Forward-Looking Statements and Risk Factors.
This report contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the
Securities and Exchange Commissionor otherwise. Any such statements that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on management's estimates, assumptions and projections and are not guarantees of future performance. Forward-looking statements may include, but are not limited to statements regarding: i) projections or estimates of revenue, income or loss, exit costs, cash flow needs and capital expenditures; ii) fluctuations in general economic conditions, including effects of rising inflation; iii) future operations, such as risks regarding strategic business initiatives, plans relating to new distribution facilities, plans for utilizing alternative sources of supply in response to government tariff and trade actions and/or due to supply chain disruptions arising from the Coronavirus pandemic, war, geopolitical conflicts and plans for new products or services; iv) plans for acquisition or sale of businesses, including expansion or restructuring plans; v) financing needs, and compliance with financial covenants in loan agreements; vi) assessments of materiality; vii) predictions of future events and the effects of pending and possible litigation; and viii) assumptions relating to the foregoing. In addition, when used in this report, the words "anticipates," "believes," "estimates," "expects," "intends," and "plans" and variations thereof and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this report are based on the Company's beliefs and expectations as of the date of this report and are subject to risks and uncertainties which may have a significant impact on the Company's business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain and undue reliance should not be placed on them. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Other factors that may affect our future results of operations and financial condition include, but are not limited to, unanticipated developments in any one or more of the following areas, as well as other factors which may be detailed from time to time in our Securities and Exchange Commissionfilings: •general economic conditions, such as customer inventory levels, consumer prices and inflation, interest rates, borrowing ability and economic conditions in the manufacturing and/or distribution industries generally, as well as government spending levels will continue to impact our business; •delays in the timely availability of products from our suppliers has in the past and could in the future delay receipt of needed product, resulting in delayed or lost sales; •global supply chains and the timely availability of products, particularly products, or product components used in domestic manufacturing, imported from Chinaand other Asian nations as well as from other countries, have been, and in the future could continue to be adversely affected by allocation restrictions of difficult to source products by our vendors; •quarantines, factory slowdowns or shutdowns, border closings and travel restrictions resulting from the Coronavirus pandemic have in the past and could in the future adversely affect the timely availability of products, resulting in delayed or lost sales; •the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, have caused us to raise the prices on certain of our products and seek alternate sources of supply, which could negatively impact our sales or disrupt our operations if we are not able to mitigate these measures; •our use of alternate sources of supply, such as utilizing new vendors in additional countries, entails various risks, such as identifying, vetting and managing new business relationships, reliance on new vendors and maintaining quality control over their products, and protecting our intellectual property rights; •increases in freight and shipping costs, including fuel costs, could affect our margins to the extent the increases cannot be passed along to customers, as has occurred in the past; •extreme weather conditions have delayed or disrupted global product supply chains and have affected our ability to timely receive and ship products, which have and could adversely impact sales; 11 -------------------------------------------------------------------------------- Table of Contents •other critical factors affecting the shipping and distribution of products imported to the United Statesby us or our domestic vendors, such as a global shortage in availability of shipping containers, shipping port congestion, and pandemic related labor shortages, have in the past and could in the future adversely affect the timely availability of products, resulting in delayed or lost sales, as well as adversely affecting our margins; •our reliance on common carrier delivery services for shipping inventoried merchandise to customers; •our reliance on drop ship deliveries directly to customers by our product vendors for products we do not hold in inventory; •our ability to maintain available capacity in our distribution operations for stocked inventory and to enable on time shipment and deliveries, such as by timely implementing additional temporary or permanent distribution resources, whether in the form of additional facilities we operate or by outsourcing certain functions to third-party distribution and logistics partners; •we compete with other companies for recruiting, training, integrating and retaining talented and experienced employees, particularly in markets where we and they have central distribution facilities; and this aspect of competition is aggravated by the current tight labor market in the U.S.for such jobs and at a time this market is undergoing competitive changes due to the Coronavirus pandemic; •we expect to pursue acquisitions and other strategic transactions that we believe will either expand or complement our business in new or existing markets or further enhance the value and offerings we are able to provide to our existing or future potential customers; •the maintenance, repair and operation ("MRO") and industrial equipment industry are consolidating as customers are increasingly aware of the total costs of fulfillment and the need to have consistent sources of supply at multiple locations. This consolidation has and will continue to cause the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower cost business models are able to operate with lower prices; •risks involved with e-commerce, including possible loss of business and customer dissatisfaction if outages or other computer-related problems should preclude customer access to our products and services; •our information systems and other technology platforms supporting our sales, procurement and other operations are critical to our operations and disruptions or delays have occurred and could occur in the future, and if not timely addressed could have a material adverse effect on us; •a data security breach due to our e-commerce, data storage or other information systems being hacked by those seeking to steal Company, vendor, employee or customer information, or due to employee error, resulting in disruption to our operations, litigation and/or loss of reputation or business; •managing various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights from our vendors; •meeting credit card industry compliance standards in order to maintain our ability to accept credit cards; •rising interest rates, increased borrowing costs or limited credit availability, could impact both our and our customers' ability to fund purchases and conduct operations in the ordinary course; •pending or threatened litigation and investigations, and other government actions, such as anti-dumping, unclaimed property, or trade and customs actions by U.S.or foreign governmental authorities, have occurred in the past and although had no material impact to our business, there can be no assurance that such events would not have such impact on our business and results of operation. Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Statements in this report, particularly in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to Condensed Consolidated Financial Statements, as well as information under the heading "Risk Factors" in our Annual Report on Form 10-K for fiscal year 2021, describe certain factors, among others, that could contribute to or cause such differences.
Global Industrial Company, through its subsidiaries, is a value-added industrial distributor of more than a million industrial and MRO products in North Americagoing to market through a system of branded e-commerce websites and relationship marketers. 12 -------------------------------------------------------------------------------- Table of Contents Continuing Operations The Company sells a wide array of industrial and MRO products, which are marketed in North 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: GlobalTM, GlobalIndustrial.comTM, NexelTM, ParamountTM and InterionTM..
See Note 2 to the condensed consolidated financial statements for additional financial information about our business geographic operations.
As noted above, the operating results of discontinued operations in the accompanying financial statements are from the NATG business sold in 2015.
The North American industrial products market is highly fragmented and we compete against multiple distribution channels. Industrial products distribution is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of maintaining inventory, leasing warehouse space, inventory management systems and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stock and drop-shipment fulfillment. The primary component of our operating expenses historically has been employee-related costs, which includes items such as wages, commissions, bonuses, employee benefits and equity-based compensation, as well as marketing expenses, primarily comprised of digital marketing spend, and occupancy related charges associated with our leased distribution and call center facilities. We continually assess our operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs. The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements, the factors that we believe may affect our future results and financial condition as well as information about how certain accounting policies and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the condensed consolidated financial statements included herein and in conjunction with the audited financial statements as of
December 31, 2021and the other information provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The Company's net sales accelerated in the second quarter with revenue increasing 16.8% to over $318 million. Sales performance included strong results led by sales in the United States, and included growth across nearly all product categories in the quarter. Customer demand was strong across each month in the quarter, and performance was highlighted by leading growth in our managed sales channels. Results reflected a continuation of our strategy to realign our strategic account managers, and ongoing efforts to drive new business customer acquisition in key end market verticals inclusive of commercial enterprise, public sector and healthcare. Gross margins in the quarter pulled back from record levels in the first quarter as the company continued to evaluate price positions in light of changing inventory availability, impacts of record fuel surcharges in domestic transportation, as well as the flow through of some higher cost inventory that had been acquired in early 2022 to assure product availability for our customers. These negative margin pressures were partially offset by a continued shift in product sales to our private brands, which traditionally carry higher margin profiles than competing national brands. Selling, distribution and administrative ("SD&A") management remained disciplined and delivered operating leverage in key expense categories within our distribution and logistics costs, compensation costs, and marketing costs, resulting in operating income of $30.5 millionand operating margin nearing 10%. 13 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 15 of the Company's 2021 Annual Report on Form 10- K. Certainaccounting 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 has identified revenue recognition, allowances for credit losses, inventory valuation and income taxes as policies that entail significant judgments or estimates. 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.
There were no material changes in the Company’s significant accounting policies during the second quarter and the six-month period ended
Public companies in
the United Statesare subject to the accounting and reporting requirements of various authorities, including the Financial Accounting Standards Board("FASB") and the Securities and Exchange Commission("SEC"). These authorities issue numerous pronouncements, most of which are not applicable to the Company's current or reasonably foreseeable operating structure. See Note 1 of Notes to Condensed Consolidated Financial Statements, Recent Accounting Pronouncements. 14 -------------------------------------------------------------------------------- Table of Contents Highlights from Q2 2022 and Year to Date Q2 2022 The discussion of our results of operations and financial conditions that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the condensed consolidated financial statements included herein.
Summary of the second quarter of 2022:
•Consolidated sales increased 16.8% to
$318.5 millionfor the second quarter of 2022 compared to $272.6 millionlast year. Sales increased 16.9% on an average daily sales basis for the second quarter ended June 30, 2022. Average daily sales is calculated based upon the number of selling days in each period, with Canadian sales converted to U.S.dollars using the current year's average exchange rate. There were 64 selling days in the U.S.in each of the second quarters of 2022 and 2021, respectively, and, in Canada, there were 62 selling days in the second quarter of 2022 as compared to 63 selling days in the second quarter of 2021. •Consolidated gross margin declined to 35.5% for the second quarter of 2022 compared to 36.0% last year. •Consolidated operating income from continuing operations increased 23.5% to $30.5 millionfor the second quarter of 2022 compared to $24.7 millionlast year. •Net income per diluted share from continuing operations increased 7.3% to $0.59for the second quarter of 2022 compared to $0.55last year.
Summary of the year to date of Q2 2022:
•Consolidated sales increased 15.9% to
$607.1 millionfor the six months ended June 30, 2022compared to $523.7 millionlast year. Sales increased 15.9% on an average daily sales basis for the six months ended June 30, 2022. There were 129 selling days in the U.S.and 126 selling days in Canadafor the six months ended 2022 and 2021, respectively. •Consolidated gross margin increased to 36.4% for the six months ended June 30, 2022compared to 33.5% last year. •Consolidated operating income from continuing operations increased 91.7% to $60.0 millionfor the six months ended June 30, 2022compared to $31.3 millionlast year. •Net income per diluted share from continuing operations increased 65.7% to $1.16for the six months ended June 30, 2022compared to $.70last year. 15 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Three and six months ended
Key Performance Indicators* (in millions except for percentages and per share amounts): Three Months Ended June 30, Six Months Ended June 30, % % 2022 2021 Change 2022 2021 Change
Net revenue from continuing operations:
Consolidated net sales
$318.5 $272.616.8% $607.1 $523.7
Consolidated gross profit
$113.0 $98.015.3% $220.8 $175.3
Consolidated gross margin 35.5% 36.0% (0.5)% 36.4% 33.5%
Consolidated SD&A costs
$82.5 $73.312.6% $160.8 $144.0
Consolidated SD&A costs as a % of net sales 25.9% 26.9% (1.0)% 26.5% 27.5%
Operating income from continuing operations: Consolidated operating income
$30.5 $24.723.5% $60.0 $31.3
Consolidated operating margin from continuing operations 9.6% 9.1% 0.5% 9.9% 6.0% 3.9% Effective income tax rate 25.2% 14.2% 11.0% 25.1% 14.5% 10.6% Net income from continuing operations
$22.6 $21.17.1% $44.4 $26.6
Net income margin from continuing operations 7.1% 7.7% (0.6)% 7.3% 5.1%
Net income per diluted share from continuing operations
$0.59 $0.557.3% $1.16 $0.7065.7% Net income from discontinued operations $0.2 $0.9(77.8)% $0.410.6 (96.2)% Net income per diluted share from discontinued operations $0.01 $0.02(50.0)% 0.01 0.28 (96.4)%
*excluding discontinued operations (see note 4 of the notes to the condensed consolidated financial statements).
year ending at midnight on the Saturday closest to
presentation, fiscal years and quarters are described as if they ended on the last day
of the respective calendar month. The actual fiscal quarters ended on
13 weeks and the first six months of 2022 and 2021 included 26 weeks.
Average daily sales are calculated based on the number of selling days in each period,
with Canadian sales converted to US dollars using the current year’s average exchange rate
assess. There have been 64 days of sales in the
2021, respectively, and in
2022 compared to 63 days of sales in the second quarter of 2021. There were 129
sales days in the
and 2021, respectively. 16
Table of Contents The following discussion and management’s analysis will relate to current and discontinued operations.
The Company's net sales increased 16.8% during the quarter ended
June 30, 2022and 15.9% for the six months ended June 30, 2022as compared to the same periods in 2021. The Company's sales reflect a continuing strong customer demand environment and a leading performance by our managed sales group. U.S.sales increased 18.2% for the quarter and 16.4% for the first six months of 2022 compared to the same periods in 2021. Canadasales, in local currency, were up 2.4% and 11.8%, respectively. In USD, Canadasales declined 1.6% for the second quarter and increased 9.6% for the first six months of 2022. Consolidated average daily sales increased 16.9% during the quarter ended June 30, 2022and increased 15.9% for the six months ended June 30, 2022. There were 64 selling days in the U.S.in each of the second quarters of 2022 and 2021, respectively, and in Canada, there were 62 selling days in the second quarter of 2022 as compared to 63 selling days in the second quarter of 2021. There were 129 selling days in the U.S.and 126 selling days in Canadafor the six months ended 2022 and 2021, respectively.
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, and pricing pressures caused by inflated inventory levels. Gross margin declined by 50 basis points in the second quarter of 2022 compared to the second quarter of 2021 reflecting the impact of freight fuel surcharges, certain promotional activities, as well as the flow through of some higher cost inventory, which were partially offset by the continued increase in private brand sales mix. Gross margin increased 290 basis points for the six months ended
June 30, 2022, driven by the continued normalization of freight margins as compared to the transitory costs incurred in the first six months of 2021 related to the transition to a new less-than-truckload ("LTL") freight partner, partially offset by freight fuel surcharges incurred in the second quarter of 2022. Other contributing factors to our increased gross margin for the six months ended June 30, 2022include higher margin private brands capturing a larger share of our sales mix and a reduction in inventory adjustments as compared to a write-down of certain personal protection equipment products occurred in the first quarter last year.
SELLING, DISTRIBUTION AND ADMINISTRATION (“SD&A”) FEES
For the three and six month periods ended
June 30, 2022, SD&A costs as a percentage of sales decreased 100 basis points compared to the same periods in 2021. This improved SD&A leverage primarily reflects targeted SD&A discipline and fixed cost leverage resulting from the sales growth in the quarter. In the second quarter of 2022, the significant cost decreases include lower contract services and consulting and professional fees of approximately $0.2 million. Offsetting these decreased costs was approximately $4.2 millionrelated to increased salary and related costs, of which approximately $2.1 millionrelated to higher variable compensation directly related to the Company's financial performance, increased temporary help and recruitment costs of approximately $0.6 million, increased internet advertising spend of approximately $2.3 million, net catalog and trade show costs of approximately $0.1 millionrelated to our national trade show held in June 2022and increased insurance costs of approximately $0.2 million. For the six months ended June 30, 2022, the significant cost decreases include lower contract services of approximately $0.3 million. Offsetting these decreased costs was approximately $9.3 millionrelated to increased salary and related costs, of which approximately $4.9 millionrelated to higher variable compensation directly related to the Company's financial performance, increased internet advertising spend of approximately $3.5 million, net catalog and trade show costs of approximately $0.2 millionrelated to our national trade show held in June 2022and increased insurance costs of approximately $0.3 million.
For the three and six month periods ended
June 30, 2022, the Company's discontinued operations recorded net income of approximately $0.2 millionand $0.4 million, respectively, primarily related to the resolution of certain liabilities. The Company expects that total additional exit charges related to discontinued operations after this quarter may aggregate up to $0.5 million. 17 -------------------------------------------------------------------------------- Table of Contents In the second quarter ended June 30, 2021, the Company's discontinued operations recorded a de minimis amount of special charges and recorded approximately $1.8 millionin benefit related to the resolution of certain liabilities offset by operating expenses of approximately $0.4 millionand approximately $0.5 millionfor provision for income taxes. For the six months ended June 30, 2021, the Company's discontinued operations received approximately $15.0 millionin restitution receipts offset by approximately $3.0 millionof related professional fees, recorded approximately $0.1 millionin vendor settlements and recorded approximately $2.3 millionin benefit related to the resolution of certain liabilities. Discontinued operations also recorded approximately $0.4 millionof operating expenses and approximately $3.4 millionfor provision for income taxes. OPERATING MARGIN Operating margin for the three and six month periods ended June 30, 2022improved by 50 basis points and 390 basis points, respectively, compared to the same periods in 2021. As discussed above, the three and six month increase was driven by continued normalization of freight margins offset by freight fuel surcharges, certain promotional activities, flow through of some higher cost inventory, favorable product margins as our higher margin private brands captured a larger share of our sales mix, and SD&A leverage.
INTEREST AND OTHER EXPENSES, NET
Interest and other expense, net from continuing operations was
$0.3 millionin the second quarter of 2022 compared to $0.1 millionin the second quarter of 2021 and for the six months ended June 30, 2022and 2021, interest and other expense, net from continuing operations was $0.7 millionand $0.2 million, respectively, which primarily related to interest and foreign exchange losses.
For the three and six month periods ended
June 30, 2022, the Company reported income taxes in continuing operations of approximately $7.6 millionand $14.9 million, respectively, related to its U.S., Canadaand Indiaoperations including tax expense for certain U.S.states. In the three month period ended June 30, 2021, the Company reported income taxes in continuing operations of approximately $3.5 million. The second quarter 2021 tax rate was benefited by the reversal of valuation allowances against the Company's Canadian net operating losses and other deferred tax assets of approximately $3.4 million, or $0.09per diluted share, as well as excess benefits from stock option exercises of approximately $0.1 million. The Company reversed these valuation allowances as it believed it was more likely than not that the net operating losses and deferred tax assets of its Canadian subsidiary would be realized. In the six month period ended June 30, 2021, the Company reported income taxes in continuing operations of approximately $4.5 million. The six month 2021 tax rate was benefited by the above mentioned reversal of valuation allowances of approximately $3.4 million, or $0.09per diluted share, as well as excess benefits from stock option exercises of approximately $0.5 million.
Financial position, liquidity and capital resources
The following tables present selected liquidity data and historical cash flows (in millions): Selected liquidity data June 30, December 31, 2022 2021 $ Change Cash and cash equivalents
$ 23.5 $ 15.4 $ 8.1Accounts receivable, net $ 135.1 $ 106.8 $ 28.3Inventories $ 205.7 $ 172.8 $ 32.9Prepaid expenses and other current assets $ 7.8$ 6.4 $ 1.4Accounts payable $ 128.7$
Accrued expenses and other current liabilities
$ 48.8 $ 50.5 $ (1.7)Short-term debt $ 30.0$ 4.5 $ 25.5Operating lease liabilities $ 11.9 $ 10.5 $ 1.4Working capital $ 152.7 $ 121.5 $ 31.218
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