GLOBAL INDUSTRIAL Co - Annual Report: 2014 (Form 10-K)

Delaware		11-3262067
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Title of each class		Name of each exchange on which registered
Common Stock, par value $ .01 per share		New York Stock Exchange

Large Accelerated Filer ☐		Accelerated Filer ☒
Non-Accelerated Filer ☐		Smaller reporting company ☐

Part I
Item 1.	Business	4
	General	4
	Products	5
	Sales and Marketing	5
	Customer Service, Order Fulfillment and Support	6
	Suppliers	6
	Competition and Other Market Factors	7
	Employees	7
	Environmental Matters	8
	Financial Information About Foreign and Domestic Operations	8
	Available Information	8
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Mine Safety Disclosures	19
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	38
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	39
Item 11.	Executive Compensation	39
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	39
Item 13.	Certain Relationships and Related Transactions, and Director Independence	39
Item 14.	Principal Accounting Fees and Services	39
Part IV
Item 15.	Exhibits and Financial Statement Schedules	39
	Signatures	43

PART I

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 or estimates of revenue, income or loss, exit costs, cash flow needs and capital expenditures, statements regarding future operations, expansion or restructuring plans, including our exit from the managing of retail stores and the focusing of our North American Technology Group operations on B2B customers, financing needs, compliance with financial covenants in loan agreements, the timely implementation of technology systems discussed below, plans for reorganizing our European operations, including timely integration of our new shared services center in Hungary, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, including our recent acquisitions of SCC/Misco Solutions in the Netherlands and of Plant Equipment Group in the US, 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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Item 1.

Business.

General

Recent developments

 

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.

The Technology Products segment sells products categorized as Information and Communications Technology (“ICT”) and Consumer Electronics (“CE”).  These products include 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, the Company does offer a selection of products that are manufactured to our own design and marketed on a private label basis. Technology Products accounted for 84%, 86% and 89% of our net sales in 2014, 2013 and 2012, respectively.

 

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Our Industrial Products segment sells a wide array of industrial products and supplies categorized as Maintenance, Repair and Operations (“MRO”) which are marketed in North America and Mexico. Most of these products are manufactured by other companies; however, the Company does offer a selection of products that are manufactured to our own design and marketed on a private label basis. Industrial products accounted for 16%, 14%, and 11% of our net sales in 2014, 2013 and 2012, respectively.

See Note 12 to the Consolidated Financial Statements included in Item 15 of this Form 10-K for additional financial information about our business 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.

Products

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.

ICT products offered by our Technology Products segment include: computing products such as laptops, desktops and tablets; computer components and accessories; commercial and home networking; and software. CE products include TV and video; audio; cameras and surveillance; GPS; cell phones; video games and toys; home and electronics accessories.

MRO products offered by our Industrial Products segment include material handling; storage and shelving; workbench and 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.

 

Sales and Marketing

We market our products to both business customers (“B2B”) and to individual consumers (“B2C”). Our B2B customers include for-profit businesses, educational organizations and government entities. We have developed numerous proprietary customer and prospect databases.

To reach our B2C 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.  As discussed above, we will be exiting the B2C retail store market during the first half of 2015.  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 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.

 

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North America	Europe
http://biz.tigerdirect.com	www.misco.co.uk
www.tigerdirect.com	www.misco.de
www.tigerdirect.ca	www.misco.fr
www.tigerdirect.pr	www.misco.nl
www.infotelusa.com	www.misco.it
www.globalcomputer.com	www.misco.es
www.globalgoved.com	www.misco.se
www.globalindustrial.com	www.misco.at
www.globalindustrial.ca	www.misco.ch
www.globalindustrial.mx	www.misco.be
www.nexelwire.com	www.misco.ie
	www.inmac-wstore.com
	www.miscosolutions.nl

We are continually upgrading the capabilities and performance of these websites. Our internet sites feature online 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, online access to purchase products and we have the ability to create targeted promotions for our customers’ interests.

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 9 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™, 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 10.4 million in 2014, which was 28.8% less than in the prior year.  In 2014, we mailed approximately 7.1 million catalogs in North America, a 24.5% decrease from last year and approximately 3.3 million catalogs in Europe, or 36.5% fewer than mailed in 2013.

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 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.

Suppliers

We purchase substantially all of our products and components directly from manufacturers and large wholesale distributors. In 2014, two vendors accounted for 10% or more of our purchases – one vendor was 12.6%, the other vendor was 11.6%.  In 2013, one vendor accounted for 13.9% of our purchases and in 2012, no vendor accounted for 10% or more of our purchases. The loss of these vendors, or any other key vendors, could have a material adverse effect on us.

 

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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., European and Asian companies vying for market share.  There are few barriers to entry, with these products being sold through multiple channels of distribution, including direct marketers, computer resellers, mass merchants, over the Internet local and national retail computer stores, 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, resulting in our frequent discounting of product sales price as well as offering free or highly discounted freight.  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 in the United States, including eroding consumer demand, as well as ongoing difficulties in the various European countries where we operate, raise additional concerns as we believe the loss of consumer confidence in the Company’s markets together has resulted 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.

Employees

As the Company has a significant portion of its sales in the North America consumer business market, the fourth quarter has historically represented the greatest portion of annual sales.  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”.

 

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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 40.1%, 38.8%, and 37.8% of our net sales during 2014, 2013 and 2012, 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, excluding discontinued operations, in those two geographic markets (in millions):

 

		North America				Europe and Asia				Total
2014
Net sales		$	2,252.9			$	1,189.9			$	3,442.8
Operating (loss)		$	(2.8	)		$	(23.1	)		$	(25.9	)
Identifiable assets		$	580.0			$	314.9			$	894.9
2013
Net sales		$	2,256.9			$	1,095.4			$	3,352.3
Operating (loss)		$	(14.9	)		$	(5.7	)		$	(20.6	)
Identifiable assets		$	610.2			$	332.0			$	942.2
2012
Net sales		$	2,417.6			$	1,126.7			$	3,544.3
Operating (loss)		$	(63.6	)		$	23.7			$	(39.9	)
Identifiable assets		$	642.9			$	319.4			$	962.3

See Item 7, “Management’s Discussions and Analysis of Financial Condition and Results of Operations”, for further information with respect to our operations.

Available Information

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

 

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).

 

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Item 1A.

Risk Factors.

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

·

General economic conditions, such as decreased consumer confidence and spending and reductions in manufacturing capacity have and could continue to result in our failure to achieve our historical sales growth rates and profit levels.

Current economic conditions may cause the loss of consumer confidence in the Company’s domestic and international markets which we believe resulted in a decrease of spending in the categories of products we sell in 2012, 2013 and 2014. With conditions in the market for technology products remaining highly competitive, reductions in our selling prices, as we have experienced in recent years, have adversely affected our revenues and profits and could continue to do so in the future.  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, which occurred in 2012, 2013 and 2014.  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, which occurred in 2012, 2013 and  2014.  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 re-attain the levels of profitability we experienced prior to the recent market downturns.  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.

 

As more particularly describe below, on March 10, 2015 the Company announced that its Technology Products business segment would be exiting the retail store business in order to accelerate its business to business (''B2B'') operations.

 

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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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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 or interpreted differently 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.

Our United States subsidiaries collect and remit sales tax in states in which the subsidiaries have physical presence or in which we believe sufficient nexus exists which obligates us to collect sales tax.  Other states may, from time to time, claim that we have state-related activities constituting physical 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, regardless of physical presence.  Such efforts by states have increased recently, as states seek to raise revenues without increasing the income 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.

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.

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.

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, and are engaged in transitioning key features of our current information and operating systems to a new platform we have developed specifically for our needs; delays or operational problems in effectively implementing the transition could have a material adverse effect on our operations.  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.  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.

 

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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 are accelerating our focus on our B2B technology business and exiting the retail store consumer electronics business; the success of our North America Technology Products segment is dependent on our ability to grow our B2B business.

On March 10, 2015 the Company announced that its Technology Products business segment would be exiting the retail store business in order to accelerate its focus on its business to business (“B2B”) operations. This exit plan includes the closing of substantially all of its retail stores, closing a distribution center, and implementing a general workforce reduction to align available resources with a B2B focus as well as transitioning retail customers to online consumer sales.  The Company has engaged outside firms to assist with the retail store liquidation, as well as the workforce reduction, and anticipates that all of these actions will be completed by the end of the second quarter of 2015. The Company anticipates that one time exit charges will aggregate between $50 and $55 million (including approximately $4 million of severance expenses, and $39 million in lease exit costs) substantially all of which will require cash expenditures. The Company expects these costs to be paid out beginning in the first quarter of 2015 through the end of 2017. After completion of these actions the Company will see a substantial decline in retail revenues, however the Company expects to realize improved profitability of between $18 and $22 million.

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We have recently completed two acquisitions; our operations will be impacted by our ability to timely and efficiently transition and integrate those acquisitions with the rest of our business in the US and EMEA.

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The establishment and integration of our shared service center in Hungary exposes us to various technology, regulatory and economic risks.

We opened our new shared services center in Budapest, Hungary during the second quarter of 2013 to facilitate the continued growth of our European Technology Products business. This new facility provides administrative and back office services for the existing European business, will help drive operational efficiencies and better serve the Company's pan-European operating strategy, and will serve as the sales location for future business in Eastern Europe. As an incentive to locate in Hungary, the Hungarian Investment and Trade Agency (“HITA”) agreed to reimburse the Company for approximately 8% of payroll costs, up to a maximum of approximately $3.1 million, for the first 505 employees hired at the shared service center. The reimbursement is limited to the first twenty four months of employment for employees hired by December 2015 with all such reimbursements being completed by December 2017.  In return for this incentive, the Company has committed to maintaining certain employment levels through 2020.  Failure by the Company to maintain these employment levels will result in the repayment of a portion or all of the related reimbursements we may receive with interest.

Our efforts to operate our European business in a more centralized manner, rather than on an individual country by country basis, requires us to implement changes in our business processes, eliminate redundancies, relocate and/or hire new personnel, transition our information management systems, and integrate the new operation into our existing business seamlessly and without disruption to our operations, customers and vendors. However, changes in economic, regulatory or political conditions in Hungary, delays or operational problems in transitioning our information management systems, which we have experienced, a lower than expected impact of the facility on the Company’s European operations, costs and capital expenditures, the ability to timely hire and train new employees in Hungary, and delays, impediments or other problems associated with its establishment, could all have a material adverse effect on our European operations and 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.  Co-operative advertising and other sales incentives provided by our suppliers have decreased and could decrease further in the future thereby increasing our expenses and adversely affecting our results of operations and cash flows.

We purchase a substantial portion 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.

 

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Many product suppliers provide us with co-operative 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 co-operative advertising support and other incentives received from suppliers has declined and may decline further in the future, increasing 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 Company has made acquisitions in the past of other businesses and these acquisitions 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.  In the fourth quarter of 2014 and 2013, our North American Technology Products segment recorded impairment charges of intangible assets of $0.5 million and $2.9 million, respectively, and in 2013 impairment charges were also recorded related to goodwill.  Although the carrying amounts of intangible assets and goodwill are relatively small as of December 31, 2014, to the extent the Company makes acquisitions in the future there could again be material amounts of such assets recorded and subject to future impairment testing.

·

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, such as risks related to the differing legal, political and regulatory requirements and economic conditions of many jurisdictions.  Risks inherent to operating internationally include:

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Changes in a country’s economic or political conditions

·

Changes in foreign currency exchange rates

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Difficulties with staffing and managing international operations

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Unexpected changes in regulatory requirements

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Changes in transportation and shipping costs

·

Enforcement of intellectual property rights

 

The functional currencies of our businesses outside of the U.S. are the local currencies. Changes in exchange rates between these foreign currencies and the U.S. Dollar will affect the recorded levels of our assets, liabilities, net sales, cost of goods sold and operating margins and could result in exchange gains or losses. The primary currencies to which we have exposure are the European Union Euro, Canadian Dollar, British Pound Sterling, and the U.S. Dollar. Exchange rates between these currencies and the U.S. Dollar in recent years have fluctuated significantly and may do so in the future.  Our operating results and profitability may be affected by any volatility in currency exchange rates and our ability to manage effectively our currency transaction and translation risks. For example, we currently have operations located in numerous countries outside the United States, and non-U.S. sales accounted for approximately 40.1% of our revenue during 2014.  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 purchases to certain suppliers and we may not be able to obtain price protection on these items.  The elimination of purchase 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.

 

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·

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 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.  Although our current credit facility expires in October 2015, we currently have no reason to believe that we will not be able to renew or replace our facilities when they reach maturity.

·

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:

·

incur additional debt

·

create or permit liens on assets

·

make capital expenditures or investments

·

pay dividends

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.

·

Our European employees are represented by unions or workers’ councils or are employed subject to local laws that are less favorable to employers than the laws of the U.S.

As of December 31, 2014, we had approximately 1,800 employees located in Europe and Asia. We have workers’ councils representing the employees of our France, Germany, and Netherlands operations, and trade unions representing our employees in Italy and Sweden and elected employee representatives for our employees in the United Kingdom and Spain. Most of these European employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of our employees in Europe are represented by unions or workers’ councils that must approve certain changes in conditions of employment, including salaries and benefits and staff changes, and may impede efforts to restructure our workforce. Although we believe that we have a good working relationship with our employees, a strike, work stoppage or slowdown by our employees or significant dispute with our employees could result in a significant disruption of our operations or higher ongoing labor costs.

·

We will operate three remaining retail stores in North America and Puerto Rico, and will continue to operate our online consumer electronics business; we must effectively manage our cost structure, such as inventory needs, point of sales systems and personnel as we accelerate our B2B business and seek to convert retail store customers to our online websites.

The Company needs to effectively manage its cost structure including the additional inventory needs, retail point of sales IT systems, retail personnel and leased facilities. Future growth in our North America Technology Products segment will be dependent on our ability to expand our B2B operations, to attract customers to our online consumer electronics offerings and to 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. As stated previously, the Company announced that its Technology Products business segment would be exiting the retail store business in order to accelerate its focus on B2B operations. This exit plan includes the closing of substantially all of its retail stores, closing a distribution center, and implementing a general workforce reduction to align available resources solely with a B2B focus as well transitioning retail customers to online consumer sales.

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·

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.  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 2014 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, “hack into” our systems 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 conforms to appropriate Payment Card Industry (“PCI”) security standards where necessary for its various businesses, any breach involving the loss of credit card information may lead to PCI related fines in the millions of dollars.  In the event of a severe breach, credit card providers may prevent our 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, the efforts of “hackers” and cyber criminals or other developments will prevent the compromise of our customer transaction processing capabilities and our customers’ 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.

 

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·

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 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, states sales tax claims on internet/ecommerce transactions, 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”.

 

Following the previously reported independent investigation of Gilbert Fiorentino and Carl Fiorentino by our Audit Committee in 2011 (in response to a whistleblower report) for a variety of improper acts, the subsequent termination of their employment and the entering into by Gilbert Fiorentino of a settlement agreement with the Securities and Exchange Commission, on November 20, 2014 the United States Attorney’s Office (“USAO”) for the Southern District of Florida announced that Gilbert Fiorentino and Carl Fiorentino had been charged with mail fraud, wire fraud and money laundering in connection with a scheme to defraud TigerDirect and Systemax.  Specifically, the charges set forth a scheme to obtain kickbacks and other benefits, and to conceal this illicit income from the IRS, all while Gilbert Fiorentino and Carl Fiorentino were employed as senior executives at the Company’s North America Technology Products business.  On December 2, 2014, the United States Attorney’s Office announced that Gilbert Fiorentino and Carl Fiorentino had pled guilty to various charges, and on March 3, 2015, Gilbert Fiorentino and Carl Fiorentino were sentenced to sixty and eighty  months’ imprisonment, respectively.  Following completion of their sentences, each is to be  placed on supervised release for a period of thirty-six months.  The Court also set a restitution hearing for April 10, 2015 to determine the amount of restitution Gilbert Fiorentino and Carl Fiorentino are obligated to pay the Company.

 

As previously disclosed in a Form 8-K filed on January 30, 2015, on January 27, 2015, the senior financial officer of the Company's North American Technology Products segment testified before a federal grand jury in the Southern District of Florida pursuant to a subpoena.  The USAO has not advised the Company as to the nature or scope of the grand jury proceeding.  Further, the Company's Audit Committee, with the assistance of independent outside counsel, is cooperating with a current investigation by the USAO into allegations arising from the Fiorentino investigation regarding possible executive officer conflicts of interest and conduct related to internal controls and books and records. The Company's independent accountants and another adviser have also received a grand jury subpoena to appear and submit documents in that regard. The Company does not currently believe these matters have had or will have a material effect on the Company's previously reported consolidated financial statements. However, it is not possible at this time to predict when the current investigation will be completed; what subject(s) will be investigated; what actions, if any, may be taken by the government as a result of its investigation; or whether any of these matters will have a material adverse impact on the Company.

 

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·

Our profitability can be adversely affected by changes in our income tax exposure due to changes in tax rates or laws, changes in our effective tax rate due to changes in the mix of earnings among different countries, restrictions on utilization of tax benefits 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 has been in the past and could be in the future adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, restrictions on utilization of tax benefits, 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 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 audit in our various jurisdictions and a material assessment by a tax authority could affect our profitability. During 2014 the Company recorded non-cash valuation allowances against the deferred tax assets of its subsidiary in the U.K. of approximately $1.7 million.

·

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.

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.

·

Concentration of Ownership and Control Limits Stockholders Ability to Influence Corporate Actions

Richard Leeds, Robert Leeds, and Bruce Leeds (each are brothers and directors and executive officers of the Company), together with trusts for the benefit of certain members of their respective families and other entities controlled by them, control approximately 70% of the voting power of our outstanding common stock. Due to such holdings, the Leeds brothers together with these trusts and entities are able to determine the outcome of virtually all matters submitted to stockholders for approval, including the election of directors, the appointment of management, amendment of our articles of incorporation, significant corporate transactions (such as a merger or other sale of our company or our assets), the payments of dividends on our common stock and the entering into of extraordinary transactions.  Further, as a "controlled company" under NYSE rules,  the Company has elected to opt-out of certain New York Stock Exchange listing standards that, among other things, require listed companies to have a majority of independent directors on their board; the Company does however currently have an independent Audit, Compensation Committee and Corporate Governance and Nominating Committees.  

·

Risk of Thin Trading and Volatility of our Common Stock Could Impact Stockholder Value

Our common stock is currently listed on the NYSE and is thinly traded. Volatility of thinly traded stocks is typically higher than the volatility of more liquid stocks with higher trading volumes. The trading of relatively small quantities of shares of common stock by our stockholders may disproportionately influence the price of those shares in either direction. This may result in volatility in our stock price and could exacerbate the other volatility-inducing factors described below. The market price of our common stock could be subject to significant fluctuations as a result of being thinly traded.

Item 1B.

Unresolved Staff Comments.

None.

 

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As of December 31, 2014 we have five distribution centers in North America which aggregate approximately 1.9 million square feet, all of which are leased.  Our headquarters, administrative offices and call centers aggregate approximately 392,000 square feet, all of which are leased. 

The following table summarizes the geographic location of our North America stores at the end of 2014:

 

Location		Stores Open – 12/31/13		Store Openings/ (Store Closings)		Stores Open – 12/31/14
Delaware		1		-		1
Florida		17		(2)		15
Georgia		1		-		1
Illinois		4		-		4
North Carolina		1		-		1
Puerto Rico		2		-		2
Texas		4		-		4
Ontario, Canada		6		-		6
		36		(2)		34

 

All of our retail stores are leased.  The retail stores average 21,955 square feet.

In March 2015 the Company announced that its Technology Products business segment would be exiting the retail store business in order to accelerate its focus on its B2B operations as well as transitioning retail customers to online consumer sales.  This exit plan includes the closing of substantially all of its retail stores and management operations.

Europe

As of December 31, 2014, we have three distribution centers in Europe which aggregate approximately 190,000 square feet.  Two of these, aggregating approximately 117,000 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 289,000 square feet, of which 212,000 square feet are leased and 77,000 square feet are owned by the Company.

Asia

As of December 31, 2014, we leased administrative offices in Asia of approximately 14,000 square feet.

Please refer to Note 11 to the Consolidated Financial Statements for additional information about leased properties, including aggregate rental expense for these properties.

Item 3.

Legal Proceedings.

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.  In this regard, the State of New York has claimed that certain of the Company’s consumer electronics e-commerce sales are subject to sales tax in those states.  The Company intends to vigorously defend these matters and believes it has strong defenses.  The Company is also being audited by an entity representing 45 states seeking recovery of “unclaimed property”.  The Company is complying with the audit and is providing requested information.

 

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Item 4.

Mine Safety Disclosures.

Not applicable.

 

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PART II

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
2014
First Quarter		$	15.28			$	10.86
Second Quarter			18.25				14.12
Third Quarter			16.41				12.30
Fourth Quarter			16.21				12.28
2013
First Quarter		$	11.20			$	9.38
Second Quarter			9.97				8.50
Third Quarter			9.87				9.04
Fourth Quarter			11.66				9.12

On December 27, 2014, the last reported sale price of our common stock on the New York Stock Exchange was $13.58 per share.  As of December 27, 2014, we had 171 shareholders of record.

On November 29, 2012, the Company’s Board of Directors declared a special dividend of $0.25 per share payable on December 21, 2012 to shareholders of record on December 12, 2012.

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 5 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 2015 Annual Meeting of Shareholders and is incorporated by reference herein.

 

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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, excluding discontinued operations, for fiscal years 2014, 2013 and 2012 and the selected balance sheet data as of December 2014 and 2013 are derived from the audited consolidated financial statements which are included elsewhere in this report.  The selected balance sheet data as of December 2012, 2011 and 2010 and the selected statement of operations data for fiscal years 2011 and 2010 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)
		2014				2013				2012				2011				2010
Statement of Operations Data:
Net sales		$	3,442.8			$	3,352.3			$	3,544.3			$	3,680.6			$	3,589.0
Gross profit		$	493.2			$	482.9			$	485.8			$	527.6			$	488.0
Operating income (loss) from continuing operations		$	(25.9	)		$	(20.6	)		$	(39.9	)		$	80.8			$	68.8
Net income (loss) from continuing operations		$	(37.5	)		$	(43.8	)		$	(8.0	)		$	54.6			$	42.6
Per Share Amounts:
Net income (loss) — diluted		$	(1.01	)		$	(1.18	)		$	(0.22	)		$	1.47			$	1.13
Weighted average common shares — diluted			37.1				37.0				36.9				37.1				37.6
Cash dividends declared per common share		$	-			$	-			$	0.25			$	-			$	-
Balance Sheet Data:
Working capital		$	312.1			$	345.8			$	360.8			$	354.8			$	300.9
Total assets		$	894.9			$	942.2			$	962.3			$	889.7			$	894.1
Long-term debt, excluding current portion		$	0.9			$	2.9			$	5.4			$	7.1			$	7.4
Shareholders’ equity		$	359.6			$	406.2			$	446.3			$	454.3			$	409.3

 

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 primarily sells ICT and CE products.  These products are marketed in North America, Puerto Rico and Europe. Most of these products are manufactured by other companies; however, the Company does offer a selection of products that are manufactured for our own design and marketed on a private label basis.  Technology products accounted for 84%, 86% and 89% of our net sales in 2014, 2013 and 2012, respectively.

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On June 12, 2014, the Company acquired SCC Services B.V. (“SCC”) (renamed Misco Solutions B.V.), a supplier of business-to-business IT products and services with operations in the Netherlands.    The purchase price (after giving effect to the conversion of Euros to U.S. dollars) was approximately $7.3 million in cash (5.4 million Euro), $0.6 million (0.4 million Euro) of which was placed into an escrow account for one year to secure the sellers’ indemnification obligations under the purchase agreement. This acquisition expands the Company’s business in the Netherlands.

In 2013, the Company opened a shared services center in Budapest, Hungary to facilitate the continued growth of its European Technology Products business.  This new facility provides administrative and back office services for the existing European business, will help drive operational efficiencies and better serve the Company’s pan-European operating strategy, and will serve as the sales location for future business in Eastern Europe. As an incentive to locate in Hungary, the Hungarian Investment and Trade Agency (“HITA”) agreed to reimburse the Company for approximately 8% of payroll costs, up to a maximum of approximately $3.1 million, for the first 505 employees hired at the shared service center. The reimbursement is limited to the first twenty four months of employment for employees hired by December 2015 with all such reimbursements being completed by December 2017.  In return for this incentive, the Company has committed to maintaining certain employment levels through 2020.  Failure by the Company to maintain these employment levels will result in pro rata repayment of related reimbursements with interest.

In the fourth quarter of 2013, certain subsidiaries of the Company sold CompUSA intellectual property assets (primarily domain names, trademarks and certain historical customer information) and accordingly the Company discontinued using the CompUSA brand in Puerto Rico.  The Company wrote off approximately $2.9 million, pre-tax, related to the intangible assets of the CompUSA brand in Puerto Rico.

In the fourth quarter of 2012, the Company conducted an evaluation, in 2012, of its Technology Products multi-brand United States consumer strategy and the intangible assets used in that strategy and concluded that the Company’s future North American consumer business would be optimized by consolidating its United States consumer operations under TigerDirect, its leading and largest brand.  This consolidation resulted in a write off of the intangible assets and goodwill of CompUSA and Circuit City of approximately $35.3 million.

In the fourth quarter of 2012, the Company exited the PC manufacturing operations after conducting an evaluation of its operations and concluded that the Company’s North American technology results would be enhanced by exiting the computer manufacturing business.  The exit resulted in a write down of the carrying cost of the Company’s computer manufacturing facilities, related equipment and inventory of approximately $4.6 million.  An additional asset write down of the Company’s computer manufacturing facilities of approximately $1.2 million was made during 2013.   The computer manufacturing facility was sold in the second quarter of 2014.

On January 30, 2015, the Company announced that its Industrial Products Group had completed its previously announced acquisition of the Plant Equipment Group, a business-to-business direct marketer of maintenance, repair and operations (“MRO”) products, from TAKKT America for $25.9 million in cash; post-closing working capital adjustments were de minimis. Integration of this acquired business is in process and proceeding timely and efficiently. This acquisition expands the Company’s regional footprint and its market share.

We exited the Software Solutions segment in June 2009.  One customer remained being serviced by the Company until the second quarter of 2012. The termination of this customer has resulted in all current and prior period results for this business segment to be classified as discontinued operations.  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 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 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.

 

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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 channel sales, consumer channel sales and period to period constant currency comparisons.  In the North American Technology Products business, we consider business to business (“B2B”) channel sales to be sales made direct to other businesses and government/public sector entities through managed business relationships, outbound call centers and extranets.  Sales in the Industrial Products segment, European Technology Products and Corporate and other are considered to be B2B sales.  Consumer (“B2C”) 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, except in our Industrial Products segment where title and risk pass at time of shipment. 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, 2014 would impact net income by approximately $0.6 million.

 

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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 certain locations 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, 2014 would impact net income by approximately $0.8 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 policy in the past three years and we do not anticipate making any material changes to this policy in the future.   We recorded goodwill and intangible assets related to the June 2014 SCC acquisition of approximately $2.7 million and in the fourth quarter of 2014, we recorded intangible asset impairment charges related to our retail operations in the United States and Canada (see below).  We have approximately $7.4 million in goodwill and intangible assets at December 31, 2014.  We do not believe it is reasonably likely that the estimates or assumptions used to determine whether any of our remaining 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.   As a result of negative cash flows in its operations in the United States and Canada and a forecast for continued cash use, the Company conducted an evaluation of the intangible assets of its Technology Products segment in North America and concluded that intangible assets were impaired and recorded an impairment charge of $0.5 million, pre-tax, in the fourth quarter of 2014.   In 2013 we sold CompUSA intellectual property assets and accordingly the Company discontinued using the CompUSA brand in Puerto Rico and rebranded its operations there as TigerDirect.  The Company wrote off the remaining carrying value of approximately $2.9 million, pre-tax, related to the intangible assets of the CompUSA brand in Puerto Rico.

 

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Long-lived Assets. Management exercises judgment in evaluating our long-lived assets for impairment and in their depreciation and amortization methods and lives including evaluating undiscounted cash flows.		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.   In 2014 the Company conducted an evaluation of the long-lived assets in its North America Technology Products segment and concluded that an impairment charge of $9.5 million, pre-tax, be recorded.   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.   A change of 10% in the carrying value of our long lived assets would impact net income by approximately $4.1 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, 2014 would impact net income by approximately $1.4 million.

 

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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/or 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.   During the fourth quarter of 2014 the Company recorded a non-cash valuation allowance against its deferred assets in the U.K. of approximately $1.7 million.   A change of 5% in our effective tax rate at December 31, 2014, excluding the non-cash valuation allowance, would impact net income by approximately $0.2 million.
Special 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 in 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, 2014 the Company recorded special charges of $24.4 million for reorganization, restructuring and asset impairment and other charges.

 

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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 April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.  This ASU provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation.  This new guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within those years. Beginning in 2015, the Company will apply this new guidance, as applicable.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”.  This ASU provides new guidance related to how an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  In addition, this ASU specifies new accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related to revenue and cash flows from contracts with customers.  This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and can be adopted either retrospectively to each reporting period presented or as a cumulative effect adjustment as of the date of the adoption, with early application not permitted.  The Company is currently determining its implementation approach and assessing the impact, if any, on the condensed consolidated financial statements.

Highlights from 2014

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.

·

Consolidated sales increased 2.7% to $3.4 billion; on a constant currency basis and excluding SCC Services, sales increased 0.6%.

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B2B channel sales increased 8.9% to $2.6 billion; on a constant currency basis and excluding SCC Services, sales increased 5.6%.

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B2C channel sales declined 11.7% to $0.9 billion; on a constant currency basis, sales declined 11.0%.

·

Movements in exchange rates positively impacted European sales by approximately $24.0 million and negatively impacted Canadian sales by approximately $13.8 million.

·

$11.7 million in estimated workforce reductions related to the restructuring of our European operations were recorded.

·

Impairment charges related to long-lived and other intangible assets of $10.0 million, pre-tax, were incurred.

 

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Results of Operations

Key Performance Indicators* (in millions):

		Years Ended December 31,
		2014				2013				% Change				2013				2012				% Change
Net sales by segment:
Technology Products		$	2,880.9			$	2,873.3				0.3	%		$	2,873.3			$	3,137.6				(8.4	)%
Industrial Products			556.0				473.8				17.3	%			473.8				401.9				17.9	%
Corporate and other			5.9				5.2				13.5	%			5.2				4.8				8.3	%
Consolidated net sales		$	3,442.8			$	3,352.3				2.7	%		$	3,352.3			$	3,544.3				(5.4	)%
Net sales by channel:
Technology Products - EMEA		$	1,189.9			$	1,095.4				8.6	%		$	1,095.4			$	1,126.7				(2.8	)%
Technology Products – NA (B2B)			800.0				769.3				4.0	%			769.3				797.3				(3.5	)%
Industrial Products			556.0				473.8				17.3	%			473.8				401.9				17.9	%
Corporate and other			5.9				5.2				13.5	%			5.2				4.8				8.3	%
Total B2B		$	2,551.8			$	2,343.7				8.9	%		$	2,343.7			$	2,330.7				0.6	%
Technology Products – NA (Consumer)			891.0				1,008.6				(11.7	)%			1,008.6				1,213.6				(16.9	)%
Consolidated net sales		$	3,442.8			$	3,352.3				2.7	%		$	3,352.3			$	3,544.3				(5.4	)%
Consolidated gross margin			14.3	%			14.4	%			(0.1	)%			14.4	%			13.7	%			0.7	%
Consolidated SG&A costs**		$	519.1			$	503.5				3.1	%		$	503.5			$	525.7				(4.2	)%
Consolidated SG&A costs** as % of sales			15.1	%			15.0	%			0.1	%			15.0	%			14.8	%			0.2	%
Operating (loss) from continuing operations by segment:**
Technology Products		$	(51.3	)		$	(40.6	)			26.4	%		$	(40.6	)		$	(46.9	)			(13.4	)%
Industrial Products			41.0				40.0				2.5	%			40.0				29.9				33.8	%
Corporate and other			(15.6	)			(20.0	)			(22.0	)%			(20.0	)			(22.9	)			(12.7	)%
Consolidated operating (loss)		$	(25.9	)		$	(20.6	)			(25.7	)%		$	(20.6	)		$	(39.9	)			(48.4	)%
Operating margin from continuing operations by segment:**
Technology Products			(1.8	)%			(1.4	)%			(0.4	)%			(1.4	)%			(1.5	)%			0.1	%
Industrial Products			7.4	%			8.4	%			(1.0	)%			8.4	%			7.4	%			1.0	%
Consolidated operating margin from continuing operations			(0.8	)%			(0.6	)%			(0.2	)%			(0.6	)%			(1.1	)%			0.5	%
Effective income tax rate			15.0	%			100.9	%			(85.9	)%			100.9	%			80.8	%			20.1	%
Net (loss) from continuing operations		$	(37.5	)		$	(43.8	)			(14.4	)%		$	(43.8	)		$	(8.0	)			447.5	%
Net margin from continuing operations			(1.1	)%			(1.3	)%			0.2	%			(1.3	)%			(0.2	)%			(1.1	)%

*excludes discontinued operations

** includes special charges, net (See Note 8 of Notes to Consolidated Financial Statements).

NET SALES

SEGMENTS:

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The Industrial Products net sales increase in 2014 is attributable to expanding our product assortment in new and core product categories, the continued expansion of our private label and brand name selections as well as investment in hiring sales personnel and subject matter experts, who bring significant technical knowledge in specific categories, thus enhancing our sales efforts with information important to our customers. On a constant currency basis, sales increased 17.7%.

The Technology Products net sales decrease in 2013 compared to 2012 was attributable to general declines in most product categories within North America, with the largest decline being in the CE product category.  The Company believes major drivers of the decline in North America net sales was attributable to web, television and retail store sales declines, resulting from sales volume and selling price erosion in certain core product categories such as personal computers and televisions. The Company believes the decline in sales and price pressures for consumer electronics are attributable to a variety of well publicized industry and market trends, including consumer preferences for new generation tablets, which erode laptop and desktop PC sales, the market share for tablets held by a major manufacturer, which does not sell to the Company for U.S. markets, the consolidation of prior generations of separate devices and functions into a single integrated device (such as GPS and cameras being integrated with smart phones), the ongoing movement of traditional brick and mortar store sales to online/ecommerce vendors, and the increasing influence of a dominant company in the online/commerce marketplace. Additionally, in the fourth quarter of 2013, the Company made the decision to avoid lowering selling prices to match aggressive online retailers.  Strong computer and consumer electronic sales within European markets were more than offset by weak sales of computer accessories, software and computer components in Europe and the declines in North America.  On a constant currency basis, sales declined 8.6% or $270.8 million.  The Industrial Products segment net sales increase in 2013 compared to 2012 was attributable to the new product category offerings on the Company's websites, solid results from our core offerings, as well as the expansion of our private label and brand name selections. On a constant currency basis, sales increased 18.0% or $72.5 million.

CHANNEL SALES:

The Company experienced growth in worldwide B2B channel sales for the year ended December 31, 2014 compared to 2013.

The North American Technology Products B2B sales increase is attributable to an increase in the sale of computer components, commercial desktops, laptops and servers during the year.  On a constant currency basis, North American Technology Products business to business net sales grew 4.7%. The North American Technology Products B2B business has experienced strong growth over the last several years, but there can be no assurance that this business will continue to achieve its historical growth rates in future periods.

The Industrial Products net sales increase is attributable to broad based growth across both new and core product categories and the continued expansion of our private label and brand name selections and the hiring of additional sales personnel and subject matter experts.  On a constant currency basis, Industrial Products net sales increased 17.7%.

The increase in consolidated B2B channel sales in 2013 compared to 2012 was driven by the Industrial Products segment’s growth in new product categories on the Company’s website and a solid performance in core offerings.  The Technology Products segment’s European operations showed modest improvement in B2B channel sales compared to 2013 which was offset by a decline in its North American B2B sales.  On a constant currency basis, worldwide B2B channel sales grew 2.0% in 2013.

 

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The North American Technology Products consumer sales decline resulted from the closing of retail stores in 2013 that contributed approximately $36.2 million in sales for the year 2013, and from continued softness in television shopping, internet and retail sales.  Consumer channel sales declines were primarily the result of declines in sales of personal computers and televisions driven by both volume and selling price erosion.  On a constant currency basis, North American Technology Products consumer sales declined 11.0%.

The decline in consolidated B2C channel sales in 2013 compared to 2012 resulted from continued weakness in our internet, television and retail stores sales in North America. B2C channel sales declines, similar to many in the industry, were the result of sales volume and selling price erosion in certain core product categories.  The Company believes that the decline in sales and price pressures for consumer electronics is attributable to a variety of well publicized industry and market trends.  The strategic decision not to chase promotional product pricing in the fourth quarter of 2013 also contributed to the sales declines. On a constant currency basis, worldwide B2C channel sales declined 16.7%.

GROSS MARGIN

The consolidated gross margin increase in 2013 is due to Industrial Products sales contributing a larger percentage to gross profit dollars as compared to 2013, improved freight margins, and the benefit from the utilization of the New Jersey distribution center. Technology Products gross margin increase is due to improved freight performance in North America and maintaining product pricing, even though net sales declined.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”), EXCLUDING SPECIAL CHARGES

SG&A expense increases for the year ended December 31, 2014 are primarily attributable to our Industrial and European Technology Products B2B business, partially offset by expense decreases in North America Technology Products compared to the year ended December 31, 2013.  Significant expense increases related to the Industrial Products segment include increased salary and related costs of approximately $5.6 million due to increased sales and product management headcount, and increased internet advertising spending of approximately $8.5 million compared to 2013.  The Industrial Products segment is expected to increase its advertising spend, in particular internet advertising, as it continues to expand its online product offerings and increase its ecommerce presence. In Europe, the Technology Products segment also had increased SG&A expenses due primarily to a continued overlap in costs as we transition functions from individual country operations to our European shared services center. The significant expense increases include approximately $4.4 million of increased salary and related costs of additional sales personnel and additional headcount for the shared services center, partially offset by $0.6 million in reimbursements for shared service center salaries under the incentive agreement with the Hungarian business development agencies, recorded in the second quarter of 2014.  Additionally, in Europe, for the year ended December 31, 2014 we had less vendor supported advertising revenue of approximately $3.7 million, increased computer and telephone maintenance of approximately $1.1 million and insurance, rent and related expense increases of approximately $2.6 million, offset by reduced internet advertising spend of approximately $1.9 million.  The Technology Products segment in North America had reduced SG&A expenses due to the closing of underperforming retail stores in the second quarter of 2013 and $2.3 million from the favorable resolution of the review of a professional service provider's billings recorded in the third quarter of 2014.  Significant expense decreases for the North America Technology include reduced salary and related costs of approximately $7.8 million, reduced rent and related costs of approximately $2.7 million, and $2.3 million from the favorable resolution of a the review of a professional service provider's billings recorded in the third quarter of 2014.

 

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SG&A expense increases for the year ended December 31, 2013 are primarily attributable to our Industrial and European Technology Products BTB business, partially offset by expense decreases in North America Technology Products compared to the year ended December 31, 2012.  Significant expense increases related to the Industrial Products segment include increased salary and related costs of approximately $4.4 million, and increased internet advertising spending of approximately $10.5 million compared to 2012.  In Europe, the Technology Products segment also had increased SG&A expenses due to a temporary overlap in costs as we transitioned functions from individual country operations to our new European shared services center. The significant expense increase for Europe includes approximately $12.7 million of salary and related costs due to additional sales personnel and additional headcount for the shared services center, $1.6 million of rent and related expenses, and $0.9 million net advertising costs offset by a decrease in internet advertising expense of $0.6 million compared to 2012.  The Technology Products segment in North America had reduced SG&A expenses compared to 2012 due to the closing of underperforming retail stores.  Significant expense decreases include reduced salary and related costs of approximately $11.1 million, reduced rent and related costs of $1.4 million, decreased internet and net advertising spending of approximately $5.4 million, a decrease of approximately $2.3 million in expenses related to sales tax and other regulatory audits which were incurred in 2012, and decreased credit card fees of $3.6 million. Corporate & Other expenses segment recorded a benefit of approximately $1.3 million in lower personnel costs and a decrease in professional fees of approximately $0.7 million.

SPECIAL CHARGES, NET

The Company’s Technology Products segment incurred special charges of approximately $24.3 million in special charges. These charges, estimates of which were previously disclosed, included approximately $11.7 million in estimated workforce reductions related to the restructuring of our European operations, $0.5 million in continued recruitment costs to staff the European shared services center, $0.3 million in other costs related to the retail stores that were closed in 2013, $0.2 million in charges related to the final sale of the facility which had been used in connection with our previously exited PC manufacturing business, $0.1 million for changes in the estimate of lease valuation accruals and the buyout of the two retail store leases that were exited in 2013 prior to lease expiration (other exit costs) and $1.5 million for additional legal and professional fees related to the previously disclosed investigation and settlement with former officers and employees.   In addition, as a result of negative cash flows in its operations in the United States and Canada in 2014 and a forecast for continued cash use, the Company conducted an evaluation of the long-lived and intangible assets in those operations and concluded that those assets were impaired. Consequently an impairment charge of approximately $10.0 million, pre-tax, was recorded in the fourth quarter of 2014.

The Company’s Technology Products segment, in both North America and Europe, incurred special charges of approximately $22.4 million during 2013.  These charges in North America include: (i) approximately $5.5 million for lease termination costs (calculated using the net present value of contractual gross lease payments net of estimated sublease rental income, or in the case of negotiated settlements, the buyout amount) and (ii) $2.0 million for fixed asset write offs related to the closing of underperforming retail stores, (iii) $2.9 million of one-time impairment charges related to intangible assets of the CompUSA brand in Puerto Rico, (iv) $2.2 million of workforce reduction charges for senior management changes in the North American operations, (v) $1.0 million for reserve adjustments related to the facility closing and exit from the PC manufacturing business and (vi) $0.6 million of additional legal and professional fees related to the previously disclosed completed investigation and settlement with a former officer and director.  The charges related to Europe include: (i) $5.9 million in workforce reductions and other exit costs related to the European shared services center implementation and other European workforce reductions, (ii) $1.8 million related to start up costs of the European shared services center and (iii) $0.5 million in continuing recruitment costs of the European shared services center.

The Company’s Industrial Products segment incurred special charges, in 2013, of approximately $0.1 million for personnel costs and benefited from an adjustment to lease termination costs of approximately $0.3 million related to the planned closing and relocation of one of our smaller distribution centers to a new, significantly larger distribution and call center in the second quarter of 2012. In Technology Products, approximately $11.9 million of these charges incurred were non-cash.

 

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OPERATING MARGIN

The slight improvement in Technology Products operating margin for 2013 compared to 2012 was due to improvement in freight performance and lower SG&A in North America, offset by increased expenses in Europe due to duplication of local functions and other redundancies until completion of the transition of the European shared services center.

The decrease in operating margin in Industrial Products segment for 2014 reflect the increased internet advertising spending  compared to 2013 to drive traffic, hiring of subject matter experts to bring additional value to our customers and a slight decline in gross product margin driven by product mix as we have begun stocking more domestically sourced products.

The increase in the Industrial Products operating margin for 2013 compared to 2012 is due to improvement in freight performance, expansion of private label and brand name selections, increased utilization of the New Jersey distribution center and approximately $0.3 million benefit from an adjustment to lease termination costs offset by $0.1 million of personnel costs related to the planned closing and relocation of one of our smaller distribution centers to a new, significantly larger, distribution and call center in the second quarter of 2012.

 

Operating margin for our North American businesses (which is comprised of part of our Technology Segment and our entire Industrial Products and Corporate and Other Segments) improved to an operating loss of $2.8 million in 2014 compared to an operating loss of $14.9 million in 2013. This improvement is primarily attributable to increased sales and gross profit from our Industrial Products segment of approximately $82.2 million and $20.5 million, respectively; lower selling, general and administrative expenses of approximately $2.8 million, within our North American Technology Products business, which includes $2.3 million from favorable resolution of the review of a professional service provider's billings,  and reduced internet advertising spending and reduced salary and related expenses.  The overall loss in North America was driven by weakness in the Technology Products business.  Within this business, the major drivers of the weakness were web and retail store sales declines, resulting from sales volume and selling price erosion in certain core product categories such as personal computers and televisions. The Company believes the decline in sales and price pressures for consumer electronics are attributable to a variety of well publicized industry and market trends.  The Company expects these trends to continue for the foreseeable future and after an extensive review and planning process, the Company is taking actions that will include the exit of substantially all retail store operations; closing a distribution center and implementing a general workforce reduction to realign available resource solely with our B2B focus.

 

Operating margin for our European business was a loss of $23.1 million in 2014 compared to a loss of $5.7 million in 2013. The increased net sales of $94.5 million, generated increased gross profit of $2.7 million, but were offset by $15.9 million of increased selling, general and administrative expenses and increased special charges of $4.2 million related to the now completed transition to a pan European operating model.  The expense increase for Europe includes approximately $4.4 million of salary and related costs due to additional headcount for the shared services center.

The decrease in Corporate and other expenses primarily resulted from lower overhead expenses incurred in 2014 as compared to 2013.  The decrease in Corporate and other expenses for 2013 compared to 2012 primarily resulted from lower personnel related costs and lower professional fees incurred in 2013 as compared to 2012.

The discontinued operations of Software Solutions incurred a loss of approximately $0.0 million for the years ended December 2014 and 2013 and $0.2 million, net of tax, for year ended December 2012.

Consolidated operating margin was impacted by special charges, net of $24.4 million, $22.2 million and $46.3 million 2014, 2013 and 2012, respectively.

INTEREST EXPENSE

Interest expense was $1.3 million, $1.5 million, and $1.7 million for 2014, 2013 and 2012, respectively. The interest expense decrease for the years 2014 compared to 2013 and 2013 compared to 2012 is attributable to decreasing balances owed on the Recovery Zone Bond facility and outstanding capital lease obligations.

 

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INCOME TAXES

The Company’s effective tax rate was 15.0% in 2014 as compared to a 100.9% in 2013.  The effective income tax rate in 2014 was primarily due to tax expense in certain states in the U.S., foreign locations with taxable income and the establishment of a valuation allowance for the deferred tax assets of a U.K. subsidiary of approximately $1.7 million.

Seasonality

The Company’s fourth quarter has historically represented a greater portion of annual sales.  Net sales have historically been modestly weaker during the second and third quarters as a result of lower business activity during those months. With the exiting of the retail store business and the closing of substantially all retail stores in 2015, the Company expects to experience less seasonality of its business in future periods. The following table sets forth the net sales seasonality, excluding discontinued operations, for each of the quarters since January 1, 2012 (amounts in millions).

		Quarter Ended
		March 31				June 30				September 30				December 31
2014
Net sales		$	873.4			$	831.1			$	825.4			$	912.9
Percentage of year’s net sales			25.4	%			24.1	%			24.0	%			26.5	%
2013
Net sales		$	880.6			$	805.7			$	791.8			$	874.2
Percentage of year’s net sales			26.3	%			24.0	%			23.6	%			26.1	%
2012
Net sales		$	913.1			$	849.1			$	847.0			$	935.1
Percentage of year’s net sales			25.8	%			24.0	%			23.9	%			26.3	%

Financial Condition, Liquidity and Capital Resources

Selected liquidity data (in millions):

		December 31,
		2014				2013				$ Change
Cash		$	165.0			$	181.4			$	(16.4	)
Accounts receivable, net		$	355.5			$	333.3			$	22.2
Inventories		$	289.9			$	321.8			$	(31.9	)
Assets available for sale		$	-			$	1.1			$	(1.1	)
Prepaid expenses and other current assets		$	15.9			$	16.4			$	(0.5	)
Accounts payable		$	420.2			$	418.8			$	1.4
Accrued expenses and other current liabilities		$	93.0			$	89.2			$	3.8
Current portion of long term debt		$	2.7			$	2.5			$	0.2
Working capital		$	312.1			$	345.8			$	(33.7	)

 

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Our primary liquidity needs are to support working capital requirements in our business, including working capital for the closing of the previously announced purchase of the Plant Equipment Group in January 2015, integrating Plant Equipment Group with our business, exiting of the consumer and retail business and related workforce reductions in 2015,  integrating SCC Services with our business (see Note 2 to the Consolidated Financial Statements), reorganizing our European operations including funding cash requirements of certain European businesses, European workforce reduction costs and transition costs, implementing new inventory and warehouse functions in Europe, funding capital expenditures, continuing investment in upgrading and expanding our technological capabilities and information technology infrastructure (including upgrading and transitioning of SCC Services and Plant Equipment Group’s technology infrastructure), repaying outstanding debt, and funding acquisitions. We rely principally upon operating cash flows to meet these needs. We believe that cash flow available from these sources and our availability under credit facilities will be sufficient to fund our working capital and other cash requirements for 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 decreased due to cash used for the SCC Services acquisition and the net loss incurred in 2014.  Accounts receivable days outstanding were at 37.5 in 2014 up from 32.6 in 2013. This trend reflects slower receivables collection in the Europe as we transition collections to the Hungarian shared services center and a higher proportion of our sales coming from B2B channels, where most customers do business with us on open credit account, and a lower proportion of our sales being B2C channels, where most customers purchase from us using credit cards.  Inventory turns were 9.5 in 2014 compared to 9.4 in 2013 and accounts payable days outstanding were 51.2 in 2014 compared to 45.9 in 2013.  We expect that future accounts receivable, inventory and accounts payable balances will fluctuate with net sales and the mix of our net sales between consumer and business customers.

Net cash used in financing activities was $2.3 million in 2014, $2.6 million in 2013 and $11.1 million in 2012.  In 2014, we repaid approximately $2.6 million of capital lease obligations and net proceeds and excess tax benefit from stock option exercises provided $0.3 million.  In 2013, we repaid approximately $2.8 million of capital lease obligations. Net proceeds and excess tax benefits from stock option exercises provided $0.2 million.  In 2012, we paid a special dividend of $9.1 million and repaid approximately $2.8 million in capital lease obligations.  Net proceeds and excess tax benefits from stock option exercises provided $0.8 million.

 

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The Company maintains a $125.0 million (which may be increased to $200.0 million, subject to certain conditions) secured revolving credit agreement with a group of financial institutions which provides for borrowings in the United States. The credit facility has a five year term and expires in October 26, 2015.  The Company expects that it will renew this facility on or before that date in 2015.  Borrowings are secured by substantially all of the Company’s assets, including accounts receivable, inventory and certain other assets, subject to limited exceptions. 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 up to 40% of qualified inventories. The interest rate under this facility is computed at applicable market rates based on LIBOR or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability. As of December 31, 2014, eligible collateral under this agreement was $121.9 million, total availability was $116.4 million, total outstanding letters of credit were $5.5 million and there were no outstanding advances. The Company was in compliance with all of the covenants under this facility as of December 31, 2014.

The Company (through a subsidiary) has an outstanding Bond financing 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.  The proceeds from the Bonds were used to finance capital equipment purchased for the Company’s distribution facility located in Jefferson, Georgia.  The purchase and installation of the equipment for the facility was completed by December 31, 2011.  Pursuant to the transaction, the Company transferred to the Authority, for consideration consisting of the Bonds proceeds, ownership of the equipment and the Authority leased 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.  As a result of the capital lease treatment for this transaction, the leased equipment is included in property, plant and equipment in the Company’s consolidated balance sheet.  As of December 31, 2014, the Company had $2.2 million outstanding against this financing facility.

Our earnings and cash flows are seasonal in nature, with the fourth quarter of the fiscal year historically 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.

The expenses, capital expenditures and exit activities described above will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources. In 2015 we anticipate capital expenditures of approximately $15.2 million, though 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.

 

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We maintain our cash and cash equivalents primarily in non-interest bearing cash accounts that partially offset banking fees as the earnings credit for doing so exceeds current money market yields. As of December 31, 2014, 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. At December 31, 2014 cash balances held in foreign subsidiaries totaled approximately $64.4 million. These balances are held in local country banks and are not readily available to the U.S. parent company on a tax efficient basis. The Company would need to accrue and pay income taxes on any cash repatriated to the U.S. parent company. The Company has made the decision to indefinitely reinvest earnings in its foreign tax jurisdictions. The Company had in excess of $220 million of liquidity (cash and undrawn line of credit) in the U.S. as of December 31, 2014, which is sufficient to fund its U.S. operations and capital needs, including any dividend payments, for the foreseeable future.

We are obligated under non-cancelable operating leases for the rental of most of our facilities and certain of our equipment which expires at various dates through 2032.  We have sublease agreements for unused space we lease in the United States.  In the event the sub lessee is unable to fulfill its obligations, we would be responsible for rents due under the leases.

As a result of the Technology Products business segment exiting the consumer electronics business in 2015 the Company will be seeking to terminate certain of its retail store operating leases early or to sublet them where possible.

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, 2014 (in millions):

		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Contractual Obligations:
Capital lease obligations		$	3.7				2.8				0.9				-				-
Non-cancelable operating leases, net of subleases			204.0				27.8				72.4				45.2				58.6
Purchase & other obligations			66.3				49.9				8.2				8.2				-
Total contractual obligations		$	274.0				80.5				81.5				53.4				58.6

Our purchase and other obligations consist primarily of product purchase commitments, certain employment agreements and service agreements.

In addition to the contractual obligations noted above, we had $5.5 million of standby letters of credit outstanding as of December 2014.

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, 2014, the Company had no material 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 an entity owned by Richard Leeds, Bruce Leeds, and Robert Leeds, senior executives, Directors and controlling shareholders of the Company.

 

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(a)	1.	Consolidated Financial Statements of Systemax Inc.	Reference
		Reports of Ernst & Young LLP Independent Registered Public Accounting Firm	44
		Consolidated Balance Sheets as of December 31, 2014 and 2013	46
		Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012	47
		Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012	48
		Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012	49
		Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2014, 2013 and 2012	50
		Notes to Consolidated Financial Statements	51
	2.	Financial Statement Schedules:
		The following financial statement schedule is filed as part of this report and should be read together with our consolidated financial statements:
		Schedule II — Valuation and Qualifying Accounts	66
		Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

Exhibit No.		Description
3.1		Composite Certificate of Incorporation of Registrant, as amended (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2001).
3.2		Amended and Restated By-laws of Registrant (effective as of December 29, 2007, incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2007).
3.3		Amendment to the Bylaws of the Registrant (incorporated by reference to the Company’s report on Form 8-K dated March 3, 2008).
4.1		Stockholders Agreement (incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarterly period ended September 30, 1995).
10.1*		Form of 1995 Long-Term Stock Incentive Plan (incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 333-1852).
10.2*		Form of 1995 Stock Plan for Non-Employee Directors (incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 333-1852).
10.3*		Form of 1999 Long-Term Stock Incentive Plan as amended (incorporated by reference to the Company’s report on Form 8-K dated May 20, 2003).
10.4*		Form of 2006 Stock Incentive Plan for Non-Employee Directors (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2006).
10.5*		Form of 2005 Employee Stock Purchase Plan (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2006).
10.6		Lease Agreement dated September 20, 1988 between the Company and Addwin Realty Associates (Port Washington facility) (incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 33-92052).
10.7		First Amendment to Lease Agreement dated September 20, 1998 between the Company and Addwin Realty Associates (Port Washington facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1998).
10.8		Second Amendment to Lease Agreement dated September 20, 1988 between the Company and Addwin Realty Associates (Port Washington facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2007).
10.9		Build-to-Suit Lease Agreement dated April, 1995 among the Company, American National Bank and Trust Company of Chicago (Trustee for the original landlord) and Walsh, Higgins & Company (Contractor) (“Naperville Illinois Facility Lease”) (incorporated by reference to the Company’s registration statement on Form S-1) (Registration No. 33-92052).
10.10		First Amendment, dated as of February 1, 2006, to the Naperville Illinois Facility Lease between the Company and Ambassador Drive LLC (current landlord) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2005).
10.11		Lease Agreement dated September 17, 1998 between Tiger Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility) (incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarterly period ended September 30, 1998).
10.12		First Amendment, dated as of September 5, 2003, to the Lease Agreement between Tiger Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2010).
10.13		Second Amendment, dated March 22, 2007, to the Lease Agreement between Tiger Direct, Inc. and Keystone Miami Property Holding Corp. (Miami facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2010).
10.14		Third Amendment, dated as of June 26, 2009, to the Lease Agreement between Tiger Direct, Inc. and Mota Associates Limited Partnership (successor in interest to landlord Keystone Miami Property Holding Corp.) (Miami facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2010).
10.15		Lease Agreement, dated December 8, 2005, between the Company and Hamilton Business Center, LLC (Buford, Georgia facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2005).
10.16		First Amendment, dated as of June 12, 2006, to the Lease Agreement between the Company and Hamilton Business Center, LLC (Buford, Georgia facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2005).

10.17*		Executive Director’s Service Agreement, dated as of December 15, 2011, between Misco UK Limited, Systemax Inc. and Perminder Dale (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2011).
10.18*		Employment Agreement, dated as of January 17, 2007, between the Company and Lawrence P. Reinhold (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2006).
10.19*		Amendment No. 1, dated December 30, 2009, to the Employment Agreement between the Company and Lawrence P. Reinhold (incorporated by reference to the Company’s report on Form 8-K dated December 30, 2009).
10.20		Second Amended and Restated Credit Agreement, dated as of October 27, 2010, by and among Systemax Inc. and certain affiliates thereof and JPMorgan Chase Bank, N.A., as U.S. Administrative Agent, J.P. Morgan Europe Limited, as UK Administrative Agent, J.P. Morgan Securities, Inc. as Sole Bookrunner and Sole Lead Arranger, and the lenders from time to time party thereto (incorporated by reference to the Company’s report on Form 8-K dated November 2, 2010).
10.21		Amendment No. 1 and Waiver, dated as of December 15, 2011, to the Second Amended and Restated Credit Agreement by and among Systemax Inc. and certain affiliates thereof and JPMorgan Chase Bank, N.A., as U.S. Administrative Agent, J.P. Morgan Europe Limited, as UK Administrative Agent and the lenders from time to time party thereto (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2011).
10.22		Lease Agreement, dated as of September 1, 2010, among Development Authority of Jefferson, Georgia, GE Government Finance Inc. and SYX Distribution Inc. (incorporated by reference to the Company’s report on Form 8-K dated September 24, 2010).
10.23		Corporate Guaranty and Negative Pledge Agreement, dated as of September 1, 2010, among Systemax Inc., Development Authority of Jefferson, Georgia and GE Government Finance Inc. (incorporated by reference to the Company’s report on Form 8-K dated September 24, 2010).
10.24		Escrow Agreement, dated as of September 1, 2010, among Marshall & Ilsley Trust Company, N.A. (as escrow agent), GE Government Finance Inc., Development Authority of Jefferson, Georgia and SYX Distribution Inc. (incorporated by reference to the Company’s report on Form 8-K dated September 24, 2010).
10.25		Lease Agreement, dated April 16, 2010, between Jefferson Project I LLC as Landlord and SYX Distribution Inc. as Tenant (incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2012).
10.26		First Amendment, dated August 24, 2010, to the Lease Agreement, dated April 2010, between Jefferson Project I LLC as Landlord and SYX Distribution Inc. as Tenant (Jefferson, GA facility) (incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2012).
10.27		Lease Agreement, dated February 27, 2012 between PR I Washington Township NJ, LLC as Landlord and Global Equipment Company Inc. as Tenant (Robbinsville, NJ facility) (incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2012).
10.28*		Form of 2010 Long Term Incentive Plan (incorporated by reference to the Company’s Definitive Proxy Statement filed April 29, 2010).
10.29*		Bonus Agreement, dated as of March 10, 2014, among Global Industrial Services, Inc., Systemax Inc. and Robert Dooley (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2013).
10.30*		Employment Agreement, dated April 12, 2012, between Systemax Inc. and Eric Lerner (incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2012).
10.31		Amendment No. 2 and Waiver, dated as of August 7, 2013, to the Second Amended and Restated Credit Agreement by and among Systemax Inc. and certain affiliates thereof and JPMorgan Chase Bank, N.A., as U.S. Administrative Agent and the lenders from time to time party thereto (incorporated by reference to the Company’s quarterly report on Form 10Q for the quarter ended September 30, 2013).
10.32		Amendment No. 3 and Waiver, dated as of October 31, 2013 with an effective date of September 28, 2013, to the Second Amendment and Restated Credit Agreement by and among Systemax Inc. and certain affiliates thereof and JPMorgan Chase Bank, N.A., as U.S. Administrative Agent and the lenders from time to time party thereto (incorporated by reference to the Company’s quarterly report on Form 10Q for the quarter ended September 30, 2013).

10.33		Amendment No. 4, dated as of August 28, 2014, to the Second Amendment and Restated Credit Agreement by and among Systemax Inc. and certain affiliates thereof and JPMorgan Chase Bank, N.A., as U.S. Administrative Agent and the lenders from time to time party thereto (incorporated by reference to the Company’s report on Form 8-K dated August 28, 2014).
10.34		Lease Agreement, dated December 10, 2014, between Prologis, L.P., as Landlord and Global Industrial Distribution Inc, as Tenant (Las Vegas, NV facility) (filed herewith).
10.35		Purchase Agreement dated December 31, 2014, by and among TAKKT America Holding, LLC, Global Industrial Holdings LLC and Global Industrial Mexico Holdings LLC (filed herewith).
10.36		Amendment No. 1 to Purchase Agreement dated January 30, 2015, by and among TAKKT America Holding, LLC, Global Industrial Holdings LLC and Global Industrial Mexico Holdings LLC (filed herewith).
14		Corporate Ethics Policy for Officers, Directors and Employees (revised as of January 2014) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2013).
21		Subsidiaries of the Registrant (filed herewith).
23		Consent of Independent Registered Public Accounting Firm (filed herewith).
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	SYSTEMAX INC.
	By: /s/ RICHARD LEEDS
	Richard Leeds
	Chairman and Chief Executive Officer
	Date: March 12, 2015

Signature		Title		Date
/s/ RICHARD LEEDS		Chairman and Chief Executive Officer		March 12, 2015
Richard Leeds		(Principal Executive Officer)
/s/ BRUCE LEEDS		Vice Chairman and Director		March 12, 2015
Bruce Leeds
/s/ ROBERT LEEDS		Vice Chairman and Director		March 12, 2015
Robert Leeds
/s/ LAWRENCE REINHOLD		Executive Vice President, Chief Financial Officer		March 12, 2015
Lawrence Reinhold		and Director
		(Principal Financial Officer)
/s/ THOMAS AXMACHER		Vice President and Controller		March 12, 2015
Thomas Axmacher		(Principal Accounting Officer)
/s/ ROBERT ROSENTHAL		Director		March 12, 2015
Robert Rosenthal
/s/ STACY DICK		Director		March 12, 2015
Stacy Dick
/s/ MARIE ADLER-KRAVECAS		Director		March 12, 2015
Marie Adler-Kravecas