 81 |
| (3.7 | )% | ||||||
Total net sales |
| $ | 687,317 |
| $ | 575,041 |
| 19.5 | % | $ | 2,010,541 |
| $ | 1,697,191 |
| 18.5 | % |
| $ | 724,737 |
| $ | 676,122 |
| 7.2 | % |
Net sales by geography: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
North America |
| $ | 459,467 |
| $ | 395,541 |
| 16.2 | % | $ | 1,330,935 |
| $ | 1,162,313 |
| 14.5 | % |
| $ | 472,356 |
| $ | 440,389 |
| 7.3 | % |
Europe |
| 227,850 |
| 179,500 |
| 26.9 | % | 679,606 |
| 534,878 |
| 27.1 | % |
| 252,381 |
| 235,733 |
| 7.1 | % | ||||||
Total net sales |
| $ | 687,317 |
| $ | 575,041 |
| 19.5 | % | $ | 2,010,541 |
| $ | 1,697,191 |
| 18.5 | % |
| $ | 724,737 |
| $ | 676,122 |
| 7.2 | % |
Gross margin |
| 16.1 | % | 15.9 | % | .2 | % | 15.3 | % | 15.3 | % | — | % |
| 15.8 | % | 14.3 | % | 1.5 | % | ||||||
Selling, general and administrative costs |
| $ | 84,847 |
| $ | 72,349 |
| 17.3 | % | $ | 239,233 |
| $ | 209,030 |
| 14.4 | % | |||||||||
Selling, general and administrative as a % of net sales |
| 12.3 | % | 12.6 | % | (.3 | )% | 11.9 | % | 12.3 | % | (.4 | )% | |||||||||||||
Selling, general and administrative expenses |
| $ | 87,147 |
| $ | 75,137 |
| 16.0 | % | |||||||||||||||||
Selling, general and administrative costs as a % of net sales |
| 12.0 | % | 11.1 | % | .9 | % | |||||||||||||||||||
Operating income |
| $ | 25,806 |
| $ | 19,165 |
| 34.7 | % | $ | 67,412 |
| $ | 50,617 |
| 33.2 | % |
| $ | 27,533 |
| $ | 21,537 |
| 27.8 | % |
Operating margin |
| 3.8 | % | 3.3 | % | .5 | % | 3.4 | % | 3.0 | % | .4 | % |
| 3.8 | % | 3.2 | % | .6 | % | ||||||
Effective income tax rate |
| 34.5 | % | 36.2 | % | (1.7 | )% | 35.5 | % | 35.7 | % | (.2 | )% |
| 36.1 | % | 37.6 | % | (1.5 | )% | ||||||
Net income |
| $ | 17,644 |
| $ | 12,451 |
| 41.7 | % | $ | 45,301 |
| $ | 37,114 |
| 22.1 | % |
| $ | 18,061 |
| $ | 13,895 |
| 30.0 | % |
Net margin |
| 2.6 | % | 2.2 | % | .4 | % | 2.3 | % | 2.2 | % | .1 | % |
| 2.5 | % | 2.2 | % | .3 | % | ||||||
The Technology Products sales increase was driven by increased internet and retail store sales, private label product sales, and expanded product offerings.offerings and the acquisition of the CompUSA ecommerce business and sixteen retail stores. Sales attributable to CompUSA were $18.3 million. The Industrial Products sales increase resulted from the Company increasing its market share through competitive pricing advantages and increased internet sales. Both North America sales and Europe sales increased in the thirdfirst quarter and for the first nine months as compared to the same periods in the prior year. European sales increased primarily as a result of growth in business to business sales. Movements in foreign exchange rates positively impacted the European sales comparison by approximately $15$18 million in the third quarter and $57 million for the first nine months of 2007.quarter. Excluding the movements in foreign exchange rates, European sales would have increased 19%decreased .4% from the prior quarter and 16% from the prior year. Sales as measured in local currencies increased in all of the European markets we serve for the first nine months of 2007. The increase in our North American sales resulted from sales growth in both our Technology Products and Industrial Products groups. This increase was primarily a result of our continuing internet initiatives, andincreased retail sales, expansion of our product offerings.offerings and the aforementioned acquisition of certain CompUSA assets. Consolidated gross margin increased slightlyimproved by over 150 basis points in the first quarter as compared to the same period in 2007 due to decreased competitive pricing pressures. Third quarter gross margin improved by over 180 basis pointspressures in 2008 as compared to the first quarter of 2007 due primarily to less price discounting for technology products.previous year. Gross margin is dependent on variables such as product mix, vendor price protection and other sales incentives, competition, pricing strategy, cooperative advertising funds required to be classified as a reduction to cost of sales and other variables, any or all of which may result in fluctuations in gross margin.
Selling, general and administrative expenses for the third quarter of 2007 increased 17.3% from the same periodThe increase in 2006, primarily the result of $7.0 million of increased salaries and $6.4 million of increased advertising costs. For the first nine months of 2007 selling, general and administrative expenses increased by 14.4% compared to the same period in 2006,during 2008 was primarily the result of $18.0$9.5 million of increased salaries, $1.5 million increased rent costs and $17.3$1.5 million of increased advertisingprofessional fees and telephone communication charges. Included in these cost increases are approximately $2.5 million of costs offset by settlement proceedsrelated to CompUSA operations and $.7 million in one time severance costs. Included in the first quarter of 2007 is a gain of approximately $2.4 million from a lawsuit that was settled favorablyfavorably. Excluding this gain and the one time severance costs in the first quarter of2008, selling, general and administrative expenses would have increased 11.5% in 2008 as compared to 2007.
During the first quarter of 2006 we sold a warehouse facility and recognized a gain of approximately $6.7 million net of a prepayment penalty incurred upon the repayment of the underlying mortgage loan, which is included in “Interest and other
1413
income, net.” The facility was replaced by a larger, leased building.
The Company’s estimated effective tax rate for the thirdfirst quarter of 20072008 was 34.5%36.1% compared to 36.2%37.6% in 2006.2007. The reductionreduced rate in 2008 is primarily the rate for third quarterresult of 2007 was primarily attributablea reversal of a tax liability of approximately $.4 million related to higher income in locations with lower effectivefavorable settlement of an outstanding tax rates. For the first nine months of 2007 the Company’s effective tax rate was 35.5% down slightly from 35.7% in 2006.
issue.
Financial Condition, Liquidity and Capital Resources
Our primary liquidity needs are to support working capital requirements in our business, to fund capital expenditures, and to fund minimalspecial dividends declared by our Board of Directors and to fund acquisitions. We rely principally upon operating cash flow and borrowings under our credit facilities to meet these needs. We believe that cash flow available from these sources will be sufficient to meet our working capital requirements as well as any interest and debt repayments in the next twelve months and thereafter.
Selected liquidity data (in thousands):
|
| September 30, |
| December 31, |
|
|
| |||
|
| 2007 |
| 2006 |
| $ Change |
| |||
Cash and cash equivalents |
| $ | 97,784 |
| $ | 86,964 |
| $ | 10,820 |
|
Accounts receivable, net |
| $ | 181,259 |
| $ | 164,615 |
| $ | 16,644 |
|
Inventories, net |
| $ | 234,877 |
| $ | 233,136 |
| $ | 1,741 |
|
Prepaid expenses and other current |
| $ | 26,952 |
| $ | 26,919 |
| $ | 33 |
|
Accounts payable |
| $ | 220,977 |
| $ | 201,486 |
| $ | 19,491 |
|
Accrued expenses |
| $ | 74,271 |
| $ | 75,688 |
| $ | (1,417 | ) |
Short term debt |
| $ | 494 |
| $ | 12,788 |
| $ | (12,294 | ) |
Working capital |
| $ | 252,909 |
| $ | 229,399 |
| $ | 23,510 |
|
|
| March 31, |
| December 31, |
| $ Change |
| |||
Cash and cash equivalents |
| $ | 98,731 |
| $ | 128,021 |
| $ | (29,290 | ) |
Accounts receivable, net |
| $ | 215,654 |
| $ | 206,940 |
| $ | 8,714 |
|
Inventories ,net |
| $ | 269,238 |
| $ | 250,222 |
| $ | 19,016 |
|
Prepaid expenses and other current assets |
| $ | 16,284 |
| $ | 14,455 |
| $ | 1,829 |
|
Accounts payable |
| $ | 262,952 |
| $ | 248,673 |
| $ | 14,279 |
|
Accrued expenses and other current liabilities |
| $ | 80,278 |
| $ | 81,670 |
| $ | (1,392 | ) |
Dividends payable |
| $ | 37,126 |
| — |
| $ | 37,126 |
| |
Short term borrowings |
| $ | 2,110 |
| $ | 4,302 |
| $ | (2,192 | ) |
Working capital |
| $ | 226,803 |
| $ | 273,453 |
| $ | (46,650 | ) |
Our working capital increaseddecreased in the first nine monthsquarter of 2007, primarily2008 as the result of the use of cash of approximately $30.4 million for the purchase of certain CompUSA assets, an increase in accounts receivable and inventory, in Europe andprimarily related to purchasing inventory for the 16 CompUSA retail stores, an increase in accounts payable offsetand accrued expenses and an increase in dividends payable as the result of the dividend declared by a reductionour Board in short term debt in Europe and a decrease in accrued expenses.March 2008. Our inventory turnover decreased from 10 times to 99.5 times on an annual basis.basis primarily the result of the restocking of the 16 acquired CompUSA retail stores. Future accounts receivable and inventory balances will continue to fluctuate with changes in sales volume and the mix of our net sales between consumer and business customers. These accounts will also be affected by the acquisition of CompUSA.
The increasedecrease in cash provided by operations in 20072008 resulted from changes in our working capital accounts, which provided $5.1used $10.9 million in cash compared to $45.9$.1 million of cash used in 2006,2007, primarily the result of an increase in accounts payable and accrued expenses and a decrease in inventories and prepaids and other current assets.related to the CompUSA acquisition. Cash generated from net income adjusted by other non-cash items provided $58.3$20.1 million for the nine months ended September 30, 2007first quarter of 2008 compared to $42.2$18.8 million provided by these items excluding a gain onin the salefirst quarter of a warehouse facility in 2006, for the nine months ended September 30, 2006.2007.
Cash flows fromused in investing activities provided cash of $14.5 million in 2006,during 2008 were primarily for the result of $18.6 million of proceeds from the sale of a warehouse facility. CapitalCompUSA acquisition and for capital expenditures in 2007retail stores and 2006information technology. Cash flows used in investing activities during 2007 consisted primarily of upgrades and enhancements to our information and communications systems hardware and facilities costs for the opening of new retail outlet stores.costs.
Net cashIn the first quarter of $46.8 million was used in financing activities for the nine months ended September 30, 2007. We2008 we repaid $12.5$2.3 million in short-term loans in Europe and we paid $36.6 million for a special dividend. Proceedshad proceeds and excess tax benefits from stock option exercises that provided approximately $4.5$2.1 million of cash. In the first nine monthsquarter of 2006,2007 we had proceeds and excess tax benefits from stock option exercises of approximately $2.5 million. We used cash of $12.4$.9 million to repay long-term debt obligations, primarily for the mortgage on a warehouse facility, we used $8.1 million to repay short-term borrowings in Europe and we received $1.0 million of proceeds from stock option exercises and excess tax benefits.Europe.
Under our $120 million (which may be increased by up to $30 million, subject to certain conditions) secured revolving credit agreement for borrowings in the United States and United Kingdom, as of September 30, 2007,March 31, 2008, eligible collateral was $120$118.7 million and total availability was $110.2$107.7 million. There were outstanding letters of credit of $9.8$11.0 million and there were no
15
outstanding advances as of September 30, 2007.March 31, 2008. The borrowings are secured by all of the domestic and United Kingdom accounts receivable, the domestic inventories of the Company, general intangibles, the Company’s shares of stock in its domestic subsidiaries and the Company’s United Kingdom headquarters building. The credit facility expires and the outstanding borrowings thereunder are due on October 26, 2010. The revolving credit agreement contains certain financial and other covenants, including maintaining a minimum level of availability and restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants under this facility as of September 30, 2007.March 31, 2008.
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Under our Netherlands €5 million ($7.17.9 million at the September 30, 2007March 31, 2008 exchange rate) credit facility, at September 30, 2007March 31, 2008 there were no borrowingswas approximately €1.1 million outstanding under this line.line ($1.7 million). This facility expires in September 2008.
We also have certain obligations with various parties that include commitments to make future payments. Our principal commitments at September 30, 2007March 31, 2008 consisted of repayments of borrowings under our credit agreements, payments under operating leases for certain of our real property and equipment and payments under employment and other service agreements. In connection with the adoption of FIN 48, as of September 30, 2007 the Company had a $1.5 million liability related to uncertain tax positions. During the second quarter of 2007 the Company paid approximately $1.9 million to a state taxing authority related to the settlement of a previously uncertain tax position. No other material changes occurred in the Company’s contractual obligations during the nine months ended September 30, 2007.
Our current and anticipated needs for cash include funding growth in working capital, andthe special dividend declared by our Board of Directors in 2008, capital expenditures necessary for future growth in sales and potential expansion through acquisitions. We believe that our cash balances 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 primarily in money market funds or their equivalent. As of September 30, 2007,March 31, 2008, all of our investments had maturities of less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
Off-balance Sheet Arrangements
The Company currently leases its facility in Port Washington, NY from Addwin Realty Associates, an entity owned by Richard Leeds, Bruce Leeds, and Robert Leeds, Directors of the Company and the Company’s three senior executive officers and principal stockholders.
The Company has not created, and is not party to, except as described above, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Pounds Sterling, Euros and 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 sales, gross margins, operating expenses and retained earnings 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 30, 2007March 31, 2008 we had no outstanding forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable rate debt includes short-term borrowings in Europe under our credit facilities. As of September 30, 2007, we did not have anyMarch 31, 2008, the balance
16
outstanding on our variable rate debt.debt was approximately $1.7 million. Based on our market sensitive instruments as of September 30, 2007,March 31, 2008, 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 for the fiscal year.
Item 4. Controls and Procedures
The Company establishesUnder the supervision and maintains disclosure controls and procedures that are intended to provide reasonable assurance that information required to be disclosed bywith the Company inparticipation of the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also intended to provide reasonable assurance that such information is accumulated and reported toCompany’s management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including ourCompany’s Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent 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 control systems, misstatements due to error or fraud may occur and not be detected. These limitations include the circumstances that breakdowns can occur as a result of error or mistake, the exercise of judgment by individuals or that controls can be circumvented by acts of misconduct. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of the end of the period covered by this report, weCompany carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of ourthe Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15as of the Securities Exchange Act of 1934.March 31, 2008. As part of this evaluation we identified certaina significant deficiencies,deficiency, as previously defined under Auditing Standard No. 2:5: An Audit of Internal Control Over Financial Reporting Performed in ConjunctionThat is Integrated With an Audit of Financial Statements, in our internal controls over financial reporting as of September 30, 2007. TheseMarch 31, 2008. This significant deficiencies are:deficiency is:
•The Company has internal control deficiencies inconsolidates its information technology area including the lack of adequate general controls. The Company lacks program changeworldwide financial results from disparate underlying financial and project management controls, has inadequate segregation of duties between information technology department development and production functions, needs formal information technology strategic planning, needs formal documentation of information security procedures, needs security around user rights to certain applicationoperational systems and needs to implement formal help desk procedures.
•The Company has disparate operating and financial information systems at certain of the Company’s locations that have inherentvarious functional limitations resultingand few automated interfaces. This results in a control environmentconsolidation process that is heavily reliant uponon manual review procedures and manual adjustments. These deficiencies include inadequateOur control over this consolidation process primarily consists of corporate review procedures. The design and operation of this control process may not prevent or lack of systems interfaces and the preparation of numerous manual journal entries. In addition, there are additional adjustments entered into the general ledger from subsidiaries after submission by the subsidiary.
Thesedetect misstatements on a timely basis. This significant deficiencies dodeficiency does not, in our judgment, rise to the level of a material weakness in internal controls over financial reporting. Thereporting because we believe that the controls in place would prevent or detect a material misstatement. Based upon this
15
evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded based on our evaluation as of September 30, 2007, that ourthe Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) wereare effective.
We have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Accordingly, management believes, based on its knowledge, that (i) this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report and (ii) the financial statements, and other
17
financial information included in this report, fairly reflect the form and substance of transactions and fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.
Section 404 of the Sarbanes-Oxley Act
For the year ended December 31, 2006 and the period ended September 30, 2007, we were not subject to the internal controls certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 because we were not an accelerated filer as defined by the SEC. For the year ending December 31, 2007, as an accelerated filer we will be subject to the requirements of Section 404 that management provide an assessment of the effectiveness of the Company’s internal control over financial reporting and the Company’s independent registered public accounting firm will be required to audit that assessment.
We are working to achieve compliance with the requirements of Section 404. We are dedicating substantial time and resources to documentation and testing of our internal controls and have engaged outside consultants to assist us. We have increased headcount of qualified financial personnel. We have made substantive (though not material) changes to our internal controls, including developing estimation processes to appropriately calculate fairly stated inventory in transit, vendor drop shipments, sales returns and allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs. We continue to perform and put in place extensive detect controls in areas where we have had significant deficiencies.We have formed a disclosure committee for purposes of ensuring that disclosures made by the Company in its filings with the SEC or to its security holders or the investment community are accurate and complete.
We have a significant amount of work to do to remediate the items we have identified. In the course of completing our evaluation and testing we may identify further deficiencies and weaknesses that will need to be addressed and will require remediation. We may not be able to correct all such internal control deficiencies in a timely manner and may find that a material weakness or weaknesses exist. As a result, management may not be able to issue an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.
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 30, 2007March 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
18Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.157 “Fair Value Measurements”. This statement was issued to increase consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) which amends SFAS 157 to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP 157-2 delays the effective date of SFAS 157, for certain items, until fiscal years beginning after November 15, 2008.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (including an amendment of FASB Statement No. 115)”. This interpretation was issued to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.
Effective January 1, 2008, the Company adopted SFAS 157 and SFAS 159. Since we do not have any financial assets and liabilities that are required to be recorded at fair value, the only impact of these adoptions will be on the disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments in our Annual Report on Form 10-K for the year ended December 31, 2008.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces FASB Statement 141. SFAS No.141R retains the requirement that the acquisition method of accounting be used for business combinations. The objective of SFAS No. 141R is to improve the relevance, representational faithfulness and comparability that reporting entities provide in their financial reports about business combinations and their effects. SFAS 141R establishes principles and requirements for how an acquirer 1) recognizes and measures identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the combination or a gain from a bargain purchase and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, “Accounting and Reporting of Noncontrolling Interest” (“SFAS No. 160”). The objective of SFAS 160 is to improve the relevance, comparability and transparency of the financial information that reporting entities provide related to noncontrolling interests, sometimes referred to as minority interests. SFAS No. 160 requires, among other things, that noncontrolling interests be shown separately in the consolidated entity’s equity section of the balance sheet. SFAS No. 160 also establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent, for presentation of amounts of consolidated net income attributable to the parent and the noncontrolling interest, for consistency in accounting for changes in a parent’s ownership interest when the parent retains a controlling interest, for the valuation of retained noncontrolling equity interests when a subsidiary is deconsolidated and for providing sufficient disclosure that identifies and distinguishes the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective beginning January 1, 2009. The Company is currently evaluating the potential impact, if any, of this pronouncement.
16
Systemax is a party to various pending legal proceedings and disputes arising in the normal course of business, including those involving commercial, employment, tax and intellectual property related claims, none of which, in management’s opinion, is anticipated to have a material adverse effect on our consolidated financial statements.
31 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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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.
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| SYSTEMAX INC. | |||
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Date: May 9, 2008 |
| By: | |||
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| Richard Leeds | |||
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| Chairman and Chief Executive Officer | |||
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| By: | /s/ LAWRENCE P. REINHOLD | ||
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| Lawrence P. Reinhold | |||
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| Executive Vice President and Chief Financial Officer | |||
2018