GLOBAL INDUSTRIAL Co - Quarter Report: 2001 March (Form 10-Q)

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

Net sales for the three months ended March 31, 2001 decreased 10% to $406 million compared to $449 million in the year-ago quarter. The decrease was attributable to lower North American computer related product sales and weakness in the market for PC’s. European sales increased 3% to $158 million (representing 39% of worldwide sales) compared to $154 million in the year-ago quarter. Movements in foreign exchange rates negatively impacted the European sales comparison by approximately $13 million in 2001. Excluding the movements in foreign exchange rates, European sales would have increased 11% over the prior year.

Gross profit was $66.1 million, or 16.3% of sales, compared to $68.2 million, or 15.2% of sales, in the year-ago quarter, a decrease of $2.1 million. The improvement in the gross profit percentage was due to the elimination of losses incurred in 2000 on liquidation of excess inventory in the Company’s PC assembly business and higher sales contribution from higher margin products.

Selling, general and administrative expenses for the quarter decreased by $6.7 million or 9.4% to $64.8 million compared to $71.5 million in the first quarter of 2000. This decrease resulted from a reduction in advertising spending and lower bad debt and telephone expenses. As a percentage of sales, selling, general and administrative expenses were 16.0% compared to 15.9% in the year-ago quarter.

The Company had income from operations for the current quarter of $1.3 million compared to an operating loss of $3.3 million in the year-ago quarter. The Company incurred an operating loss of $4.5 million in its North American operations in the current quarter compared to an operating loss of $9.5 million last year. Operating income in Europe was $5.8 million, slightly decreased from $6.2 million in the year-ago quarter.

Interest and other expense - net consists principally of interest expense. Interest expense increased in 2001 as a result of increased short-term borrowings.

Income taxes consist of foreign income taxes paid or payable reduced by an income tax benefit for U. S. operating loss carrybacks.

As a result of the above, net income for the quarter was $0.4 million, or $.01 per basic and diluted share, compared to a net loss of $2.6 million, or $.07 per basic and diluted share, in the first quarter of 2000.

Liquidity and Capital Resources

The Company’s cash balance totaled approximately $2.5 million at March 31, 2001. The Company’s working capital at March 31, 2001 was $159 million, increased from $107 million at the end of 2000, due principally to decreased inventories and repayments of outstanding short-term borrowings. For the three months ended March 31, 2001, the Company generated cash from operating activities of $19.3 million compared to $4.4 million used in the year ago period. As a result of the net loss incurred in the year ended December 31, 2000, the Company applied for and has received a refund of approximately $25 million from the Internal Revenue Service. The refund was used to reduce the Company’s short-term bank borrowings. Cash was used in investing activities in 2001 for the purchase of capital equipment, primarily investments in information technology. Cash was used in financing activities to repay $29 million of short-term borrowings from banks. For the three months ended March 31, 2001, cash and cash equivalents decreased by $12 million.

The Company maintains uncommitted credit lines with financial institutions totaling approximately $90 million in the United States and Europe, borrowings under which are available at the discretion of the lenders.

The Company has a Revolving Credit Agreement with its domestic banks to provide an uncommitted credit facility of $70 million, secured by all of the Company’s domestic accounts receivable. The agreement, originally expiring on January 31, 2001, was later extended to May 31, 2001. This facility replaces previously uncommitted, unsecured lines of credit the Company maintained with these banks, and is available for its domestic operations. The agreement provides, at the Company’s option, interest based on LIBOR or the prime rate and contains certain covenants and restrictions, including limitation on the payment of dividends and on business acquisitions. At March 31, 2001 there was $13.8 million outstanding under this agreement. Included in this agreement, the Company may have outstanding letters of credit equal to the amount of the total line less outstanding borrowings. At March 31, 2001 there were $2,000,000 of outstanding letters of credit.

The Company also has a £15,000,000 ($21,325,000 at the March 31, 2001 exchange rate) multi-currency credit facility with a financial institution in the United Kingdom. Drawings under the facility may be made by overdraft, trade acceptance or loan. The facility is secured by assets of certain of the Company’s United Kingdom subsidiaries and a guaranty from the Company. At March 31, 2001 there were £4.0 million ($5.7 million) of borrowings outstanding under this line.

The Company has accepted a proposal from a financial institution for a three-year committed domestic borrowing facility to replace the existing Revolving Credit Agreement, secured principally by the Company’s eligible accounts receivable and inventory balances. The Company expects to close this transaction during the second quarter, subject to due diligence and negotiation of a definitive agreement. In the event the Company does not close this transaction by May 31, 2001, the Company believes that it will be able to obtain an additional extension of its existing credit facility. The Company believes it has access to adequate funds for continued operations and growth through its available cash balances and funds generated by operations and secured lines of credit maintained with financial institutions but there can be no assurance that the Company will reach a satisfactory agreement for a new facility.


Forward Looking Statements

This Quarterly Report on Form 10-Q 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 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 referenced above. 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, access to funds, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and plans relating to products or services of the Company, assessments of materiality, predictions of future events and the effects of pending and possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “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 actual 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 2. 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 could contribute to or cause such differences include, but are not limited to, unanticipated developments in any one or more of the following areas: (i) the Company’s ability to manage rapid growth as a result of internal expansion and strategic acquisitions, (ii) the effect on the Company of volatility in the price of paper and periodic increases in postage rates, (iii) the operation of the Company’s management information systems, (iv) the general risks attendant to the conduct of business in foreign countries, including currency fluctuations associated with sales not denominated in United States dollars, (v) significant changes in the computer products retail industry, especially relating to the distribution and sale of such products, (vi) competition in the PC, notebook computer, computer related products, office products and industrial products markets from superstores, direct response (mail order) distributors, mass merchants, value added resellers, the Internet and other retailers, (vii) the potential for expanded imposition of state sales taxes, use taxes, or other taxes on direct marketing and e-commerce companies, (viii) the continuation of key vendor relationships including the ability to continue to receive vendor supported advertising, (ix) timely availability of existing and new products, (x) 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 the Company, (xi) risks associated with delivery of merchandise to customers by utilizing common delivery services such as UPS, including possible strikes, (xii) risks due to shifts in market demand and/or price erosion of owned inventory, (xiii) ability to consummate satisfactory loan agreements with the Company’s lenders, (xiv) borrowing costs, (xv) changes in taxes due to changes in the mix of U.S. and non-U.S. revenue, (xvi) pending or threatened litigation and investigations and (xvii) the availability of key personnel, as well as other risk factors which may be detailed from time to time in the Company’s Securities and Exchange Commission filings.

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

Item 3.

Quantitative and Qualitative Disclosure About Market Risk.

The Company is exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates as measured against the U.S. dollar and each other. Systemax may attempt to reduce these risks by utilizing certain derivative financial instruments.

The value of the U.S. dollar affects the Company’s financial results. Changes in exchange rates may positively or negatively affect Systemax’s sales (as expressed in U.S. dollars), gross margins, operating expenses and retained earnings. The Company may engage in hedging programs aimed at limiting in part the impact of certain currency fluctuations. Using primarily forward exchange and foreign currency option contracts, Systemax may from time to time hedge certain of its assets that may impact the Statement of Consolidated Income when remeasured according to generally accepted accounting principles. These hedging activities provide only limited protection against currency exchange risks. Factors that could impact the effectiveness of the Company’s hedging programs include accuracy of sales forecasts, volatility of the currency markets, availability of hedging instruments and the credit-worthiness of the parties which have entered into such contracts with the Company. All currency contracts that are entered into by Systemax are for the sole purpose of hedging an existing or anticipated currency exposure, not for speculative or trading purposes. In spite of Systemax’s hedging efforts to reduce the effect of changes in exchange rates against the U.S. dollar, the Company sales or costs could still be adversely affected by changes in those exchange rates.

As of March 31, 2001, the Company had no outstanding forward exchange contracts.