Unless otherwise indicated, all references herein to Systemax Inc. (sometimes referred to as “Systemax,” the “Company” or “we”) include its subsidiaries.
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 report, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” and “plans” and variations thereof and similar expressions are intended to identify forward looking statements.
Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements contained in this report. Statements in this report, particularly in “Item 1. Business,” “Item 1A. Risk Factors,” “Item 3. Legal Proceedings,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Notes to Consolidated Financial Statements describe certain factors, among others, that could contribute to or cause such differences.
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:
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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 us
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general economic conditions, such as decreased consumer confidence and spending, reductions in manufacturing capacity, and inflation could result in our failure to achieve our historical sales growth rates and profit level
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the markets for our products and services are extremely competitive and if we are unable to successfully respond to our competitors’ strategies our sales and gross margins will be adversely affected
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sales tax laws may be changed which could result in ecommerce and direct mail retailers having to collect sales taxes in states where the current laws do not require us to do so
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goodwill and intangible assets may become impaired resulting in a charge to earnings
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our substantial international operations are subject to risks such as fluctuations in currency rates, foreign regulatory requirements, political uncertainty and the management of our growing international operations
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managing various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights and price protection from our vendors
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effective management of our rapid growth in retail stores in North America
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meeting credit card industry compliance standards in order to maintain our ability to accept credit cards
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significant changes in the computer products retail industry, especially relating to the distribution and sale of such products
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timely availability of existing and new products
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risks associated with delivery of merchandise to customers by utilizing common delivery services
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the effect on us of volatility in the price of paper and periodic increases in postage rates
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borrowing costs or availability
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pending or threatened litigation and investigations
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the availability of key personnel
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the continuation of key vendor relationships
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the operation of the Company’s management information systems
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the ability to maintain satisfactory credit arrangements
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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.
Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in two reportable business segments — Technology Products and Industrial Products.
Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America and Europe. Most of these products are manufactured by other companies; however, we do offer a selection of products that are manufactured for us to our own design and marketed on a private label basis. Technology Products accounted for 91%, 93% and 94% of our net sales in 2011, 2010 and 2009, respectively.
Our Industrial Products segment sells a wide array of industrial products and supplies 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 on a private label basis
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Industrial products accounted for 9%, 7%, and 6% of our net sales in 2011, 2010 and 2009, respectively.
The Company announced plans to exit its Software Solutions segment in June 2009 as the result of economic conditions and difficulties in marketing the segment’s products successfully. The Software Solutions segment participated in the emerging market for on-demand, web-based business software applications through the marketing of its PCS ProfitCenter Software
™
application. Substantially all of the third party business activities of the Software Solutions segment have ended. Current and prior year results of Software Solutions are now included in “Corporate and other”.
See Note 12 to the Consolidated Financial Statements included in Item 15 of this Form 10-K for additional financial information about our business segments as well as information about our geographic operations.
The Company was incorporated in Delaware in 1995. Certain predecessor businesses which now constitute part of the Company have been in business since 1949. Our headquarters office is located at 11 Harbor Park Drive, Port Washington, New York.
We offer hundreds of thousands of brand name and private label products. We endeavor to expand and keep current the breadth of our product offerings in order to fulfill the increasingly wide range of product needs of our customers.
Products offered by our Technology Products segment include individual technology products in the following categories: computers; computer parts; TV and video; audio; cameras and surveillance; car and GPS; cell phones; software; video games and toys; home and office; and other products.
We assemble our private label PCs in our ISO-9001:2008 certified facility in Fletcher, Ohio. We purchase components and subassemblies from suppliers in the United States as well as overseas. Certain parts and components for our PCs are obtained from a limited group of suppliers. We also utilize licensed technology and computer software in the assembly of our PCs. For a discussion of risks associated with these licenses and suppliers, see Item 1A, Risk Factors.
Products offered by our Industrial Products segment include individual industrial products in the following categories: material handling; storage and shelving; workbench & shop desks; packaging and supplies; furniture and office; foodservice and appliances; janitorial and maintenance; tools and instruments; fasteners and hardware; motors and power transmission; HVAC/R and fans; electrical and bulbs; plumbing supplies; and safety and medical items.
We market our products to both individual consumers and business customers. Our business customers include for-profit businesses, educational organizations and government entities. We have developed numerous proprietary customer and prospect databases.
To reach our individual consumer customers, we use online methods such as website campaigns, banner ads and e-mail campaigns. We are able to monitor and evaluate the results of our various advertising campaigns to enable us to execute them in the most cost-effective manner. We combine our use of e-commerce initiatives with catalog mailings, which generate online orders and calls to inbound sales representatives. These sales representatives use our information and distribution systems to fulfill orders and explore additional customer product needs. Sales to individual consumers are generally fulfilled from our own stock, requiring us to carry more inventory than we would for our business customers. We also periodically take advantage of attractive product pricing by making opportunistic bulk inventory purchases with the objective of turning them quickly into sales. We have also successfully increased our sales to individual consumers by using retail outlet stores. Over the past several years, the Company has expanded its brick and mortar retail operations through the CompUSA acquisition and by opening new stores.
We have established a multi-faceted direct marketing system to business customers, consisting primarily of our relationship marketers, catalog mailings and proprietary internet websites, the combination of which is designed to maximize sales. Our relationship marketers focus their efforts on our business customers by establishing a personal relationship between such customers and a Systemax account manager. The goal of the relationship marketing sales force is to increase the purchasing productivity of current customers and to actively solicit newly targeted prospects to become customers. With access to the records we maintain, our relationship marketers are prompted with product suggestions to expand customer order values. In certain countries, we also have the ability to provide such customers with electronic data interchange (“EDI”) ordering and customized billing services, customer savings reports and stocking of specialty items specifically requested by these customers. Our relationship marketers’ efforts are supported by frequent catalog mailings and e-mail campaigns, both of which are designed to generate inbound telephone sales, and our interactive websites, which allow customers to purchase products directly over the internet. We believe that the integration of our multiple marketing methods enables us to more thoroughly penetrate our business, educational and government customer base. We believe increased internet exposure leads to more internet-related sales and also generates more inbound telephone sales; just as we believe catalog mailings and email campaigns which feature our websites results in greater internet-related sales.
E-commerce
The worldwide growth in active internet users has made e-commerce a significant opportunity for sales growth.
The increase in our internet-related sales enables us to leverage our advertising spending. We currently operate multiple e-commerce sites, including:
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North America
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Europe
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www.tigerdirect.com
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www.misco.co.uk
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www.compusa.com
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www.misco.de
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www.circuitcity.com
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www.misco.fr
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www.compusagoved.com
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www.misco.nl
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www.compusabusiness.com
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www.misco.it
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www.tigerdirect.ca
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www.misco.es
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www.infotelusa.com
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www.misco.se
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www.globalcomputer.com
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www.misco.at
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www.globalgoved.com
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www.misco.ch
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www.systemaxpc.com
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www.misco.be
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www.globalindustrial.com
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www.misco.ie
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www.globalindustrial.ca
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www.wstore.co.uk
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www.inmac-wstore.com
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www.dealopro.com
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We are continually upgrading the capabilities and performance of these websites. Our internet sites feature on-line catalogs of hundreds of thousands of products, allowing us to offer a wider variety of computer and industrial products than our printed catalogs. Our customers have around-the-clock, on-line access to purchase products and we have the ability to create targeted promotions for our customers’ interests. Many of our internet sites also permit customers to purchase “build to order” PCs configured to their own specifications.
In addition to our own e-commerce websites, we have partnering agreements with several of the largest internet shopping and search engine providers who feature our products on their websites or provide “click-throughs” from their sites directly to ours. These arrangements allow us to expand our customer base at an economical cost.
Catalogs
We currently produce a total of 15 full-line or direct mail publications in North America and Europe under distinct titles. Our portfolio of catalogs includes such established brand names as
TigerDirect.com™, Global Computer Supplies™, TigerDirect.ca™, Misco®, Global Industrial™, Nexel™ and Inmac WStore®.
We mail catalogs to both businesses and individual consumers. In the case of business mailings, we mail our catalogs to many individuals at a single business location, providing us with multiple points-of-contact. Our in-house staff designs all of our catalogs, which reduces overall catalog expense and shortens catalog production time. Our catalogs are printed by third parties under fixed pricing arrangements. The commonality of certain core pages of our catalogs also allows for economies of scale in catalog production.
Continuing our focus on internet advertising, the distribution of our catalogs decreased to 30.7 million in 2011, which was 6.7% less than in the prior year. In 2011, we mailed approximately 24.2 million catalogs in North America, a 6.4% decrease from last year and approximately 6.5 million catalogs in Europe, or 7.5% fewer than mailed in 2010.
Customer Service, Order Fulfillment and Support
We receive orders through the internet, by telephone, electronic data interchange and by fax. We generally provide toll-free telephone number access for our customers in countries where it is customary. Certain domestic call centers are linked to provide telephone backup in the event of a disruption in phone service.
Certain of our products are carried in stock, and orders for such products are fulfilled on a timely basis directly from our distribution centers, typically within one day of the order. We utilize numerous sales and distribution facilities in North America and Europe. Orders are generally shipped by third-party delivery services. We maintain relationships with a number of large distributors in North America and Europe that also deliver products directly to our customers.
We provide extensive technical telephone support to our private label PC customers. We maintain a database of commonly asked questions for our technical support representatives, enabling them to respond quickly to similar questions. We conduct regular on-site training seminars for our sales representatives to help ensure that they are well trained and informed regarding our latest product offerings.
We purchase substantially all of our products and components directly from manufacturers and large wholesale distributors. In 2011, one vendor accounted for 11.5% of our purchases. One vendor accounted for 10% of our purchases in 2010, and in 2009 one vendor accounted for 12.0% and another vendor accounted for 11.3% of our purchases. The loss of these vendors, or any other key vendors, could have a material adverse effect on us.
Most private label products are manufactured by third parties to our specifications.
Competition and Other Market Factors
Technology Products
The North American and European technology product markets are highly competitive, with many U.S., Asian and European companies vying for market share. There are few barriers to entry, with these products being sold through multiple channels of distribution, including direct marketers, local and national retail computer stores, computer resellers, mass merchants, over the internet and by computer and office supply superstores.
Timely introduction of new products or product features are critical elements to remaining competitive. Other competitive factors include product performance, quality and reliability, technical support and customer service, marketing and distribution and price. Some of our competitors have stronger brand-recognition, broader product lines and greater financial, marketing, manufacturing and technological resources than us.
Conditions in the market for technology products remain highly competitive characterized by prevalent discounting of product sales price as well as free or highly discounted freight offerings to our customers. These actions have and may continue to adversely affect our revenues and profits. Additionally, we rely in part upon the introduction of new technologies and products by other manufacturers in order to sustain long-term sales growth and profitability. There is no assurance that the rapid rate of such technological advances and product development will continue.
Current economic conditions raise additional factors as the loss of consumer confidence in the Company’s markets could result in a decrease of spending in the categories of products we sell. It is also possible that as manufacturers react to the marketplace they may reduce manufacturing capacity and create shortages of product.
Industrial Products
The market for the sale of industrial products in North America is highly fragmented and is characterized by multiple distribution channels such as small dealerships, direct mail distribution, internet-based resellers, large warehouse stores and retail outlets. We also face competition from manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors. Many high volume purchasers, however, utilize catalog distributors as their first source of product. In the industrial products market, customer purchasing decisions are primarily based on price, product selection, product availability, level of service and convenience. We believe that direct marketing via sales representatives, catalog and the internet are effective and convenient distribution methods to reach mid-sized facilities that place many small orders and require a wide selection of products. In addition, because the industrial products market is highly fragmented and generally less brand oriented, it is well suited to private label products.
As of December 31, 2011, we employed a total of approximately 5,500 employees, of whom 4,100 were in North America and 1,400 were in Europe and Asia.
Seasonality
As the Company’s consumer channel sales have grown significantly in the past few years, the fourth quarter has represented a greater portion of annual sales than historically. Net sales have historically been modestly weaker during the second and third quarters as a result of lower business activity during those months. See Item 7, "Management’s Discussions and Analysis of Financial Condition and Results of Operations - Seasonality."
Under various national, state and local environmental laws and regulations in North America and Western Europe, a current or previous owner or operator (including the lessee) of real property may become liable for the costs of removal or remediation of hazardous substances at such real property. Such laws and regulations often impose liability without regard to fault. We lease most of our facilities. In connection with such leases, we could be held liable for the costs of removal or remedial actions with respect to hazardous substances. Although we have not been notified of, and are not otherwise aware of, any material real property environmental liability, claim or non-compliance, there can be no assurance that we will not be required to incur remediation or other costs in connection with real property environmental matters in the future.
Financial Information About Foreign and Domestic Operations
We currently sell our products in North America (the United States, Puerto Rico and Canada) and Europe. Approximately 36.0%, 35.1%, and 32.7% of our net sales during 2011, 2010 and 2009, respectively were made by subsidiaries located outside of the United States. For information pertaining to our international operations, see Note 12, “Segment and Related Information,” to the Consolidated Financial Statements included in Item 15 of this Form 10-K. The following sets forth selected information with respect to our operations in those two geographic markets (in thousands):
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North
America
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Europe and Asia
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Total
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2011
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Net sales
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$
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2,582,214
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$
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1,099,825
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$
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3,682,039
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Operating income
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$
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44,755
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$
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35,772
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$
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80,527
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Identifiable assets
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$
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646,759
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$
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242,903
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$
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889,662
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2010
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Net sales
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$
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2,543,014
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$
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1,046,975
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$
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3,589,989
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Operating income
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$
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47,739
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$
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21,006
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$
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68,745
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Identifiable assets
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$
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665,686
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$
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228,414
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$
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894,100
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2009
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Net sales
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$
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2,317,475
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$
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848,520
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$
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3,165,995
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Operating income
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$
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62,308
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$
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11,321
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$
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73,629
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Identifiable assets
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$
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591,990
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$
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224,911
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$
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816,901
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See Item 7, "Management’s Discussions and Analysis of Financial Condition and Results of Operations", for further information with respect to our operations.
We maintain an internet website at www.systemax.com. We file reports with the Securities and Exchange Commission 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”):
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Corporate Ethics Policy for officers, directors and employees
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Charter for the Audit Committee of the Board of Directors
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Charter for the Compensation Committee of the Board of Directors
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Charter for the Nominating/Corporate Governance Committee of the Board of Directors
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Corporate Governance Guidelines and Principles
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In accordance with the listing standards of the New York Stock Exchange, each of the Corporate Governance Documents is available on our Company website (www.systemax.com).
There are a number of factors and variables described below that may affect our future results of operations and financial condition. Other factors of which we are currently not aware or that we currently deem immaterial may also affect our results of operations and financial position.
Risks Related to the Economy and Our Industries
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General economic conditions, such as decreased consumer confidence and spending, reductions in manufacturing capacity, and inflation could result in our failure to achieve our historical sales growth rates and profit levels.
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Current economic conditions may cause the loss of consumer confidence in the Company’s markets which may result in a decrease of spending in the categories of products we sell. With conditions in the market for technology products remaining highly competitive, reductions in our selling prices, as we have experienced in recent years, would adversely affect our revenues and profits. It is also possible that as manufacturers react to the marketplace they may reduce manufacturing capacity or allocations to their customers creating shortages of product. Both we and our customers are subject to global political, economic and market conditions, including inflation, interest rates, energy costs, the impact of natural disasters, military action and the threat of terrorism. Our consolidated results of operations are directly affected by economic conditions in North America and Europe. We may experience a decline in sales as a result of poor economic conditions and the lack of visibility relating to future orders. Our results of operations depend upon, among other things, our ability to maintain and increase sales volumes with existing customers, our ability to limit price reductions and maintain our margins, our ability to attract new customers and the financial condition of our customers. A decline in the economy that adversely affects our customers, causing them to limit or defer their spending, would likely adversely affect our sales, prices and profitability as well. We cannot predict with any certainty whether we will be able to maintain or improve upon historical sales volumes with existing customers, or whether we will be able to attract new customers.
In response to economic and market conditions, from time to time we have undertaken initiatives to reduce our cost structure where appropriate. These initiatives, as well as any future workforce and facilities reductions, may not be sufficient to meet current and future changes in economic and market conditions and allow us to continue to achieve the growth rates and levels of profitability we have recently experienced. In addition, costs actually incurred in connection with our restructuring actions may be higher than our estimates of such costs and/or may not lead to the anticipated cost savings.
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The markets for our products and services are extremely competitive and if we are unable to successfully respond to our competitors’ strategies our sales and gross margins will be adversely affected.
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We may not be able to compete effectively with current or future competitors. The markets for our products and services are intensely competitive and subject to constant technological change. We expect this competition to further intensify in the future. Competitive factors include price, availability, service and support. We compete with a wide variety of other resellers and retailers, including internet marketers, as well as manufacturers. Many of our competitors are larger companies with greater financial, marketing and product development resources than ours. The market for the sale of industrial products in North America is highly fragmented and is characterized by multiple distribution channels such as small dealerships, direct mail distribution, internet-based resellers, large warehouse stores and retail outlets. We also face competition from manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors. In addition, new competitors may enter our markets. This may place us at a disadvantage in responding to competitors’ pricing strategies, technological advances and other initiatives, resulting in our inability to increase our revenues or maintain our gross margins in the future.
In most cases our products compete directly with those offered by other manufacturers and distributors. If any of our competitors were to develop products or services that are more cost-effective or technically superior, demand for our product offerings could decrease.
Our gross margins are also dependent on the mix of products we sell and could be adversely affected by a continuation of our customers’ shift to lower-priced products.
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Sales tax laws may be changed which could result in ecommerce and direct mail retailers having to collect sales taxes in states where the current laws do not require us to do so. This could reduce demand for our products in such states and could result in us having substantial tax liabilities for past sales.
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Our United States subsidiaries collect and remit sales tax in states in which the subsidiaries have physical presence or in which we believe nexus exists which obligates us to collect sales tax. Other states may, from time to time, claim that we have state-related activities constituting a sufficient nexus to require such collection. Additionally, many other states seek to impose sales tax collection or reporting obligations on companies that sell goods to customers in their state, or directly to the state and its political subdivisions, even without a physical presence. Such efforts by states have increased recently, as states seek to raise revenues without increasing the tax burden on residents. We rely on United States Supreme Court decisions which hold that, without Congressional authority, a state may not enforce a sales tax collection obligation on a company that has no physical presence in the state and whose only contacts with the state are through the use of interstate commerce such as the mailing of catalogs into the state and the delivery of goods by mail or common carrier. We cannot predict whether the nature or level of contacts we have with a particular state will be deemed enough to require us to collect sales tax in that state nor can we be assured that Congress or individual states will not approve legislation authorizing states to impose tax collection or reporting obligations on all e-commerce and/or direct mail transactions. A successful assertion by one or more states that we should collect sales tax on the sale of merchandise could result in substantial tax liabilities related to past sales and would result in considerable administrative burdens and costs for us and may reduce demand for our products from customers in such states when we charge customers for such taxes.
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Events such as acts of war or terrorism, natural disasters, changes in law, or large losses could adversely affect our insurance coverage and insurance expense, resulting in an adverse affect on our profitability and financial condition.
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We insure for certain property and casualty risks consisting primarily of physical loss to property, business interruptions resulting from property losses, worker’s compensation, comprehensive general liability, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Although we believe that our insurance coverage is reasonable, significant events such as acts of war and terrorism, economic conditions, judicial decisions, legislation, natural disasters and large losses could materially affect our insurance obligations and future expense.
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Changes in accounting standards or practices, as well as new accounting pronouncements or interpretations, may require us to account for and report our financial results in a different manner in the future, which may be less favorable than the manner used historically.
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A change in accounting standards or practices can have a significant effect on our reported results of operations. New accounting pronouncements and interpretations of existing accounting rules and practices have occurred and may occur in the future. Changes to existing rules may adversely affect our reported financial results.
Risks Related to Our Company
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We rely to a great extent on our information and telecommunications systems, and significant system failures or outages, or our failure to properly evaluate, upgrade or replace our systems, or the failure of our security/safety measures to protect our systems and websites, could have an adverse affect on our results of operations.
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We rely on a variety of information and telecommunications systems in our operations. Our success is dependent in large part on the accuracy and proper use of our information systems, including our telecommunications systems. To manage our growth, we continually evaluate the adequacy of our existing systems and procedures. We anticipate that we will regularly need to make capital expenditures to upgrade and modify our management information systems, including software and hardware, as we grow and the needs of our business change. In particular, our primary financial system is being replaced currently. The occurrence of a significant system failure, electrical or telecommunications outages or our failure to expand or successfully implement new systems could have a material adverse effect on our results of operations.
Our information systems networks, including our websites, and applications could be adversely affected by viruses or worms and may be vulnerable to malicious acts such as hacking. The availability and efficiency of sales via our websites could also be adversely affected by “denial of service” attacks and other unfair competitive practices. Although we take preventive measures, these procedures may not be sufficient to avoid harm to our operations, which could have an adverse effect on our results of operations.
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We rely on third party suppliers for most of our products and services. The loss or interruption of these relationships could impact our sales volumes, the levels of inventory we must carry, and/or result in sales delays and/or higher inventory costs from new suppliers. Coop advertising and other sales incentives provided by our suppliers could decrease in the future thereby increasing our expenses and adversely affecting our results of operations and cash flows.
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We purchase substantially all of our technology products from major distributors and directly from large manufacturers who may deliver those products directly to our customers. These relationships enable us to make available to our customers a wide selection of products without having to maintain large amounts of inventory. The termination or interruption of our relationships with any of these suppliers could materially adversely affect our business.
We purchase a number of our products from vendors outside of the United States. Difficulties encountered by one or several of these suppliers could halt or disrupt production and delay completion or cause the cancellation of our orders. Delays or interruptions in the transportation network could result in loss or delay of timely receipt of product required to fulfill customer orders. Our ability to find qualified vendors who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S. Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, civil unrest, outbreaks of pandemics and other factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could materially adversely affect our revenue and gross profit
.
Our PC products contain electronic components, subassemblies and software that in some cases are supplied through sole or limited source third-party suppliers, some of which are located outside of the U.S. Although we do not anticipate any problems procuring supplies in the near-term, there is no assurance that parts and supplies will be available in a timely manner and at reasonable prices. Any loss of, or interruption of, supply from key suppliers may require us to find new suppliers. This could result in production or development delays while new suppliers are located, which could substantially impair operating results. If the availability of these or other components used in the manufacture of our products was to decrease, or if the prices for these components were to increase significantly, operating costs and expenses could be adversely affected.
Many product suppliers provide us with coop advertising support in exchange for featuring their products in our catalogs and on our internet sites. Certain suppliers provide us with other incentives such as rebates, reimbursements, payment discounts, price protection and other similar arrangements. These incentives are offset against cost of goods sold or selling, general and administrative expenses, as applicable. The level of coop advertising support and other incentives received from suppliers may decline in the future, which could increase our cost of goods sold or selling, general and administrative expenses and have an adverse effect on results of operations and cash flows.
|
|
·
|
Goodwill and intangible assets may become impaired resulting in a charge to earnings.
|
The acquisition of certain assets of CompUSA, CircuitCity and the purchase of the stock of WStore Europe SA resulted in the recording of significant intangible assets and or goodwill. We are required to test goodwill and intangible assets annually to determine if the carrying values of these assets are impaired or on a more frequent basis if indicators of impairment exist. If any of our goodwill or intangible assets are determined to be impaired we may be required to record a significant charge to earnings in the period during which the impairment is discovered.
|
|
·
|
Our substantial international operations are subject to risks such as fluctuations in currency rates (which can adversely impact foreign revenues and profits when translated to US Dollars), foreign regulatory requirements, political uncertainty and the management of our growing international operations
.
|
We operate internationally and as a result, we are subject to risks associated with doing business globally. Risks inherent to operating overseas include:
|
|
·
|
Changes in a country’s economic or political conditions
|
|
|
·
|
Changes in foreign currency exchange rates
|
|
|
·
|
Difficulties with staffing and managing international operations
|
|
|
·
|
Unexpected changes in regulatory requirements
|
For example, we currently have operations located in numerous countries outside the United States, and non-U.S. sales (Europe, Canada and Puerto Rico) accounted for approximately 36.0% of our revenue during 2011. To the extent the U.S. dollar strengthens against foreign currencies, our foreign revenues and profits will be reduced when translated into U.S. dollars.
|
|
·
|
We are exposed to various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights and price protection from our vendors; such events could lower our gross margins or result in inventory write-downs that would reduce reported future earnings.
|
Our inventory is subject to risk due to technological change and changes in market demand for particular products. If we fail to manage our inventory of older products we may have excess or obsolete inventory. We may have limited rights to return products to certain suppliers and we may not be able to obtain price protection on these items. The elimination of product return privileges and lack of availability of price protection could lower our gross margin or result in inventory write-downs.
We also take advantage of attractive product pricing by making opportunistic bulk inventory purchases; any resulting excess and/or obsolete inventory that we are not able to re-sell could have an adverse impact on our results of operations. Any inability to make such bulk inventory purchases may significantly impact our sales and profitability.
|
|
·
|
If we fail to observe certain restrictions and covenants under our credit facilities the lenders could refuse to waive such default, terminate the credit facility and demand immediate repayment, which would adversely affect our cash position and materially adversely affect our operations.
|
Our United States revolving credit agreement contains covenants restricting or limiting our ability to, among other things:
|
|
·
|
create or permit liens on assets
|
|
|
·
|
make capital expenditures or investments
|
If we fail to comply with the covenants and other requirements set forth in the credit agreement, we would be in default and would need to negotiate a waiver agreement with the lenders. Failure to agree on such a waiver could result in the lenders terminating the credit agreement and demanding repayment of any outstanding borrowings, which could adversely affect our cash position and adversely affect the availability of financing to us, which could materially impact our operations.
|
|
·
|
We depend on bank credit facilities to address our working capital and cash flow needs from time to time, and if we are unable to renew or replace these facilities, or borrowing capacity were to be reduced our liquidity and capital resources may be adversely affected.
|
We require significant levels of capital in our business to finance accounts receivable and inventory. We maintain credit facilities in the United States and in Europe to finance increases in our working capital if available cash is insufficient. The amount of credit available to us at any point in time may be adversely affected by the quality or value of the assets collateralizing these credit lines. In addition, in recent years global financial markets have experienced diminished liquidity and lending constraints. Our ability to obtain future and/or increased financing to satisfy our requirements as our business expands could be adversely affected by economic and market conditions, credit availability and lender perception of our Company and industry
.
However, we currently have no reason to believe that we will not be able to renew or replace our facilities when they reach maturity.
|
|
·
|
We have experienced rapid growth in retail stores in North America and to maintain their profitability we must effectively manage our growth and cost structure, such as inventory needs, point of sales systems, personnel and lease expense.
|
We have 42 retail stores operating in North America at December 31, 2011 and one under construction. The Company needs to effectively manage its cost structure in order to maintain profitability including the additional inventory needs, retail point of sales IT systems, retail personnel and leased facilities. Future growth in retail will also be dependent on the ability to attract customers and build brand loyalty. The retail computer and consumer electronics business is highly competitive and has narrow gross margins. If we fail to manage our growth and cost structure while maintaining high levels of service and meeting competitive pressures adequately, our business plan may not be achieved and may lead to reduced profitability
.
|
|
·
|
The failure to timely and satisfactorily process manufacturers’ and our own rebate programs could negatively impact our customer satisfaction levels
.
|
Similar to other companies in the technology products industry, we advertise manufacturers’ mail-in rebates on many products we sell and, in some cases, offer our own rebates. These rebates are processed through third party vendors and in house. If these rebates are not processed in a timely and satisfactory manner by either third party vendors or our in house operations, our reputation in the marketplace could be negatively impacted.
|
|
·
|
We may be unable to reduce prices in reaction to competitive pressures, or implement cost reductions or new product line expansion to address gross profit and operating margin pressures; failure to mitigate these pressures could adversely affect our operating results and financial condition
.
|
The computer and consumer electronics industry is highly price competitive and gross profit margins are narrow and variable. The Company’s ability to further reduce prices in reaction to competitive pressure is limited. Timely introduction of new products or product features are critical elements to remaining competitive. Additionally, gross margins and operating margins are affected by changes in factors such as vendor pricing, vendor rebate and or price protection programs, product return rights, and product mix. In 2011 pricing pressure continued to be prevalent in the markets we serve and we expect this to continue. We may not be able to mitigate these pricing pressures and resultant declines in sales and gross profit margin with cost reductions in other areas or expansion into new product lines. If we are unable to proportionately mitigate these conditions our operating results and financial condition may suffer.
|
|
·
|
We would be exposed to liability, including substantial fines and penalties and, in extreme cases, loss of our ability to accept credit cards, in the event our privacy and data security policies and procedures are inadequate to prevent security breaches of our consumer personal information and credit card information records.
|
In processing our sales orders we often collect personal information and credit card information from our customers. The Company has privacy and data security policies in place which are designed to prevent security breaches, however, if a third party or a rogue employee or employees are able to bypass our network security or otherwise compromise our customers’ personal information or credit card information, we could be subject to liability. This liability may include claims for identity theft, unauthorized purchases and claims alleging misrepresentation of our privacy and data security practices or other related claims. While the Company believes it is in compliance with appropriate Payment Card Industry (“PCI”) security standards for its various businesses, any breach involving the loss of credit card information may lead to PCI related fines of up to $500,000. In the event of a severe breach credit card providers may prevent the accepting of credit cards. Any such liability related to the aforementioned risks could lead to reduced profitability and damage our brand(s) and/or reputation.
|
|
·
|
Failure to protect the integrity, security and use of our customers’ information could expose us to litigation and materially damage our standing with our customers
|
The use of individually identifiable consumer data is regulated at the state, federal and international levels and we incur costs associated with information security – such as increased investment in technology and the costs of compliance with consumer protection laws. Additionally, our internet operations and website sales depends upon the secure transmission of confidential information over public networks, including the use of cashless payments. While we have taken significant steps to protect customer and confidential information, there can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. If any such compromise of our security were to occur, it could have a material adverse effect on our reputation, operating results and financial condition and could subject us to litigation.
|
|
·
|
Sales to individual customers expose us to credit card fraud, which impacts our operations. If we fail to adequately protect ourselves from credit card fraud, our operations could be adversely impacted.
|
Failure to adequately control fraudulent credit card transactions could increase our expenses. Increased sales to individual consumers, which are more likely to be paid for using a credit card, increases our exposure to fraud. We employ technology solutions to help us detect the fraudulent use of credit card information. However, if we are unable to detect or control credit card fraud, we may suffer losses as a result of orders placed with fraudulent credit card data, which could adversely affect our business.
|
|
·
|
Our business is dependent on certain key personnel.
|
Our business depends largely on the efforts and abilities of certain key senior management. The loss of the services of one or more of such key personnel could have a material adverse affect on our business and financial results. We do not currently maintain key man insurance policies on any of our executive officers.
|
|
·
|
We are subject to litigation risk due to the nature of our business, which may have a material adverse effect on our results of operations and business.
|
From time to time, we are involved in lawsuits or other legal proceedings arising in the ordinary course of our business. These may relate to, for example, patent, trademark or other intellectual property matters, employment law matters product liability, commercial disputes, consumer sales practices, or other matters. In addition, as a public company we could from time to time face claims relating to corporate or securities law matters. The defense and/or outcome of such lawsuits or proceedings could have a material adverse affect on our business. See “Legal Proceedings”.
|
|
·
|
Our profitability can be adversely affected by increases in our income tax exposure due to, among other things, changes in the mix of U.S. and non-U.S. revenues and earnings, changes in tax rates or laws, changes in our effective tax rate due to changes in the mix of earnings among different countries and changes in valuation of our deferred tax assets and liabilities.
|
Changes in our income tax expense due to changes in the mix of U.S. and non-U.S. revenues and profitability, changes in tax rates or exposure to additional income tax liabilities could affect our profitability. We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws or by material audit assessments. The carrying value of our deferred tax assets, which are primarily in the United States and the United Kingdom, is dependent on our ability to generate future taxable income in those jurisdictions. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions and a material assessment by a tax authority could affect our profitability.
None.
We operate our business from numerous facilities in North America, Europe and Asia. These facilities include our headquarters location, administrative offices, telephone call centers, distribution centers, computer assembly and retail stores. Certain facilities handle multiple functions. Most of our facilities are leased; certain are owned by the Company.
North America
As of December 31, 2011 we have six distribution centers in North America which aggregate approximately 1.5 million square feet, all of which are leased. Our headquarters, administrative offices and call centers aggregate approximately 358,000 square feet, all of which are leased. Our computer assembly facility is approximately 300,000 square feet and is owned by the Company.
The following table summarizes the geographic location of our North America stores at the end of 2011:
|
Location
|
|
Stores Open – 12/31/10
|
|
Store Openings
|
|
Stores Open – 12/31/11
|
|
|
Delaware
|
|
2
|
|
|
|
2
|
|
|
Florida
|
|
18
|
|
|
|
18
|
|
|
Georgia
|
|
1
|
|
|
|
1
|
|
|
Illinois
|
|
4
|
|
1
|
|
5
|
|
|
North Carolina
|
|
2
|
|
|
|
2
|
|
|
Puerto Rico
|
|
1
|
|
|
|
1
|
|
|
Texas
|
|
7
|
|
|
|
7
|
|
|
Ontario, Canada
|
|
6
|
|
|
|
6
|
|
|
|
|
41
|
|
|
|
42
|
|
All of our retail stores are leased. The retail stores average 22,188 square feet.
Europe and Asia
As of December 31, 2011, we have seven distribution centers in Europe which aggregate approximately 287,000 square feet. Six of these, aggregating approximately 214,000 square feet, are leased; one distribution center of approximately 73,000 square feet is owned by the Company. Our administrative offices and call centers aggregate approximately 270,000 square feet, of which 193,000 square feet are leased and 77,000 square feet are owned by the Company.
As of December 31, 2011, we leased administrative offices in Asia of approximately 4,400 square feet.
Please refer to Note 11 to the Consolidated Financial Statements for additional information about leased properties.
The Company and its subsidiaries are involved in various lawsuits, claims, investigations and proceedings including commercial, employment, consumer, personal injury and health and safety law matters, which are being handled and defended in the ordinary course of business. In addition, the Company is subject to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of products the Company sells. The Company is also audited by (or has initiated voluntary disclosure agreements with) numerous governmental agencies in various countries, including U.S. Federal and state authorities, concerning potential income tax, sales tax and unclaimed property liabilities. These matters are in various stages of investigation, negotiation and/or litigation, and are being vigorously defended.
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 condition 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 routinely 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.
Audit Committee Investigation and Gilbert Fiorentino’s Resignation and Settlement and Related Matters.
In January and February 2011 the Company received anonymous whistleblower allegations concerning the Company’s Miami Florida operations involving the actions of Mr. Gilbert Fiorentino, then the Chief Executive of the Company’s Technology Products Group. In response to the allegations, the Company commenced an internal investigation of the whistleblower allegations, which was conducted by the Company’s Audit Committee of the Board of Directors with the assistance of independent counsel.
On April 18, 2011, following the independent investigation, the Company delivered a Cause Notice to Mr. Fiorentino pursuant to the terms of his Employment Agreement dated October 12, 2004. The Cause Notice advised Mr. Fiorentino that the Company intended to terminate him for “Cause” (as defined in the Employment Agreement) at a meeting of its Executive Committee scheduled for May 3, 2011, at which meeting Mr. Fiorentino and his counsel could appear, and that Mr. Fiorentino was being placed on administrative leave pending the outcome of that meeting. In the Cause Notice, the Company advised Mr. Fiorentino that the Audit Committee investigation had identified grounds to terminate him for Cause under his Employment Agreement, and set forth the following findings by the Audit Committee constituting such grounds:
i) Mr. Fiorentino personally removed or caused to be removed from the Company’s Miami premises product inventory, and/or kept or caused others to receive at his direction such removed product inventory, without payment to the Company and for his own personal gain;
ii) Mr. Fiorentino caused substantial amounts of Company inventory purchases to be effected through Company credit cards in order to accrue and/or use “reward points” for his personal benefit and which he improperly converted to his own use;
iii) Mr. Fiorentino caused his mother to be identified as an employee of the Company in positions for which she had no bona fide job responsibility or function, and caused the Company to pay her a salary and employee benefits, including extended
COBRA reimbursements; and
iv) Mr.
Fiorentino engaged in fraudulent “kickback” arrangements with certain of the Company’s vendors, to the detriment of the Company
The Company stated in the Cause Notice that the foregoing activities were in violation of Company policy, the Company’s Corporate Ethics Policy, his fiduciary duties and applicable law.
The amounts involved in the employment of Mr. Fiorentino's mother are small in absolute terms. The inventory removal constitutes a shortage that is not material for a company the size of Systemax. The credit card reward points scheme involved the creation, and conversion, of non-monetary assets. The finding involving the vendor overcharge/kickback allegations is not material when compared to the Company's total inventory spend during the subject period.
The Audit Committee’s independent investigation determined that the matters described above did not have any material impact on our previously reported financial results and were limited to the Company’s Miami operations.
On May 9, 2011, following several meetings of the Executive Committee and after extensive discussions with Mr. Fiorentino and his counsel, the Company announced that it had accepted the resignation of Mr. Fiorentino, and that it had executed an agreement with Mr. Fiorentino, effective May 6, 2011, under which Mr. Fiorentino surrendered certain assets to the Company valued at approximately $11 million at May 9, 2011: these assets included the surrender of 1,130,001 shares of Systemax common stock and $480,000 in cash. The shares surrendered consisted of 580,001 shares of fully vested unexercised stock options, 2) 100,000 shares of fully vested restricted stock awards and 3) 450,000 shares directly owned by Mr. Fiorentino. The shares surrendered were valued at fair value on May 6, 2011 in the case of the stock options and restricted stock awards and at fair value on May 12, 2011 in the case of the owned shares. The agreement also required Mr. Fiorentino to disclose his and his immediate family’s personal assets; forfeit undisclosed assets discovered by the Company; disclose information regarding certain matters that led to his being notified of the Company’s intent to terminate him; and to fully cooperate with the Company in the future. Mr. Fiorentino and the Company also exchanged mutual general releases and nondisparagement commitments, and Mr. Fiorentino agreed to a 5 year noncompetition obligation. The $11 million settlement value included a financial statement benefit to the Company related to the surrender of shares and cash payment of approximately $8.4 million which was recorded in the second quarter of 2011 under special (gains) charges, net of related legal and professional fees of approximately $1.3 million for the quarter ended June 30, 2011 and $1.8 million for the first six months of 2011. The remainder of the settlement value, approximately $2.6 million, was the intrinsic value of the fully vested unexercised stock options on the date of the settlement agreement for which there is no financial statement impact. The amount of the settlement with Mr. Fiorentino was based on negotiation with him, and was not based on any specific level or nature of damages incurred by the Company, and does not constitute restitution.
On June 21, 2011 Systemax Inc. received notice that the Securities and Exchange Commission (“SEC”) has initiated a formal investigation into the matters discovered by the Audit Committee’s internal investigation. The Company is fully cooperating with the SEC in its formal investigation and does not expect to comment further on developments related to this matter and disclaims any intention or obligation to update any of the information contained herein except as required by law.
For the third and fourth quarters of 2011, $0.4 million and $0.6 million, respectively, of additional legal and professional fees were incurred related to follow up of the completed investigation and ancillary matters, and for the first nine months of 2011 and for fiscal 2011 related fees totaled $2.2 million and $2.8 million, respectively. The Company expects to incur additional expenses related to this matter in future quarters in connection with the ongoing follow up to the completed investigation of matters related to Mr. Fiorentino’s actions, providing cooperation to the SEC and in pursuing related matters.
In addition, in April 2011, the Company also terminated the employment of Carl Fiorentino and Patrick Fiorentino (employees of the Company and Gilbert Fiorentino's brothers), and Mr. Gerdy Carballos based on the determination that they had assisted in, participated in and/or had knowledge of the improper activities. The Company also terminated the employment of Ms. Andrea Fongyee (assistant to Mr. Gilbert Fiorentino) in May 2011. In January 2012, the Company commenced a lawsuit in Miami-Dade County Circuit Court in Florida against, among others, Carl Fiorentino, Patrick Fiorentino, Andrea Fongyee and Gerdy Carballos, seeking recovery of damages incurred by the Company due to their actions.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Systemax common stock is traded on the NYSE Euronext Exchange under the symbol “SYX.” The following table sets forth the high and low closing sales price of our common stock as reported on the New York Stock Exchange for the periods indicated.
|
|
|
High
|
|
|
Low
|
|
|
2011
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
14.80
|
|
|
$
|
12.25
|
|
|
Second Quarter
|
|
|
15.18
|
|
|
|
12.37
|
|
|
Third Quarter
|
|
|
17.01
|
|
|
|
11.90
|
|
|
Fourth Quarter
|
|
|
16.97
|
|
|
|
11.64
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
21.90
|
|
|
$
|
15.80
|
|
|
Second Quarter
|
|
|
23.85
|
|
|
|
15.07
|
|
|
Third Quarter
|
|
|
16.97
|
|
|
|
11.77
|
|
|
Fourth Quarter
|
|
|
14.31
|
|
|
|
12.09
|
|
On December 31, 2011, the last reported sale price of our common stock on the New York Stock Exchange was $16.41 per share. As of December 31, 2011, we had 192 shareholders of record.
Depending in part upon profitability, the strength of our balance sheet, our cash position and the need to retain cash for the development and expansion of our business, we may decide to declare special dividends in the future, subject to availability limitations under our credit facilities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Liquidity and Capital Resources” and Note 4 of Notes to Consolidated Financial Statements.
Information regarding securities authorized for issuance under equity compensation plans and a performance graph relating to the Company’s common stock is set forth in the Company’s Proxy Statement relating to the 2012 annual meeting of shareholders and is incorporated by reference herein.
Item 6. Selected Financial Data.
The following selected financial information is qualified by reference to, and should be read in conjunction with, the Company’s Consolidated Financial Statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this report. The selected statement of operations data for fiscal years 2011, 2010 and 2009 and the selected balance sheet data as of December 2011 and 2010 are derived from the audited consolidated financial statements which are included elsewhere in this report. The selected balance sheet data as of December 2009, 2008 and 2007 and the selected statement of operations data for fiscal years 2008 and 2007 are derived from the audited consolidated financial statements of the Company which are not included in this report.
|
|
|
Years Ended December 31,
|
|
|
|
|
(In millions, except per share data)
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statement of Operations Data
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,682.0
|
|
|
$
|
3,590.0
|
|
|
$
|
3,166.0
|
|
|
$
|
3,033.0
|
|
|
$
|
2,779.9
|
|
|
Gross profit
|
|
$
|
530.7
|
|
|
$
|
489.6
|
|
|
$
|
453.4
|
|
|
$
|
451.2
|
|
|
$
|
418.8
|
|
|
Operating income
|
|
$
|
80.5
|
|
|
$
|
68.7
|
|
|
$
|
73.6
|
|
|
$
|
83.6
|
|
|
$
|
94.2
|
|
|
Net income
|
|
$
|
54.4
|
|
|
$
|
42.6
|
|
|
$
|
46.2
|
|
|
$
|
52.8
|
|
|
$
|
69.5
|
|
|
Per Share Amounts
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income — diluted
|
|
$
|
1.47
|
|
|
$
|
1.13
|
|
|
$
|
1.24
|
|
|
$
|
1.40
|
|
|
$
|
1.84
|
|
|
Weighted average common shares — diluted
|
|
|
37.1
|
|
|
|
37.6
|
|
|
|
37.3
|
|
|
|
37.7
|
|
|
|
37.8
|
|
|
Cash dividends declared per common share
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
.75
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
Balance Sheet Data
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
354.7
|
|
|
$
|
300.9
|
|
|
$
|
250.1
|
|
|
$
|
253.1
|
|
|
$
|
274.4
|
|
|
Total assets
|
|
$
|
889.7
|
|
|
$
|
894.1
|
|
|
$
|
816.9
|
|
|
$
|
702.5
|
|
|
$
|
677.6
|
|
|
Long-term debt, excluding current portion
|
|
$
|
7.1
|
|
|
$
|
7.4
|
|
|
$
|
1.2
|
|
|
$
|
1.4
|
|
|
$
|
.3
|
|
|
Shareholders’ equity
|
|
$
|
454.3
|
|
|
$
|
409.3
|
|
|
$
|
364.7
|
|
|
$
|
334.0
|
|
|
$
|
335.8
|
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in two reportable business segments — Technology Products and Industrial Products.
Our Technology Products segment sells computers, computer supplies and consumer electronics which are marketed in North America, Puerto Rico and Europe. Most of these products are manufactured by other companies; however, we do offer a selection of products that are manufactured for us to our own design and marketed on a private label basis. Technology products accounted for 91%, 93% and 94% of our net sales in 2011, 2010 and 2009, respectively.
Our Industrial Products segment sells a wide array of industrial products and supplies 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 9%, 7% and
6% of our net sales in 2011, 2010 and 2009, respectively. In both of these product groups, we offer our customers a broad selection of products, prompt order fulfillment and extensive customer service.
We announced plans to exit the Software Solutions segment during the second quarter of 2009.
Substantially all of the third party business activities of ProfitCenter Software have ended. Current and prior year results for Software Solutions are now included in “Corporate and other”. See Note 12 to the Consolidated Financial Statements included in Item 15 of this Form 10-K
for additional financial information about our business segments as well as information about our geographic operations.
The market for computer 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 companies utilizing multiple distribution channels. Distribution 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 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, employee benefits and stock option expenses. We continually assess our operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs.
In the discussion of our results of operations we refer to business to business sales, consumer channel sales and period to period constant currency comparisons. Business to business sales are sales made direct to other businesses through managed business relationships, outbound call centers and extranets. Sales in the Industrial Products segment and Corporate and other are considered to be business to business sales. Consumer channel sales are sales from retail stores, consumer websites, inbound call centers and television shopping channels. 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.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 15 of this Form 10-K. Certain accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty, and as a result, actual results could differ materially from those estimates. These judgments are based on historical experience
,
observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements of the Company accurately reflect management’s best estimate of the consolidated results of operations, financial position and cash flows of the Company for the years presented. We identify below a number of policies that entail significant judgments or estimates, the assumptions and or judgments used to determine those estimates and the potential effects on reported financial results if actual results differ materially from these estimates.
|
Accounting policy
|
|
Assumptions and uncertainties
|
|
Quantification and analysis of effect on actual results if estimates differ materially
|
|
Revenue Recognition.
We recognize product sales when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Generally, these criteria are met at the time of receipt by customers when title and risk of loss both are transferred. Sales are presented net of returns and allowances, rebates and sales incentives. Reserves for estimated returns and allowances are provided when sales are recorded, based on historical experience and current trends.
|
|
Our revenue recognition policy contains assumptions and judgments made by management related to the timing and amounts of future sales returns. Sales returns are estimated based upon historical experience and current known trends.
|
|
We have not made any material changes to our sales return reserve policy in the past three years and we do not anticipate making any material changes to this policy in the future. However if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.
|
|
Allowance for Doubtful Accounts Receivable
. We record an allowance for doubtful accounts to reflect our estimate of the collectibility of our trade accounts receivable. While bad debt allowances have been within expectations and the provisions established, there can be no guarantee that we will continue to experience the same allowance rate we have in the past.
|
|
Our allowance for doubtful accounts policy contains assumptions and judgments made by management related to collectibility of aged accounts receivable and chargebacks from credit card sales. We evaluate the collectibility of accounts receivable based on a combination of factors, including an analysis of the age of customer accounts and our historical experience with accounts receivable write-offs. The analysis also includes the financial condition of a specific customer or industry, and general economic conditions. In circumstances where we are aware of customer credit card charge-backs or a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts applicable to amounts due to reduce the net recognized receivable to the amount management reasonably believes will be collected is recorded. In those situations with ongoing discussions, the amount of bad debt recognized is based on the status of the discussions.
|
|
We have not made any material changes to our allowance for doubtful accounts receivable reserve policy in the past three years and we do not anticipate making any material changes to this policy in the future. However if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.
A change of 10% in our allowance for doubtful accounts reserve at December 31, 2011 would impact net income by approximately $0.4 million.
|
|
Accounting policy
|
|
Assumptions and uncertainties
|
|
Quantification and analysis of effect on actual results if estimates differ materially
|
|
Inventory valuation
. We value our inventories at the lower of cost or market, cost being determined on the first-in, first-out method except in Europe and retail locations where an average cost is used. Excess and obsolete or unmarketable merchandise are written down based on historical experience, assumptions about future product demand and market conditions. If market conditions are less favorable than projected or if technological developments result in accelerated obsolescence, additional write-downs may be required. While obsolescence and resultant markdowns have been within expectations, there can be no guarantee that we will continue to experience the same level of markdowns we have in the past.
|
|
Our inventory reserve policy contains assumptions and judgments made by management related to inventory aging, obsolescence, credits that we may obtain for returned merchandise, shrink and consumer demand.
|
|
We have not made any material changes to our inventory reserve policy in the past three years and we do not anticipate making any material changes to this policy in the future. However if our estimates are materially different than our actual experience we could have a material loss adjustment.
A change of 10% in our inventory reserves at December 31, 2011 would impact net income by approximately $0.5 million.
|
|
Goodwill and Intangible Assets.
We apply the provisions of relevant accounting guidance in our valuation of goodwill, trademarks, domain names, client lists and other intangible assets. Relevant accounting guidance requires that goodwill and indefinite lived intangibles be reviewed at least annually for impairment or more frequently if indicators of impairment exist. The amount of an impairment loss would be recognized as the excess of the asset’s carrying value over its fair value.
|
|
Our impairment testing involves judgments and uncertainties, quantitative and qualitative, related to the use of discounted cash flow models and forecasts of future results, both of which involve significant judgment and may not be reliable. Significant management judgment is necessary to evaluate the operating environment and economic conditions that exist to develop a forecast for a reporting unit. Assumptions related to the discounted cash flow models we use include the inputs used to determine the Company’s weighted average cost of capital including a market risk premium, the beta of a reporting unit, reporting unit specific risk premiums and terminal growth values. Critical assumptions related to the forecast inputs used in our discounted cash flow models include projected sales growth, same store sales growth, gross margin percentages, new business opportunities, working capital requirements, capital expenditures and growth in selling, general and administrative expense. We also use our company's market capitalization and comparable company market data to validate our reporting unit valuations.
|
|
We have not made any material changes to our goodwill and intangible assets policy in the past three years and we do not anticipate making any material changes to this policy in the future.
We do not believe it is reasonably likely that the estimates or assumptions used to determine whether any of our goodwill or intangible assets are impaired will change materially in the future. However if the inputs used in our discounted cash flow models or our forecasts are materially different than actual experience we could incur impairment charges that are material.
The Company has approximately $57.8 million in goodwill and intangible assets at December 31, 2011. In 2011 no impairment of the Company’s goodwill or intangible assets were identified.
|
|
Accounting policy
|
|
Assumptions and uncertainties
|
|
Quantification and analysis of effect on actual results if estimates differ materially
|
|
Long-lived Assets.
Management exercises judgment in evaluating our long-lived assets for impairment and in their depreciation and amortization methods and lives. We believe we will generate sufficient undiscounted cash flow to more than recover the investments made in property, plant and equipment.
|
|
The impairment analysis for long lived assets requires management to make judgments about useful lives and to estimate fair values of long lived assets. It may also require us to estimate future cash flows of related assets using discounted cash flow model Our estimates of future cash flows involve assumptions concerning future operating performance and economic conditions. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.
|
|
We have not made any material changes to our long lived assets policy in the past three years and we do not anticipate making any material changes to this policy in the future.
We do not believe it is reasonably likely that the estimates and assumptions used to determine long lived asset impairment will vary materially in the future. However if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.
An change of 10% in the carrying value of our long lived assets would impact net income by approximately $4.9 million.
|
|
|
|
|
|
|
|
Vendor Accruals.
Our contractual agreements with certain suppliers provide us with funding or allowances for costs such as price protection, markdowns and advertising as well as funds or allowances for purchasing volumes.
Generally, allowances received as a reimbursement of identifiable costs are recorded as an expense reduction when the cost is incurred. Sales related allowances are generally determined by our level of purchases of product and are deferred and recorded as a reduction of inventory carrying value and are ultimately included as a reduction of cost of goods when inventory is sold.
|
|
Management makes assumptions and exercises judgment in estimating period end funding and allowances earned under our various agreements. Estimates are developed based on the terms of our vendor agreements and using existing expenditures for which funding is available, determining products whose market price would indicate coverage for markdown or price protection is available and estimating the level of our performance under agreements that provide funds or allowances for purchasing volumes. Estimates of funding or allowances for purchasing volume will include projections of annual purchases which are developed using current actual purchase data and historical purchase trends. Accruals in interim periods could be materially different if actual purchase volumes differ from projections.
|
|
We have not made any material changes to our vendor accrual policy in the past three years nor do we anticipate making any material changes to this policy in the future.
If actual results are different from the projections used we could have a material gain or loss adjustment.
A change of 10% in our vendor accruals at December 31, 2011 would impact net income by approximately $1.6 million.
|
|
Accounting policy
|
|
Assumptions and uncertainties
|
|
Quantification and analysis of effect on actual results if estimates differ materially
|
|
Income Taxes.
We are subject to taxation from federal, state and foreign jurisdictions and the determination of our tax provision is complex and requires significant management judgment.
We conduct operations in numerous U.S. states and foreign locations. Our effective tax rate depends upon the geographic distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of our pre-tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We are also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due. These examinations include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. We establish as needed, and periodically reevaluate, an estimated income tax reserve on our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While management believes that we have identified all reasonably identifiable exposures and whether or not a reserve is appropriate, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved.
|
|
The determination of deferred tax assets and liabilities and any valuation allowances that might be necessary requires management to make significant judgments concerning the ability to realize net deferred tax assets. The realization of net deferred tax assets is dependent upon the generation of future taxable income. In estimating future taxable income there are judgments and uncertainties related to the development of forecasts of future results that may not be reliable. Significant management judgment is also necessary to evaluate the operating environment and economic conditions that exist to develop a forecast for a reporting unit. Where management has determined that it is more likely than not that some portion or the entire deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made.
|
|
We have not made any material changes to our income tax policy in the past three years and we do not anticipate making any material changes to this policy in the future.
We do not believe it is reasonably likely that the estimates or assumptions used to determine our deferred tax assets and liabilities and related valuation allowances will change materially in the future. However if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.
A change of 5% in our effective tax rate at December 31, 2011 would impact net income by approximately $1.2 million.
|
|
Reorganization and other charges.
We have recorded reorganization, restructuring and other charges in the past and could in the future commence further reorganization, restructuring and other activities which result in recognition of charges to income.
|
|
The recording of reorganization, restructuring and other charges may involve assumptions and judgments about future costs and timing for amounts related to personnel terminations, stay bonuses, lease termination costs, lease sublet revenues, outplacement services, contract termination costs, asset impairments and other exit costs. Management may estimate these costs using existing contractual and other data or may rely on third party expert data.
|
|
When we incur a liability related to these actions, we estimate and record all appropriate expenses. We do not believe it is reasonably likely that the estimates or assumptions used to determine our reorganization, restructuring and other charges will change materially in the future. However if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.
For the year ended December 31, 2011 the Company did not have any amounts accrued for reorganization, restructuring and other charges.
|
Recently Adopted and Newly Issued Accounting Pronouncements
Public companies in the United States are subject to the accounting and reporting requirements of various authorities, including the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). These authorities issue numerous pronouncements, most of which are not applicable to the Company’s current or reasonably foreseeable operating structure. Below are the new authoritative pronouncements that management believes are relevant to the Company’s current operations.
In 2011, the FASB issued guidance which provides companies with the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing updated qualitative factors, a company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not have to perform the current two-step goodwill impairment test. The Company adopted this guidance in October 2011. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In June 2011, the FASB issued amended guidance related to comprehensive income. The amended guidance requires the presentation of items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or in two separate but consecutive statements. Presentation of other comprehensive income as part of the statement of stockholders’ equity is no longer allowed under the amended guidance. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In December 2010, the FASB issued authoritative guidance that updates existing disclosure requirements related to supplementary pro forma information for business combinations. Under the updated guidance, a public entity that presents comparative financial statements should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance became effective for the Company on January 1, 2011 and will be applied prospectively to business combinations that have an acquisition date on or after January 1, 2011.
Highlights from 2011
The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements included herein.
|
|
·
|
Sales grew 2.6%, 1% on a constant currency basis, to $3.7 billion in 2011 over 2010.
|
|
|
·
|
One new retail store opened.
|
|
|
·
|
Movements in exchange rates positively impacted European sales by approximately $45.6 million and Canadian sales by approximately $9.0 million.
|
|
|
·
|
Gross margin benefited from changes in the segment mix, reflecting increased sales of industrial products.
|
|
|
·
|
Special gains, net of investigative and legal costs, of $5.6 million pre tax, approximately $0.10 per diluted share, after tax, for settlement proceeds received from a former officer and director.
|
|
|
·
|
Diluted earnings per share increased to $1.47 from $1.13 in 2010.
|
Results of Operations
Key Performance Indicators (in millions):
|
|
|
Years Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
%
Change
|
|
|
2010
|
|
|
2009
|
|
|
%
Change
|
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
3,358.7
|
|
|
$
|
3,337.7
|
|
|
|
0.6
|
%
|
|
$
|
3,337.7
|
|
|
$
|
2,966.7
|
|
|
|
12.5
|
%
|
|
Industrial products
|
|
|
319.9
|
|
|
|
250.0
|
|
|
|
28.0
|
%
|
|
|
250.0
|
|
|
|
196.1
|
|
|
|
27.5
|
%
|
|
Corporate and other
|
|
|
3.4
|
|
|
|
2.3
|
|
|
|
47.8
|
%
|
|
|
2.3
|
|
|
|
3.2
|
|
|
|
(28.1
|
)%
|
|
Consolidated net sales
|
|
$
|
3,682.0
|
|
|
$
|
3,590.0
|
|
|
|
2.6
|
%
|
|
$
|
3,590.0
|
|
|
$
|
3,166.0
|
|
|
|
13.4
|
%
|
|
Net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,582.2
|
|
|
$
|
2,543.0
|
|
|
|
1.5
|
%
|
|
$
|
2,543.0
|
|
|
$
|
2,317.5
|
|
|
|
9.7
|
%
|
|
Europe
|
|
|
1,099.8
|
|
|
|
1,047.0
|
|
|
|
5.0
|
%
|
|
|
1,047.0
|
|
|
|
848.5
|
|
|
|
23.4
|
%
|
|
Consolidated net sales
|
|
$
|
3,682.0
|
|
|
$
|
3,590.0
|
|
|
|
2.6
|
%
|
|
$
|
3,590.0
|
|
|
$
|
3,166.0
|
|
|
|
13.4
|
%
|
|
Net sales by channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business to business
|
|
$
|
1,985.2
|
|
|
$
|
1,770.2
|
|
|
|
12.1
|
%
|
|
$
|
1,770.2
|
|
|
$
|
1,401.5
|
|
|
|
26.3
|
%
|
|
Consumer
|
|
|
1,696.8
|
|
|
|
1,819.8
|
|
|
|
(6.8
|
)%
|
|
|
1,819.8
|
|
|
|
1,764.5
|
|
|
|
3.1
|
%
|
|
Consolidated net sales
|
|
$
|
3,682.0
|
|
|
$
|
3,590.0
|
|
|
|
2.6
|
|
|
$
|
3,590.0
|
|
|
$
|
3,166.0
|
|
|
|
13.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated gross margin
|
|
|
14.4
|
%
|
|
|
13.6
|
%
|
|
|
0.8
|
%
|
|
|
13.6
|
%
|
|
|
14.3
|
%
|
|
|
(0.7
|
)%
|
|
Consolidated SG&A costs*
|
|
$
|
450.1
|
|
|
$
|
420.9
|
|
|
|
6.9
|
%
|
|
$
|
420.9
|
|
|
$
|
379.7
|
|
|
|
10.9
|
%
|
|
Consolidated SG&A
costs* as % of sales
|
|
|
12.2
|
%
|
|
|
11.7
|
%
|
|
|
0.5
|
%
|
|
|
11.7
|
%
|
|
|
12.0
|
%
|
|
|
(0.3
|
)%
|
|
Operating income (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
$
|
68.0
|
|
|
$
|
65.0
|
|
|
|
4.6
|
%
|
|
$
|
65.0
|
|
|
$
|
88.6
|
|
|
|
(26.6
|
)%
|
|
Industrial products
|
|
|
34.6
|
|
|
|
23.8
|
|
|
|
45.4
|
%
|
|
|
23.8
|
|
|
|
15.4
|
|
|
|
54.5
|
%
|
|
Corporate and other
|
|
|
(22.1
|
)
|
|
|
(20.1
|
)
|
|
|
10.0
|
%
|
|
|
(20.1
|
)
|
|
|
(30.4
|
)
|
|
|
(33.9
|
)%
|
|
Consolidated operating income
|
|
$
|
80.5
|
|
|
$
|
68.7
|
|
|
|
17.2
|
%
|
|
$
|
68.7
|
|
|
$
|
73.6
|
|
|
|
(6.7
|
)%
|
|
Operating margin by segment
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology products
|
|
|
2.0
|
%
|
|
|
1.9
|
%
|
|
|
0.1
|
%
|
|
|
1.9
|
%
|
|
|
3.0
|
%
|
|
|
(1.1
|
)%
|
|
Industrial products
|
|
|
10.8
|
%
|
|
|
9.5
|
%
|
|
|
1.3
|
%
|
|
|
9.5
|
%
|
|
|
7.9
|
%
|
|
|
1.6
|
%
|
|
Consolidated operating margin
|
|
|
2.2
|
%
|
|
|
1.9
|
%
|
|
|
0.3
|
%
|
|
|
1.9
|
%
|
|
|
2.3
|
%
|
|
|
(0.4
|
)%
|
|
Effective income tax rate
|
|
|
30.9
|
%
|
|
|
35.6
|
%
|
|
|
(4.7
|
)%
|
|
|
35.6
|
%
|
|
|
36.8
|
%
|
|
|
(1.2
|
)%
|
|
Net income
|
|
$
|
54.4
|
|
|
$
|
42.6
|
|
|
|
27.7
|
%
|
|
$
|
42.6
|
|
|
$
|
46.2
|
|
|
|
(7.8
|
)%
|
|
Net margin
|
|
|
1.5
|
%
|
|
|
1.2
|
%
|
|
|
0.3
|
%
|
|
|
1.2
|
%
|
|
|
1.5
|
%
|
|
|
(0.3
|
)%
|
*includes special (gains) charges. See Note 8 of Notes to Consolidated Financial Statements.
NET SALES
SEGMENTS:
The Technology Products net sales increase is attributable to the effect of currency movements and improved business to business sales offset by decreased consumer channel sales. On a constant currency basis, sales declined 1.0% or $33.5 million. This decline is due to lower sales in certain geographies, primarily North America and certain channels, primarily unassisted consumer web and television shopping.
The Industrial Products net sales increase in 2011 is attributable to more products offered on the Company’s websites and the addition of sales personnel.
GEOGRAPHIES:
The North American sales increase resulted primarily from the Industrial Products segment’s additional new product lines partially offset by declining consumer sales in the Technology Products segment. On a constant currency basis, North American sales would have grown 1.2%. The movement in foreign exchange rates positively impacted sales by approximately $9.0 million.
The European sales increase resulted primarily from an increase in business to business sales. On a constant currency basis, European sales would have increased 0.7%. Movement in foreign exchange rates positively impacted sales by approximately $45.6 million.
CHANNEL SALES:
The worldwide business to business channel sales increase resulted primarily from the Industrial Products segment’s additional product lines and the addition of business to business sales personnel in both the Technology Products and Industrial Products segments. On a constant currency basis, worldwide business to business channel sales grew 9.7%.
The worldwide consumer-channels, defined as revenues from retail stores, consumer websites, inbound call centers and television shopping channels, decline resulted primarily from decreased European and North American unassisted web and television shopping sales. On a constant currency basis, worldwide consumer channel sales declined 7.4%.
2010 versus 2009:
The growth in Technology Products sales in 2010 compared to 2009 was driven by increased business to business and consumer channel sales worldwide as a result of improved global economic conditions, the expansion of the number of retail stores in the United States and Canada and the continued sales contribution from our Circuit City and WStore Europe SA (“WStore”) acquisitions in 2009. On a constant currency basis, excluding the impact of the WStore acquisition on results, Technology Product sales would have grown 7.9% or $230.6 million. North American Technology Products sales increased 8.2% in 2010 compared to 2009 benefiting from increased retail and internet sales in the consumer channel, the result of opening seven retail stores in 2010 and the Circuit City acquisition in 2009. On a constant currency basis, North American sales would have grown 8.9%. The movement in the exchange rates positively impacted sales by approximately $19.9 million. European sales grew primarily from an increase in business to business sales. On a constant currency basis, European sales would have increased 29.6%. Movement in foreign exchange rates negatively impacted sales by approximately $52.9 million. Industrial Products sales increased 27.5% compared to 2009 because of improved economic conditions in North America in 2010 resulting in increased demand for the segment’s various products as well as an increase in the number of products offered on its websites and in its catalogs. On a constant currency basis and excluding the WStore acquisition, worldwide business to business channel sales increased 18.1% and worldwide consumer-channel sales increased 2.4% in 2010 compared to 2009. The Company announced plans to exit its Software solutions segment during the second quarter of 2009. Substantially all of the third party business activities of ProfitCenter Software had ended as of December 31, 2009. Current and prior year results for this segment are now included in Corporate and other.
GROSS MARGIN
The consolidated gross margin increase in 2011 is due to changes in the segment and channel mix, with Industrial Products sales, which are typically higher margin than Technology Products, contributing a larger percentage to gross profit dollars. Modest improvements in our freight margin in Technology Products contributed to the improved margin from our ongoing freight and logistics initiatives. 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, freight discounting and other variables, any or all of which may result in fluctuations in gross margin
.
The consolidated gross margin decrease in 2010 was due to lower product prices; freight discounts on the Company’s North American websites and start up costs related to the new distribution center in North America partially offset by improvement in gross margin in Europe and in Industrial Products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The selling, general and administrative expenses increase in 2011 primarily resulted from the increased sales volume, increases in facility and other operating costs related to the retail stores being opened a full year compared to 2010 and hiring of additional sales personnel. Selling, general and administrative costs as a percent of sales increased 80 basis points compared to 2010. Significant expense increases include approximately $21.4 million of increased payroll, and related costs due to additional sales personnel and additional retail stores operating for the full year of 2011 compared to 2010, additional rent and related costs of approximately $2.8 million and $10.1 million of increased internet, store space ads advertising and reduced cooperative advertising funding on catalogs, offset by decreased spending on catalogs compared to 2010. The Company incurred approximately $2.8 million of additional depreciation and amortization compared to 2010 due to significant additions to our second distribution center, expenditures in our retail stores and amortization of intangible assets.
The selling, general and administrative expenses increase in 2010 primarily resulted from increased sales volume and increased facility and other operating costs related to opening additional retail stores. Selling, general and administrative costs as a percent of sales declined as sales grew at a faster rate than costs. Retail expansion in the United States and the inclusion of WStore results for a full year were primary drivers of the cost increases in 2010. Significant expense increases include approximately $24.1 million of increased payroll, $8.5 million of increased internet advertising expenses, $5.6 million of increased rent and related expenses primarily related to retail stores, $2.8 million of increased credit card fees, $2.5 million of additional depreciation and amortization expense offset by approximately $9.7 million of increased vendor consideration related to advertising expenses. Also included in 2009 is a gain of approximately $1.8 million from a lawsuit that was settled favorably.
SPECIAL (GAINS) CHARGES
The Company recorded a net special gain of approximately $5.6 million primarily related to the investigation and settlement with a former officer and director of the Company. A special gain of approximately $8.4 million related to this settlement was recorded in the second quarter of 2011. This gain was partially offset by charges for related investigative, legal and professional fees of approximately $2.8 million for the year (See Note 8 of Notes to Consolidated Financial Statements).
The Company’s WStore France subsidiary incurred integration related charges of approximately $4.0 million for severances and other costs related to the merger of its Misco and WStore operations and the Company incurred $0.3 million in contract terminations costs related to the exit of its Software Solutions segment.
OPERATING MARGIN
Technology Products operating margin increased 10 basis points in 2011 versus 2010 due to the effect of a special gain recorded in 2011 related to the investigation of the former officer and director of the Company and the special charges incurred in 2010 for the WStore integration. Excluding these gains and charges, Technology Products operating margin would have declined compared to 2010 due to continuing price promotions offered and increased spending related to the retail stores, additional headcount and a full year of operation of the second distribution center. Technology Products operating margin decreased in 2010 versus 2009 due to price promotions, freight discounts offered during the year, start up costs related to the new distribution center in North America and reorganization costs related to the WStore integration which could not be fully offset by cost reduction initiatives.
Industrial Products operating margin increased 130 basis points in 2011 due to increased demand for the segment’s various products, the availability of additional products on the Company’s websites and in its catalogs and additional sales personnel. Industrial Products operating margin increased in 2010 compared to 2009 due to prudent cost management and improved economic conditions in North America, resulting in increased demand for the segment’s various products.
Corporate and other operating costs increased 13.2% during 2011 primarily as a result of increased personnel costs and increased tax and accounting fees offset by savings in general consulting fees. Corporate and other operating costs decreased 29.6% during 2010 due to cost savings from winding down the ProfitCenter Software segment in 2009, reduced consulting and outside services for software implementation which began in 2009 and significantly less legal and professional fees incurred in 2010 compared to 2009.
INTEREST EXPENSE
Interest expense was $2.2 million, $1.8 million, and $1.4 million in 2011, 2010 and 2009, respectively. The interest expense increase in 2011 compared to 2010 is primarily the result of a full year of interest on the Recovery Zone Bond entered into to finance the equipment for the second Technology Products distribution center opened in 2010. The interest expense increase in 2010 compared to 2009 is primarily attributable to a full year of interest expense related to the debt assumed in the WStore acquisition, higher average outstanding balances under the Company’s revolving credit agreement and interest on the Recovery Zone Bond.
INCOME TAXES
The Company’s effective tax rate was 30.9% in 2011 as compared to 35.6% in 2010. The lower tax rate in 2011 is primarily the result of the company’s France operations having sufficient income to partially utilize net operating loss carryforwards that have a full valuation allowance applied.
The effective tax rate in 2010 was 35.6% compared to 36.8% in 2009. The lower tax rate in 2010 is primarily attributed to reversals of valuation allowances of approximately $0.5 million. If excluded, the Company’s effective tax rate would have been 36.3%. The lower tax rate in 2010 is primarily attributed to a higher percentage of taxable income in countries that have lower corporate tax rates. The Company’s effective tax rate will vary as the mix of pretax income from the countries the Company does business in varies.
Seasonality
As the Company’s consumer channel sales have grown significantly in the past few years, the fourth quarter has represented a greater portion of annual sales than historically. Net sales have historically been modestly weaker during the second and third quarters as a result of lower business activity during those months. The following table sets forth the net sales seasonality for each of the quarters since January 1, 2009
(amounts in millions)
.
|
|
|
Quarter Ended
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
930
|
|
|
$
|
872
|
|
|
$
|
901
|
|
|
$
|
979
|
|
|
Percentage of year’s net sales
|
|
|
25.3
|
%
|
|
|
23.7
|
%
|
|
|
24.5
|
%
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
915
|
|
|
$
|
806
|
|
|
$
|
863
|
|
|
$
|
1,006
|
|
|
Percentage of year’s net sales
|
|
|
25.5
|
%
|
|
|
22.5
|
%
|
|
|
24.0
|
%
|
|
|
28.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
752
|
|
|
$
|
722
|
|
|
$
|
754
|
|
|
$
|
938
|
|
|
Percentage of year’s net sales
|
|
|
23.8
|
%
|
|
|
22.8
|
%
|
|
|
23.8
|
%
|
|
|
29.6
|
%
|
Financial Condition, Liquidity and Capital Resources
Selected liquidity data (in thousands):
|
|
|
December 31,
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
Cash
|
|
$
|
97,254
|
|
|
$
|
92,077
|
|
|
$
|
5,177
|
|
|
Accounts receivable, net
|
|
$
|
268,980
|
|
|
$
|
276,344
|
|
|
$
|
(7,364
|
)
|
|
Inventories
|
|
$
|
372,244
|
|
|
$
|
370,375
|
|
|
$
|
1,869
|
|
|
Prepaid expenses and other current assets
|
|
$
|
18,198
|
|
|
$
|
19,308
|
|
|
$
|
(1,110
|
)
|
|
Accounts payable
|
|
$
|
336,550
|
|
|
$
|
377,030
|
|
|
$
|
(40,480
|
)
|
|
Accrued expenses and other current liabilities
|
|
$
|
72,410
|
|
|
$
|
84,680
|
|
|
$
|
(12,270
|
)
|
|
Current portion of long term debt
|
|
$
|
2,552
|
|
|
$
|
2,655
|
|
|
$
|
(103
|
)
|
|
Working capital
|
|
$
|
354,704
|
|
|
$
|
300,872
|
|
|
$
|
53,832
|
|
Our primary liquidity needs are to support working capital requirements in our business, including working capital for new retail stores, capital expenditures, payment of interest on outstanding debt, special dividends declared by our Board of Directors and acquisitions. We rely principally upon operating cash flows to meet these needs. 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.
Our working capital increase in 2011 is primarily the result of lower accounts payable, accrued expenses and other current liabilities balances in addition to increased cash and inventory balances compared to 2010. Accounts receivable days outstanding were at 27 in 2011 up from 25 in 2010. We expect that future accounts receivable and inventory balances will fluctuate with growth in net sales and the mix of our net sales between consumer and business customers.
Net cash provided by operating activities was $18.2 million, $64.9 million, and $4.8 million during 2011, 2010, and 2009. The decrease in cash provided by operating activities in 2011 compared to 2010 resulted from a $3.6 million increase in net income adjusted by other non-cash items, such as depreciation expense, and a decrease of $50.3 million in cash used in our working capital accounts. The increase in cash provided by operating activities in 2010 over 2009 resulted from a $5.0 million decrease in net income adjusted by other non-cash items, such as depreciation expense, and an increase of $65.1 million in cash used for changes in our working capital accounts.
Net cash used in investing activities was $12.3 million and were for upgrades and enhancements to our information and communications systems hardware and software and expenditures in retail stores in North America. In 2010, net cash used in investing activities was $24.7 million, primarily for capital expenditures including expenditures for the second North American distribution center for the Technology Products segment. Cash flows used in investing activities during 2009 totaled $32.3 million primarily for the CircuitCity.com acquisition and for capital expenditures. Capital expenditures in 2010 and 2009 also included upgrades and enhancements to our information and communications systems hardware and software and expenditures in retail stores in North America.
Net cash used in financing activities was $0.7 million in 2011. We borrowed and repaid approximately $10.9 million from revolving credit and short term debt facilities. We also repaid approximately $2.7 million in capital lease obligations. Net proceeds and excess tax benefits from stock option exercises provided $0.5 million and we received proceeds of approximately $1.5 million from the Recovery Zone Facility Bond. In 2010 net cash used in financing activities was $4.7 million. We borrowed and repaid approximately $261.7 million against our credit facilities. We repaid approximately $13.2 million in short term debt and approximately $1.5 million in capital lease obligations and received proceeds of approximately $7.9 million from the Recovery Zone Facility Bond. Net proceeds and excess tax benefits from stock option exercises provided approximately $2.1 million of cash. In 2009, net cash used in financing activities was $31.5 million. We repaid approximately $3.6 million in short-term debt and approximately $0.8 million in capital lease obligations, paid a special dividend of $27.6 million, and repurchased Company stock of approximately $1.2 million. Net proceeds and excess tax benefits from stock option exercises provided approximately $1.7 million of cash.
On December 15, 2011, the Company entered into an amendment of its second amended and restated credit agreement. The amendment increased the maximum availability under the United States revolving loan component of the facility by $25 million to a total of $125.0 million (which may be increased to $200.0 million, subject to certain conditions), eliminated the Company’s unneeded $25 million United Kingdom revolving loan component of the facility, released the related United Kingdom assets that were pledged to secure this component and removed the Company’s United Kingdom subsidiary from the facility. The facility has a five year term expiring in October 2015. The borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and up to 40% of qualified inventories. Borrowings are secured by substantially all of the Company’s assets, including accounts receivable, inventory and certain other assets, subject to limited exceptions. The amended and restated 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 we maintain a minimum level of availability. If such availability is not maintained, we will then be required to maintain a fixed charge coverage ratio (as defined). As of December 31, 2011, the Company was in compliance with all of the covenants under the credit facility. Eligible collateral under the facility was $119.5 million, total availability was $113.1 million, outstanding letters of credit were $6.4 million and there were no outstanding advances.
The Company’s Inmac WStore subsidiary maintains a secured revolving credit agreement with a financial institution in France which is secured by WStore Europe SA accounts receivable balances. Available amounts for borrowing under this facility includes all accounts receivable balances not over 60 days past due reduced by the greater of €4.0 million or 10% of the eligible accounts receivable. As of December 31, 2011, there was availability under this credit facility of approximately €24.1 million ($31.2 million) and there were no outstanding borrowings. The credit facility duration is indefinite; however either party may cancel the agreement with sixty days notice. Under this agreement the Company is subject to certain non-financial covenants which it was in compliance with at December 31, 2011.
On September 23, 2010, the Company (through a subsidiary) completed tax exempt Recovery Zone Facility Bond (the “Bonds”) financing for up to $15 million with the Development Authority of Jefferson, Georgia (the “Authority”). The Bonds were issued by the Authority and initially purchased by GE Government Finance Inc., and mature on October 1, 2018. Interest on the Bonds is calculated at the rate of 4.15% per annum and principal and interest payments are due monthly. The proceeds of the Bonds are used to finance or repay the costs of capital equipment purchased for the Company’s distribution facility located in Jefferson, Georgia. The purchase and installation of all the equipment for the facility was completed by December 31, 2011. Pursuant to the transaction, the Company will transfer to the Authority for consideration consisting of the Bond proceeds ownership of the equipment to be used at the distribution facility and the Authority in turn will lease the equipment to the Company’s subsidiary pursuant to a capital equipment lease expiring October 1, 2018. Under the capital equipment lease the Company has the right to acquire ownership of the equipment at any time for a purchase price sufficient to pay off all principal and interest on the Bonds, plus $1.00.
Our earnings and cash flows are seasonal in nature, with the fourth quarter of the fiscal year generating higher earnings and cash flows than the other quarters. Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, general 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 Technology Products segment 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 significant cash balances and minimal debt.
We anticipate cash needs to support our growth and expansion plans, continued investment in upgrading and expanding our technological capabilities and information technology infrastructure, opening of new retail stores, and in building out and expanding our distribution center facilities and inventory systems.
These expenses and capital expenditures will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources. In 2012 we anticipate capital expenditures of approximately $20 million although at this time we are not contractually committed to incur 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 consumer and/ or business to 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. In addition we anticipate cash needs for implementation of the financial systems. We believe that our cash balances, future cash flows from operations and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for at least the next twelve months.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 31, 2011, 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.
We are obligated under non-cancelable operating leases for the rental of most of our facilities and certain of our equipment which expire at various dates through 2030. We have sublease agreements for unused space we lease in Uniondale, New York. In the event the sub lessee is unable to fulfill its obligations, we would be responsible for rents due under the leases.
Following is a summary of our contractual obligations 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 December 31, 2011 (in thousands):
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
11,796
|
|
|
$
|
3,147
|
|
|
$
|
7,902
|
|
|
$
|
747
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable operating leases, net of subleases
|
|
|
204,425
|
|
|
|
27,340
|
|
|
|
67,794
|
|
|
|
56,379
|
|
|
|
52,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase & other obligations
|
|
|
48,013
|
|
|
|
25,969
|
|
|
|
11,522
|
|
|
|
10,522
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
264,234
|
|
|
$
|
56,456
|
|
|
$
|
87, 218
|
|
|
$
|
67,648
|
|
|
$
|
52,912
|
|
Our purchase and other obligations consist primarily of certain employment agreements and service agreements.
In addition to the contractual obligations noted above, we had $6.4 million of standby letters of credit outstanding as of December 31, 2011.
We are party to certain litigation, the outcome of which we believe, based on discussions with legal counsel, will not have a material adverse effect on our consolidated financial statements.
Tax contingencies are related to uncertain tax positions taken on income tax returns that may result in additional tax, interest and penalties being paid to taxing authorities. As of December 31, 2011, the Company had no uncertain tax positions.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
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, senior executives, Directors and controlling shareholders of the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally 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 located 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. Sales would have fluctuated by approximately $126.6 million and pretax income would have fluctuated by approximately $3.0 million if average foreign exchange rates changed by 10% in 2011. 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 December 31, 2011 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 consists of short-term borrowings under our credit facilities. As of December 31, 2011, 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 over the next fiscal year.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial Statements filed with this report; see Item 15 of Part IV of this Form 10-K.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 December 31, 2011. 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.
Inherent Limitations of Internal Controls over Financial Reporting
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.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.
Under the supervision and with the participation of Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its internal control over financial reporting based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, a copy of which is included in this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting for the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.