Global Industrial Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; the company’s actual fiscal second quarter ended July 1, 2023. Comparisons are with the corresponding 2022 periods. Financial statements are unaudited and amounts are in millions except per-share data.
Business context
Global Industrial distributes industrial and maintenance, repair and operations products in North America through e-commerce and relationship marketers. It reports one operating segment. On May 19, 2023, it acquired Indoff LLC, a North American business-to-business marketer of material handling, commercial interiors and business products, for approximately $72.6 million in cash.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $325.8 | $318.5 | $599.6 | $607.1 |
| Gross profit / margin | $112.9 / 34.7% | $113.0 / 35.5% | $211.3 / 35.2% | $220.8 / 36.4% |
| Operating income from continuing operations / margin | $29.1 / 8.9% | $30.5 / 9.6% | $46.9 / 7.8% | $60.0 / 9.9% |
| Net income from continuing operations | $21.5 | $22.6 | $34.8 | $44.4 |
| Diluted EPS from continuing operations | $0.56 | $0.59 | $0.91 | $1.16 |
- Q2 sales rose 2.3% year over year, primarily from Indoff; excluding Indoff, sales declined 5.2%. Six-month sales declined 1.2%; excluding Indoff, they declined 5.2% (4.5% on an average-daily-sales basis).
- Q2 operating income declined 4.6% and continuing-operations net income declined 4.9%. For the six months, operating income fell 21.8% and continuing-operations net income fell 21.6%.
- Q2 SD&A was $83.8 million, up 1.6%; six-month SD&A was $164.4 million, up 2.2%. Interest and other expense was $0.3 million for Q2 and $0.5 million for six months.
- Six-month operating cash flow from continuing operations was $65.5 million, compared with cash use of $2.1 million in 2022. Investing cash use was $73.7 million, including the Indoff purchase; financing provided $24.9 million. Cash increased $16.4 million to $44.9 million.
- At June 30, cash was $44.9 million, short-term debt $40.3 million, working capital $128.1 million, and current assets $359.4 million versus current liabilities of $231.3 million. The $125 million revolving facility had $40.3 million outstanding and $79.4 million of reported excess availability; the company reported covenant compliance.
Material changes and management commentary
- Indoff contributed approximately $23.9 million of revenue and $0.9 million of net income after acquisition. Its purchase-price allocation remains preliminary; it includes $35.1 million of goodwill and $30.3 million of acquired intangible assets. The company expects approximately $3.0 million of annual book amortization over ten years.
- Management attributed weaker core sales to price deflation and cautious demand, particularly among small and medium business customers. It noted improving volume trends through the quarter, expanded web-sales growth, and strong customer acquisition and retention trends.
- Consolidated Q2 gross margin fell 80 basis points year over year, primarily because Indoff’s gross margin is in the low-20% range. Excluding Indoff, Q2 gross margin was 35.7%, up 20 basis points. Management expects the acquisition to lower consolidated gross-margin rates in future periods and sees continued variability from economic conditions, inflation and seasonality.
- Q2 SD&A included approximately $0.7 million of acquisition costs and $4.0 million of Indoff expenses. Six-month operating income was also affected by approximately $1.5 million of severance and other salary-related costs.
- Management expects cash, operating cash flow and facility availability to fund requirements for at least the next 12 months. Planned 2023 capital expenditures are $6–$8 million; the company also cites investment needs for inventory, a Canadian distribution center, technology and distribution facilities.
Risks, contingencies and unusual items
- Risks include cautious customer demand, pricing and margin pressure, inflation and freight costs, supplier and global supply-chain disruption, tariffs, labor constraints, competition, inventory exposure, technology outages and cybersecurity incidents, and variable-rate borrowing costs.
- The company had $101.9 million of operating lease liabilities, with leases extending through 2032, and $1.4 million of standby letters of credit. It also depends on subtenants meeting obligations for unused or excess space.
- The company is involved in ordinary-course litigation, claims, investigations and tax matters. It stated that it does not expect currently known matters to have a material adverse effect, while noting outcomes are uncertain; it did not believe reasonably possible losses above accruals would be material.
- Management’s disclosure-controls evaluation excluded Indoff’s internal controls following the recent acquisition; the company is integrating Indoff into its controls process. Management concluded disclosure controls were effective.
- No formal revenue or earnings guidance is provided in the filing. Management cautions that past performance may not predict future results.
Important facts for investors to verify
- Whether core sales and customer demand stabilize, and how much reported growth continues to depend on Indoff.
- Indoff’s realized margins, integration progress and final purchase-price allocation, including acquired intangible-asset valuations and goodwill.
- Working-capital trends, operating cash conversion, debt repayment and available borrowing capacity under the secured, variable-rate facility.
- Whether planned capital expenditures and other investment needs remain within management’s liquidity expectations, and whether lease and litigation exposures change.