Global Industrial Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; each quarter included 13 weeks. The company’s actual fiscal second quarter ended July 3, 2021. Figures are in millions of dollars except per-share amounts and percentages.
Business context
Global Industrial is a North American value-added distributor of industrial and maintenance, repair and operations (MRO) products, selling through e-commerce and relationship marketing. It reports one operating segment. The filing compares continuing operations with 2020; discontinued operations primarily relate to the former North American Technology Group.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $272.6 | $242.1 | $523.7 | $469.4 |
| Gross profit | $98.0 | $84.8 | $175.3 | $161.5 |
| Gross margin | 36.0% | 35.0% | 33.5% | 34.4% |
| Operating income, continuing operations | $24.7 | $20.1 | $31.3 | $31.6 |
| Operating margin | 9.1% | 8.3% | 6.0% | 6.7% |
| Net income, continuing operations | $21.1 | $15.3 | $26.6 | $23.6 |
| Net income, including discontinued operations | $22.0 | $16.4 | $37.2 | $24.6 |
| Diluted EPS, continuing operations | $0.55 | $0.40 | $0.70 | $0.62 |
| Diluted EPS, total | $0.57 | $0.43 | $0.98 | $0.65 |
- Q2 sales increased 12.6% year over year; first-half sales rose 11.6%. Q2 U.S. sales grew 12.2%; Canadian sales rose about 18.0% in U.S. dollars, or 4.9% in local currency.
- Q2 gross margin improved 100 basis points year over year and 520 basis points sequentially. Management cited favorable product mix, private-label sales, price capture, lower transitional 3PL costs, and a reduced PPE inventory-reserve impact. First-half gross margin declined 90 basis points, reflecting a $2.7 inventory write-down for certain PPE products, 3PL transition costs and ocean-freight pressure.
- Q2 SD&A rose 13.3% to $73.3; as a share of sales it increased 20 basis points to 26.9%. Higher marketing, employee, consulting and temporary-labor costs contributed. First-half SD&A rose 10.9%, while its sales ratio improved 20 basis points to 27.5%.
- Q2 continuing-operations diluted EPS included an approximately $0.09-per-share tax benefit from reversing $3.4 of valuation allowances on Canadian net operating losses and other deferred tax assets. Management concluded realization was more likely than not.
Cash flow, liquidity and capital
- For the first half, operating cash flow was $32.3, including $20.5 from continuing operations and $11.8 from discontinued operations. Continuing-operations operating cash flow was $13.4 in the comparable 2020 period. Investing outflow was $2.1, mainly for New Jersey distribution-center equipment; financing outflow was $11.5. Cash increased $18.7 to $42.7, including $1.1 of restricted cash.
- At June 30, cash and cash equivalents were $41.6, working capital was $102.0, and current assets and current liabilities were $292.3 and $190.3, respectively. Working capital increased $24.6 from year-end 2020.
- No credit-facility borrowings were outstanding. The $75.0 secured revolving facility had $72.5 of excess availability; the company was compliant with its covenants. The facility was due to mature October 28, 2021, and the company said it was renewing it on similar terms, expecting a five-year extension.
- Operating lease liabilities totaled $83.8, including $10.1 current and $73.7 non-current. The company reported no debt outstanding and said cash and operating cash flow should fund requirements for at least the next 12 months.
- First-half dividends paid were $12.5; the quarterly dividend declared was $0.16 per share. Planned 2021 capital expenditures were $5.0–$7.0, not contractually committed at the filing date.
Changes, outlook and risks
- Revenue growth remained strong, but management said the realized Q2 growth rate was below customer demand as supply constraints delayed fulfillment and open orders increased. Growth slowed to about 3% in June as prior-year comparisons strengthened.
- Management said Q2 price/cost timing, including selling lower-cost FIFO inventory before higher-cost inventory, temporarily benefited gross margin; this benefit was not expected to be as significant in future quarters. It aimed to balance pricing and costs while remaining competitive. No specific revenue or earnings guidance was provided.
- Discontinued operations recorded $10.6 of first-half net income, including $15.0 of restitution receipts, settlement benefits and related costs and taxes. The company estimated up to $0.5 of additional exit charges after Q2; accrued exit costs were $2.7 at June 30.
- Key risks include product availability and supply-chain disruption, port and freight costs, inflation in product and transportation costs, pricing competition, tight distribution labor markets, changing PPE demand, and e-commerce or information-security disruptions. Management expects period-to-period margin variability.
- The company described various litigation, tax, customs and unclaimed-property matters, including discontinued-operations claims involving multiple states. It said it did not expect currently known matters, individually or collectively, to have a material adverse effect, while noting outcomes remain inherently unpredictable.
Important facts for investors to verify
- Whether the revolving credit facility was renewed before its October 2021 maturity and on what terms.
- Whether open orders converted to sales as supply constraints eased, and how demand normalization and PPE comparisons affected growth.
- Whether gross margins remained sustainable after the temporary FIFO price/cost benefit and amid freight, product-cost and mix pressures.
- How much future earnings depend on tax-valuation-allowance reversals and discontinued-operations restitution or settlements.
- Actual capital expenditure levels, cash generation, dividend funding, and any developments in legal or unclaimed-property matters.