Overview
19 -------------------------------------------------------------------------------- Table o f ContentsGlobal Industrial Company , through its subsidiaries, is a value-added industrial distributor of more than one million industrial and maintenance, repair and operation ("MRO") products inNorth America going to market through a system of branded e-commerce websites and relationship marketers.
Continuing Operations
The Company sells a wide array of industrial and MRO products, which are marketed inNorth America . These industrial and MRO products are manufactured by other companies. Some products are manufactured for us and sold as a white label product, and some are manufactured to our own design and marketed as private brand products under the trademarks: Global™, GlobalIndustrial.com™, Nexel™, Paramount™ and Interion™. Discontinued Operations The Company's discontinued operations include the results of theNorth American Technology Group ("NATG") business sold inDecember 2015 (see Note 1 and Note 7 to the Consolidated Financial Statements).
Operating Conditions
The North American industrial products market is highly fragmented and we compete against numerous competitors in multiple distribution channels. Industrial products distribution is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of maintaining inventory, leasing warehouse space, inventory management systems and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stock and drop-shipment fulfillment. The primary component of our operating expenses historically has been employee-related costs, which includes items such as wages, commissions, bonuses, employee benefits and equity-based compensation, as well as marketing expenses, primarily comprised of digital marketing spend, and occupancy related charges associated with our leased distribution and call center facilities. We continually assess our operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs. The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements, the factors that we believe may affect our future results and financial condition as well as information about how certain accounting policies and estimates affect the consolidated financial statements. The Company has elected to omit discussion of the earliest year presented,December 31, 2020 , in MD&A. This discussion can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for the year endedDecember 31, 2021 , filed onMarch 17, 2022 .
Business Outlook
As we enter 2023, while uncertainty remains in the economic outlook, the Company is cautiously optimistic and excited by the opportunities we see for growth including our ability to attract new enterprise customers, penetrate new vertical markets including healthcare and hospitality, expand our Global Industrial Exclusive BrandsTM products and deliver an innovative and personalized e-commerce experience.
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Highlights from 2022 vs. 2021 The following discussion of our results of operations and financial condition will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements included herein. •Consolidated sales increased 9.7% to$1.17 billion inU.S. dollars compared to$1.06 billion last year. Sales increased 9.3% on an average daily sales basis. Average daily sales is calculated based upon the number of selling days in each period, with Canadian sales converted to US dollars using the current year's average exchange rate. •Consolidated operating income increased 19.5% to$105.2 million compared to$88.0 million last year. •Net income per diluted share from continuing operations increased 10.9% to$2.04 compared to$1.84 last year. 21
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Results of Operations(1)
Key Performance Indicators (in millions):
Years Ended December 31 Change 2022 2021 2022 vs. 2021 Results of continuing operations: Consolidated net sales$ 1,166.1 $ 1,063.1 9.7 % Consolidated gross profit$ 421.2 $ 374.3 12.5 % Consolidated gross margin 36.1 % 35.2 % 0.9 % Consolidated SD&A costs$ 316.0 $ 286.3 10.4 % Consolidated SD&A costs as % of sales 27.1 % 26.9 % 0.2 % Consolidated operating income$ 105.2 $ 88.0 19.5 % Consolidated operating margin from continuing operations: 9.0 % 8.3 % 0.7 % Effective income tax rate 24.8 % 20.0 % 4.8 % Net income from continuing operations$ 78.1 $ 70.1 11.4 % Net margin from continuing operations 6.7 % 6.6 % 0.1 %
Net income from discontinued operations, net of tax $ 0.7
$ 33.2 (97.9) %
1
year that ends at midnight on the Saturday closest to December
31. For clarity of
presentation, fiscal years are described as if they ended on
the last day of the
respective calendar month. Fiscal years 2022 and 2021 ended on
andJanuary 1, 2022 , respectively. The fiscal years ended 2022
and 2021 included 52
weeks. Average daily sales is calculated based upon the number of
selling days in each
period, with Canadian sales converted to US dollars using the
current year's average
exchange rate. There were 254 selling days in theU.S. in 2022
compared to 253
selling days in 2021 and 251 selling days inCanada in 2022 compared to 250 selling days in 2021. 22
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Table o f Contents Management's discussion and analysis that follows will include current operations and discontinued operations.
The Company's net sales increased 9.7% to$1.17 billion compared to$1.06 billion in 2021. The Company's sales reflect a leading performance by our managed sales group and our private brand offering continuing to increase as a percentage of total sales. Our private brand offering was an area of focus and opportunity during 2022 and for the year it represented approximately 50% of total sales.U.S. sales increased 10.1% compared to 2021 andCanada sales, in local currency, were up 7.7%. In USD,Canada sales increased 3.8%. Consolidated sales increased 9.3% on an average daily sales basis compared to 2021. In 2022 sales grew by double digits during the first half of the year and growth moderated in the second half of the year as the Company experienced a softened demand environment and as the benefit of price increases that started in the third quarter of 2021 were lapped and largely waned. Overall, we perceive customers to be guarded in their buying decisions and the pricing environment remaining competitive. In the fourth quarter of 2022 revenue was down 0.6% as compared to the same period in 2021 and we have seen a continuation of this trend into the start of 2023.
GROSS MARGIN
Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, vendor volume rebates, freight pricing decisions including the use of free or other promotional freight plans, freight cost inflation including both domestic outbound freight as well as international inbound ocean freight, inventory valuation and obsolescence and other variables, any or all of which may result in fluctuations in gross margin. The Company expects to see continued margin variability due to the current economic environment, inflationary pressures on both transportation and raw material costs, pricing pressures caused by inflated inventory levels and historical seasonality. Gross margin was 36.1% compared to 35.2% in the prior year primarily driven by normalization of freight margins as compared to the transitory costs incurred in 2021 related to the transition to a new less-than-truckload ("LTL") freight partner, partially offset by increased freight fuel surcharges as well as increased accessorial charges that were incurred in 2022. Other contributing factors to our increased gross margin include higher margin private brands capturing a larger share of our sales mix and a reduction in inventory adjustments in 2022 as compared to 2021 which included a write-down of certain personal protective equipment ("PPE") products.
Maintaining our margin profile remains a key focus for the Company. We have seen some early benefits from lower ocean supply chain costs; however we expect variability throughout 2023 as we work through select inventory with higher total landed costs and manage a dynamic pricing environment.
SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES ("SD&A")
Selling, distribution and administrative expenses totaled
SD&A costs as a percentage of sales increased in 2022 compared to 2021 by 20 basis points. This increased SD&A reflects increased marketing investment to support both core and private brand product lines, growth initiatives, as well as increased distribution center compensation. Significant cost increases related to increased salary and other related costs of approximately$13.6 million , of which approximately$4.4 million related to higher variable incentive and equity compensation expenses related to the Company's financial performance and increased sales commissions of approximately$1.8 million due to the growth in sales. Other cost increases were related to our increased net marketing investment of approximately$7.2 million , costs of our new Canadian distribution center of approximately$2.2 million , increased consulting and professional fees of approximately$1.1 million related to the continued investment in upgrading and expanding our technological capabilities, specifically our e-commerce shopping experience and sales force productivity.
DISCONTINUED OPERATIONS
The Company's discontinued operations include the results of the NATG businesses
sold in
During 2022, the Company recorded net income in its discontinued operations of
approximately
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During 2021, the Company recorded net income in its discontinued operations of approximately$33.2 million primarily related to the resolution of certain liabilities and restitution receipts offset by related professional fees and the provision for income taxes. OPERATING MARGIN The Company's operating margin increased 70 basis points in 2022 compared to 2021, driven by improved gross margin that resulted primarily from the product mix shift to in stock and private brand products and efficiencies in our marketing efforts. Operating margin in 2021 was negatively impacted by PPE inventory write downs of approximately$3.5 million and continued freight pricing pressures.
INTEREST AND OTHER EXPENSE, NET
Interest and other expense, net from continuing operations was$1.1 million for 2022 and$0.1 million in 2021. Increased costs in 2022 reflect the increased loan balances year over year and higher interest rate environment. The Company also recorded foreign exchange losses of approximately$0.3 million in 2022 and 2021. INCOME TAXES The Company recorded net tax expense in continuing operations for 2022 of$25.7 million , or 24.8%, and a net tax expense in discontinued operations of$0.2 million . Tax expense from continuing operations was primarily the result of pretax income in theU.S. andIndia operations, including tax expense for certainU.S. states. Non-deductible expenses, including executive compensation, was approximately$3.0 million . Tax expense in discontinued operations is attributed to pretax income recorded in the discontinuedNorth American Technology Products Group business. The Company recorded net tax expense in continuing operations for 2021 of$17.5 million , or 20.0%, and a net tax expense in discontinued operations of$10.7 million . Tax expense from continuing operations was primarily the result of pretax income in theU.S. andIndia operations, including tax expense for certainU.S. states. The tax rate was benefited by the reversal of valuation allowances against the Company's Canadian net operating loss carryforward and other deferred tax assets of approximately$3.4 million , as the Company believed it was more likely than not that all of the net operating losses of the Canadian subsidiary would be utilized. Tax expense from continuing operations was also benefited by approximately$0.8 million of stock option exercises. Non-deductible expenses, including executive compensation, was approximately$0.4 million . Tax expense in discontinued operations is attributed to pretax income recorded in the discontinuedNorth American Technology Products Group business.
Financial Condition, Liquidity and Capital Resources
Selected liquidity data (in millions):
December 31, 2022 2021 $ Change Cash and cash equivalents$ 28.5 $ 15.4 $ 13.1 Accounts receivable, net$ 108.0 $ 106.8 $ 1.2 Inventories$ 179.4 $ 172.8 $ 6.6 Prepaid expenses and other current assets$ 9.8 $ 6.4 $ 3.4 Accounts payable$ 96.9 $ 114.4
Accrued expenses and other current liabilities$ 43.2 $ 50.5 $ (7.3) Short-term debt$ 0.6 4.5$ (3.9) Operating lease liabilities$ 12.4 $ 10.5 $ 1.9 Working capital$ 172.6 $ 121.5 $ 51.1 24
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Table o f Contents Historical Cash Flows Year EndedDecember 31, 2022 2021
Net cash provided by operating activities from continuing operations $
49.8$ 47.6 Net cash provided by operating activities from discontinued operations$ 0.4 $ 2.2 Net cash used in investing activities from continuing operations $
(7.1)
Net cash used in financing activities from continuing operations $
(29.7)
Effects of exchange rates on cash$ (0.3) $ 0.0 Net increase (decrease) in cash and cash equivalents $
13.1
Our primary liquidity needs are to support working capital requirements in our business, including inflationary cost pressures within inventory, funding recently declared and any future dividends, funding capital expenditures and inventory purchases related to our new distribution center inCanada , debt repayment, continuing investment in upgrading and expanding our technological capabilities and information technology infrastructure specifically related to our e-commerce shopping experience, sales force productivity and automation, continuing investment in upgrading and expanding our distribution footprint and funding acquisitions. We rely principally upon operating cash flows to meet these needs. We currently believe that current cash on hand, cash flow from operations and our availability under our credit facility will be sufficient to fund our working capital and other cash requirements for at least the next twelve months. We believe our current capital structure and cash resources are adequate for our internal growth initiatives. To the extent our growth initiatives expand, including major acquisitions, we would seek to raise additional capital. We believe that, if needed, we can access public or private funding alternatives to raise additional capital. Our working capital increased$51.1 million primarily related to increased inventory balances and lower accounts payable and accrued expense balances. Our inventory balance increase is primarily associated with increased cost of capitalized freight associated with increased costs of inbound ocean freight, as well as an expansion of safety stock levels. Accounts receivable days outstanding were 38.3 in 2022 compared to 38.0 in 2021. Inventory turns were 3.8 in 2022 compared to 4.7 in 2021 and accounts payable days outstanding were 56.6 in 2022 compared to 69.1 in 2021. We expect that future accounts receivable, inventory and accounts payable balances will fluctuate with net sales and the product mix of our net sales.
Operating Activities
Net cash provided by operating activities from continuing operations was$49.8 million attributable to cash generated from net income adjusted by other non-cash items which provided$88.0 million in 2022 compared to$76.3 million provided by these items in 2021. This increase is primarily related to the higher net income from continuing operations in 2022 compared to 2021, the deferred tax benefit recognized in 2021 and the increased equity compensation expense incurred during 2022 due to the Company's improved financial performance. Offsetting this increase are the changes in our working capital accounts, which used$38.2 million in cash compared$28.7 million used in 2021, primarily the result of changes in the inventory, accounts payable, income taxes and accounts receivable balances. Net cash provided by operating activities from discontinued operations was$0.4 million and$2.2 million in 2022 and 2021, respectively.
Investing Activities
Net cash used in investing activities from continuing operations totaled$7.1 million and$3.4 million for 2022 and 2021, respectively. In 2022, investing activities was used for warehouse machinery and equipment, primarily related to our new Canadian distribution center, leasehold improvements, computer equipment and software. In 2021, investing activities was used primarily for warehouse machinery and equipment related to ourNew Jersey distribution center and for other distribution centers, as well as, leasehold improvements.
Financing Activities
Net cash used in financing activities was$29.7 million and$55.0 million in 2022 and 2021, respectively. In 2022, net cash used in financing activities primarily related to the regular quarterly dividend of$0.18 per common share which totaled approximately$27.6 million and net repayments of short-term borrowings of$3.9 million . Offsetting these payments, were proceeds from the issuance of common stock from stock option exercises, net of payments for payroll taxes through shares withheld, totaled$0.4 million and proceeds from the issuance of common stock from our employee stock purchase plan totaled$1.4 million . In 2021, net cash used in financing activities primarily related to the special dividend and regular quarterly 25 -------------------------------------------------------------------------------- Table o f Contents dividends, which totaled approximately$62.5 million . During 2021, the Company had net borrowings under its credit facility of approximately$4.5 million and proceeds from the issuance of common stock from stock option exercises, net of payments for payroll taxes through shares withheld, which totaled$1.9 million . Proceeds from the issuance of common stock from our employee stock purchase plan totaled$1.1 million . InNovember 2022 , the Company, amended its credit agreement to increase its existing$75.0 million secured revolving credit facility to$125.0 million . This credit facility is with one financial institution which has a five-year term, maturing onOctober 19, 2026 and provides for borrowings inthe United States . The credit agreement contains certain operating, financial and other covenants, including limits on annual levels of capital expenditures, availability tests related to payments of dividends and stock repurchases and fixed charge coverage tests related to acquisitions. The revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the Company will be required to maintain a fixed charge coverage ratio (as defined). The borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and the inventory advance rate computed as the lesser of 65% (previously 60%) or 85% of the net orderly liquidation value ("NOLV"). Borrowings are secured by substantially all of the Borrower's assets, as defined, including all accounts, accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral. The interest rate under the amended and restated facility is computed at applicable market rates based on the Secured Overnight Financing Rate ("SOFR"), theFederal Reserve Bank of New York ("NYFRB") or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability. As ofDecember 31, 2022 , eligible collateral under the credit agreement was$116.4 million , total availability was$113.7 million , total outstanding letters of credit was$1.4 million , total outstanding borrowings was$0.6 million and total excess availability was$111.7 million . The Company was in compliance with all of the covenants of the credit agreement in place as ofDecember 31, 2022 . Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, distribution and administrative costs, product mix and relative levels of domestic and foreign sales. Unusual gains or expense items, such as special (gains) charges and settlements, may impact earnings and are separately disclosed. We expect that past performance may not be indicative of future performance due to the competitive nature of our business segments where the need to adjust prices to gain or hold market share is prevalent. Macroeconomic conditions, such as business and consumer sentiment, may affect our revenues, cash flows or financial condition. However, we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues, cash flows or financial condition. We are not currently interest rate sensitive, as we have minimal debt. The expenses and capital expenditures described above will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources, cash flow from operations and borrowing under our current credit facility. In 2023 we anticipate capital expenditures to be in the range of$6.0 to$8.0 million , though at this time we are not contractually committed to incur these expenditures. In the past we have engaged in opportunistic acquisitions, choosing to pay the purchase price in cash, and may do so in the future as favorable situations arise. However, a deep and prolonged period of reduced business spending could adversely impact our cash resources and force us to either forego future acquisition opportunities or to pay the purchase price using stock, debt or a combination of consideration which could have an adverse effect on our earnings. We believe that our cash balances and future cash flows from operations and availability under our credit facility will be sufficient to fund our working capital and other cash requirements for at least the next twelve months. We maintain our cash and cash equivalents in money market funds or their equivalent that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees. As ofDecember 31, 2022 , we had no investments with maturities of greater than three months. Accordingly, we do not believe that our cash balances have significant exposure to interest rate risk. AtDecember 31, 2022 cash balances held in foreign subsidiaries totaled approximately$3.1 million . These balances are held in local country banks and are held primarily to support local working capital needs. The Company had in excess of$137 million of liquidity (cash and an undrawn line of credit) in theU.S. as ofDecember 31, 2022 .
Material Cash Requirements
We are obligated under non-cancelable operating leases for the rental of our facilities and certain of our equipment which expires at various dates through 2032. As ofDecember 31, 2022 we were obligated for approximately$128.2 million under these non-cancelable operating leases. In 2023 we anticipate cash expenditures of approximately$17.7 million for these operating leases. We have sublease agreements for unused space, as well as excess space in facilities we are currently 26 -------------------------------------------------------------------------------- Table o f Contents occupying, inthe United States andCanada . In the event the sub lessee is unable to fulfill its obligations, we would be responsible for remaining rents due under the leases. Our purchase and other obligations consist primarily of purchase commitments for certain employment, consulting and service agreements. As ofDecember 31, 2022 we were obligated for approximately$31.7 million under these commitments. In 2023 we anticipate cash expenditures of approximately$7.9 million related to these commitments. In addition to the previously mentioned commitments, we had$1.4 million of standby letters of credit outstanding as ofDecember 31, 2022 . We are party to certain litigation, the outcome of which we believe, based on discussions with legal counsel, will not have a material adverse effect on our consolidated financial statements. Tax contingencies are related to uncertain tax positions taken on income tax returns that may result in additional tax, interest and penalties being paid to taxing authorities. As ofDecember 31, 2022 , the Company had no material uncertain tax positions.
Discontinued Operations
The Company's discontinued operations include the former North American
Technology Group business sold in
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, forecasts of future economic conditions 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.
Revenue Recognition
The Company recognizes revenue from contracts with its customers utilizing the following steps:
•Identifying the contract with the customer ?Identifying the performance obligations under the contract ?Determine the transaction price ?Allocate transaction price to performance obligations, if necessary ?Recognizing revenue as performance obligations are satisfied The Company's invoice, and the terms and conditions of sale contained therein, constitutes the evidence of an arrangement and is a contract with the customer. The performance obligations are generally delivery of the products listed on the invoice and the transaction price for each product is listed. Allocation of transaction price is generally not needed. Performance obligations are satisfied, and revenue is recognized upon the shipment of goods from one of the Company's distribution centers or drop shippers for most contracts or in certain cases revenue will be recognized upon delivery and acceptance by the customer. Customer acceptance occurs when the customer accepts the shipment. The Company's standard terms, provided on its invoices as well as on its websites, are included in communications with the customer and have standard payment terms of 30 days. Certain customers may have extended payment terms that have been pre-approved by the Company's credit department, but generally none extend longer than 90 days. Provisions for sales returns and allowances are estimated based on historical data and are recorded concurrently with the recognition of revenue. These provisions are reviewed and adjusted periodically by the Company. Revenue is presented net of sales taxes collected from customers and remitted to government authorities. Revenue is reduced for any early payment discounts or volume incentive rebates offered to customers. 27 -------------------------------------------------------------------------------- Table o f Contents The Company's revenue is shown as "Net sales" in the accompanying Consolidated Statements of Operations and is measured as the determined transaction price, net of any variable consideration consisting primarily of rights to return product. The Company has elected to treat shipping and handling revenues as activities to fulfill its performance obligation. Billings for freight and shipping and handling are recorded in net sales and costs of freight and shipping and handling are recorded in cost of sales in the accompanying Consolidated Statements of Operations. The Company will record a contract liability in cases where customers pay in advance of the Company satisfying its performance obligation. The Company did not have any material unsatisfied performance obligations or liabilities as ofDecember 31, 2022 . The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates its sales returns liability quarterly based upon its historical returns rates as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately$2.2 million atDecember 31, 2022 and 2021, respectively, and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.
Inventory Valuation
We value our inventories at the lower of cost or net realizable value; cost being determined on the first-in, first-out method. Excess and obsolete or unmarketable merchandise are written down based on historical experience, assumptions about future product demand and market conditions. If market conditions are less favorable than projected or if technological developments result in accelerated obsolescence, additional write-downs may be required. While obsolescence and resultant markdowns have been within expectations, there can be no guarantee that we will continue to experience the same level of markdowns we have in the past. The Company estimates the net realizable value of its inventory by considering factors such as inventory levels, historical write-off information, market conditions, estimated direct selling costs and physical condition of the inventory. Our inventory reserve estimates for the years endedDecember 31, 2022 and 2021 have not been materially different than our actual experience. However, if in the future our estimates are materially different than our actual experience we could have a material loss adjustment.
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplemental Data, of this Annual Report on Form 10-K.
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