Global Industrial Company — Q1 2022 Form 10-Q
Business context and reporting period
Global Industrial distributes more than one million industrial and maintenance, repair and operations products in North America through e-commerce and relationship-marketing channels. It reports one business segment. The report covers the three months ended March 31, 2022; the actual 13-week fiscal quarter ended April 2, 2022. Comparatives are for the 13 weeks ended April 3, 2021. Financial amounts below are in millions, except per-share data.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales, continuing operations | $288.6 | $251.1 | +14.9% |
| Gross profit / gross margin | $107.8 / 37.4% | $77.3 / 30.8% | +39.5% / +6.6 pts |
| SD&A / percent of sales | $78.3 / 27.1% | $70.7 / 28.2% | +10.7% / −1.1 pts |
| Operating income / margin | $29.5 / 10.2% | $6.6 / 2.6% | +347.0% / +7.6 pts |
| Continuing-operations net income | $21.8 | $5.5 | +296.4% |
| Net income, including discontinued operations | $22.0 | $15.2 | +44.7% |
| Diluted EPS, continuing operations / total | $0.57 / $0.58 | $0.14 / $0.39 | Continuing EPS +307.1% |
Interest and other expense was $0.4, versus $0.1. The continuing-operations effective tax rate was 25.1%, compared with 15.4%. The company declared a $0.18-per-share dividend, versus $0.16.
Cash flow, liquidity and debt
- Cash from continuing operating activities was negative $14.0, versus positive $8.9 a year earlier. Working-capital changes used $38.2 of cash, principally reflecting inventory and receivables growth; earnings and other non-cash items contributed $24.2.
- Capital expenditures were $1.1. Financing provided $14.4, including $20.5 of net short-term borrowings and $7.0 of dividends paid. Cash ended the quarter at $14.6, down $0.8 from year-end.
- At March 31, cash was $14.6, accounts receivable $118.9, inventory $204.4, and working capital $137.9. Inventory was up $31.6 and receivables up $12.1 from December 31, 2021.
- Short-term debt was $25.0, up from $4.5 at year-end. The secured revolving facility is $75.0 and matures October 2026. The company reported $45.9 of excess availability and compliance with all covenants. It reported more than $54 million of U.S. liquidity, defined as cash and undrawn line availability.
- Inventory turns declined to 4.3 from 5.2; receivable days rose to 37.8 from 37.4, and payable days declined to 65.9 from 69.2.
Material changes and management commentary
Sales growth reflected strong customer demand, pricing actions to address inflation, strength in core categories and managed sales groups, and growth in Global Industrial-branded products. U.S. sales rose 14.4%; Canadian sales rose approximately 21.6% in U.S. dollars and 21.7% in local currency. Average daily sales increased 14.8%.
Gross margin expanded 6.6 percentage points, which management attributed to normalized freight margins after prior-year transition costs with a new less-than-truckload provider, a larger private-brand sales mix, price rationalization, and lower inventory adjustments after a prior-year PPE write-down. SD&A leverage reflected cost discipline and sales growth. Higher compensation, including performance-related variable pay, and increased advertising partly offset lower temporary labor costs. Management said gross margin could remain variable because of inflation, transportation and raw-material costs, product mix, PPE demand normalization and seasonality.
Prior-year discontinued-operations income included approximately $15.0 of restitution receipts, offset by professional fees and other items. Q1 2022 discontinued-operations income was $0.2, primarily from resolving certain liabilities; the company expects up to $0.5 of additional exit charges. Thus, total net income comparisons include a material, non-recurring prior-year contribution.
Outlook, commitments and risks
- No specific revenue or earnings guidance was provided. Management expects cash, operating cash flow and credit-facility availability to cover working capital and other requirements for at least 12 months.
- Expected 2022 capital expenditures are $7.0–$9.0, not contractually committed at the filing date. A 10-year lease signed in March for a roughly 334,000-square-foot Canadian distribution facility is expected to commence by October 1, 2022; the company expects to record an approximately $33.0 right-of-use asset when it has use of the space.
- Non-cancelable operating lease obligations were approximately $76.3 at quarter-end, with approximately $10.9 of 2022 lease cash expenditures expected. The company also has $1.5 of standby letters of credit.
- Principal cited risks include inflation and rising interest rates, supplier and shipping delays, freight costs, tariffs and trade barriers, labor availability, inventory obsolescence, distribution capacity, reliance on e-commerce and technology systems, cybersecurity, and litigation or government investigations. The company had no outstanding foreign-currency options or forward contracts. It said a one-percentage-point interest-rate change was not expected to materially affect results or cash flows.
- Legal matters include commercial, employment, tax, customs, intellectual-property and other claims. The company said it does not expect currently known matters to materially affect its financial position or results, but outcomes are inherently uncertain. No material risk-factor changes were reported.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether gross-margin gains from pricing, private-brand mix and freight normalization persist as inflation and freight costs evolve.
- Whether inventory growth, slower turns and working-capital cash use unwind or continue, and the resulting need for revolver borrowings.
- Execution, timing and costs of the Canadian distribution-center lease, including the expected right-of-use asset and planned capital spending.
- The extent to which comparisons of total net income are affected by prior-year restitution receipts from discontinued operations and by expected future exit charges.
- Future performance against the company’s stated liquidity expectations, debt-facility covenants and exposure to supply-chain, technology, litigation and other disclosed risks.