Global Industrial Company — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; the company’s fiscal third quarter actually ended October 2, 2021. Comparative periods were 13 weeks each. Global Industrial is a North American value-added industrial and MRO products distributor, reported as one segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $277.4m | $285.7m | $801.1m | $755.1m |
| Gross profit / margin | $102.0m / 36.8% | $102.3m / 35.8% | $277.3m / 34.6% | $263.8m / 34.9% |
| Operating income, continuing operations | $30.6m | $31.4m | $61.9m | $63.0m |
| Net income, continuing operations | $23.2m | $24.1m | $49.8m | $47.7m |
| Diluted EPS, continuing operations | $0.61 | $0.64 | $1.31 | $1.26 |
| Net income (loss) from discontinued operations | $(0.1)m | $0.5m | $10.5m | $1.5m |
| Total net income | $23.1m | $24.6m | $60.3m | $49.2m |
- Q3 sales decreased 2.9% year over year, while nine-month sales rose 6.1%. Q3 operating income from continuing operations declined 2.5%; nine-month operating income declined 1.7%.
- Q3 gross margin improved 100 basis points year over year and 80 basis points sequentially. Nine-month gross margin fell 30 basis points, reflecting a $4.0m PPE inventory write-down, transition costs for a new third-party logistics partner, and ocean freight pressures.
- Q3 operating margin was 11.0%, flat year over year; nine-month operating margin was 7.7%, down 60 basis points. Q3 SD&A rose 0.7% to $71.4m, including higher marketing and labor costs.
- Q3 effective tax rate was 23.7%; the nine-month rate was 19.0%, aided by a $3.4m reversal of Canadian deferred-tax valuation allowances (about $0.09 per diluted share) and $0.6m of excess stock-option tax benefits.
Cash, liquidity and balance sheet
- At September 30, cash and cash equivalents were $54.1m, working capital was $121.2m, and total assets were $429.8m. Cash increased $31.7m from December 31, 2020.
- Nine-month operating cash flow was $50.9m, including $39.3m from continuing operations and $11.6m from discontinued operations. Continuing-operations cash flow was $41.5m in the prior-year period. Capital expenditures were $3.4m.
- The company had no outstanding revolver borrowings and reported $72.5m of total and excess availability under its $75m secured facility. It was in covenant compliance. The facility was extended in October 2021 through October 2026.
- Operating lease liabilities totaled $81.3m, including $10.3m current and $71.0m noncurrent. The company reported no other debt outstanding.
- Nine-month dividends paid were $18.6m; the quarterly dividend declared was $0.16 per share. No shares were repurchased in the first nine months of 2021.
Management commentary, outlook and risks
- Management cited strong and accelerating customer demand, particularly in core lines and private label, but said supply constraints increased open orders and limited reported Q3 sales. PPE represented 3% of Q3 2021 sales versus 11% a year earlier.
- Pricing and mix supported Q3 gross margin, including selling through lower-cost FIFO inventory. Management cautioned that this timing benefit will be less pronounced in future quarters and expects ongoing margin variability from product-cost inflation, domestic transportation, ocean freight, product mix and PPE demand normalization.
- The filing gives no specific revenue or earnings guidance. Management expected 2021 capital expenditures of $4.0m–$5.0m and said cash and operating cash flow should cover requirements for at least the next 12 months under current conditions.
- Key operating risks include supply-chain and shipping delays, freight and product-cost inflation, tight distribution-center labor availability, vendor allocation constraints, tariffs, inventory risk, and e-commerce or cybersecurity disruption.
- Discontinued operations received $15.0m in restitution during the first nine months, contributing to reported nine-month results. The company expects up to $0.5m of additional exit charges and said discontinued operations carry approximately $41m of aged payables and other liabilities, including a lease; management expects significant balances to be resolved favorably in future quarters.
- The company disclosed $3.1m of professional-fee expense to a law firm employing an immediate family member of a vice chairman; $3.0m was contingent on receipt of the $15.0m restitution. It also described ordinary-course litigation and unclaimed-property matters, but did not expect reasonably possible losses beyond accruals to be material.
Most important facts for investors to verify
- Whether open orders convert to sales as supplier availability and shipping conditions evolve.
- Whether price increases keep pace with product, labor, domestic freight and ocean-freight costs after the temporary FIFO margin benefit fades.
- How much of nine-month earnings and cash generation came from the Canadian tax-allowance reversal and discontinued-operations restitution, and whether further exit charges or liability settlements arise.
- Whether the estimated $4.0m–$5.0m capital-spending plan and stated 12-month liquidity assessment remain appropriate as working-capital needs change.
- Developments in the approximately $41m of discontinued-operation aged payables and liabilities and in the company’s legal and unclaimed-property matters.