2019 ANNUAL REPORT
TO RECEIVE ADDITIONAL INFORMATION ON SYSTEMAX
PLEASE SEND A WRITTEN REQUEST TO:
CORPORATE HEADQUARTERS:
Systemax Inc.
11 Harbor Park Drive
Port Washington, NY 11050
516-608-7000 ext. 7181
Email: investinfo@systemax.com
Web Site: http://www.systemax.com
INVESTOR RELATIONS:
The Plunkett Group
106 West 32nd Street
2nd Floor - Suite 169
New York, NY 10001
Attention: Mike Smargiassi
(212) 739-6740
Email: syx@theplunkettgroup.com
Website: www.theplunkettgroup.com
TRANSFER AGENT:
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717
(877) 830-4936
Email: shareholder@broadridge.com
Website: http://www.shareholder.broadridge.com
SEND CERTIFICATES FOR TRANSFER AND ADDRESS CHANGES TO:
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717
STOCK EXCHANGE:
The Company’s shares are traded on the
New York Stock Exchange under the symbol SYX.
CORPORATE GOVERNANCE
Copies of the Company’s 2019 Annual Report on Form 10-K, Proxy Statement for the 2020 Annual Meeting,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange
Commission are available online at www.systemax.com or to stockholders without charge upon written
request to the Company’s address listed above, Attention: Investor Relations. In addition, on the Corporate
Governance page of the Company’s website, www.systemax.com, stockholders can view the Company’s
Corporate Ethics Policy, Audit Committee Charter, Compensation Committee Charter, Nominating/
Corporate Governance Committee Charter and Corporate Governance Guidelines and Principles.
Systemax Inc. (www.systemax.com), through its operating subsidiaries, is a provider of industrial
products in North America going to market through a system of branded e-Commerce websites and
relationship marketers. The primary brand is Global Industrial.
Dear Fellow Stockholders,
In 2019, we made significant progress executing on our customer centric strategy and strategic growth pillars. We generated
almost $950 million in revenue, delivered $66 million of operating income, and had strong free cash flow from continuing
operations of $63 million. This solid financial performance allowed us to deliver increased direct returns to our shareholders
through an increased quarterly dividend and special cash dividend of $1.00 per share in March 2020.
A year ago, we launched a multi-year strategic plan called ACE (Accelerating our Customer Experience) to improve service
levels, grow customer engagement and generate operating leverage from current operations and investments. We also
championed a stronger customer centric culture across our entire organization.
As part of these efforts, we delivered on a number of important projects in 2019, listed below, and as a result we are delivering
higher service levels and greater end-to-end transaction transparency to our customers:
· the expansion of our distribution network, which has allowed us to improve service levels and will support our growth;
· the launch of a new Global Industrial website, which delivers a significantly enhanced customer experience and self-service
capabilities;
· the creation of a voice of customer process to solicit, analyze and address customer feedback in real time; and
· investments in new leadership and talent to drive and execute our strategy.
In 2020, we will advance our ACE strategy and invest in market share growth through enhanced sales force and digital
marketing productivity, as well as product and category expansion. In addition, our national distribution network and expanded
suite of digital self-service tools will improve efficiency and improve the customer experience. These investments, combined
with our continuous improvement culture, will strengthen our platform, enhance our competitive position and drive our long-
term performance.
I am extremely proud of our company’s recent response to COVID-19. The virus is impacting every facet of our personal
lives and the economic landscape. The safety and well-being of our associates, their families, our vendor partners, and our
customers is our first priority. As an essential business, we initiated a company-wide remote workforce strategy, while keeping
our distribution network fully operational. New social distancing and sanitation practices were implemented to prioritize the
health and safety of our associates, and we remained committed to delivering the products and service levels our customers
expect. A mobilization of this scale required every part of our organization working closely to ensure that each of our associates’
needs were supported, and that we maintained business continuity.
As we continue to navigate the impact of COVID-19 through year end, I am seeing leaders emerge in every area of the
business. Our sourcing and supply chains continue to secure high demand products for medical, healthcare, and business-
critical operations equipment, and in turn highlighting our position as a reliable and valued partner. Our recently launched R3
(Restore, Return, Rebound) customer-focused program is supporting our clients and helping them plan for the re-opening
of their business and to keep their operations running. While our financial results in the year ahead will reflect the current
economic environment across the nation, our business is operating well given these unprecedented circumstances.
Systemax has a vision for success, a winning strategy in place, talented associates, and a strong platform to compete. We will
continue to make targeted investments in our business and our people to strengthen our competitive position and drive future
growth to the benefit of our employees, customers, vendors and stockholders.
Sincerely,
Barry Litwin
Chief Executive Officer
11 Harbor Park Drive, Port Washington, NY 11050 • 516.608.7000 • investinfo@systemax.com
Notice of Annual Meeting of Stockholders
Date and time:
Monday, June 1, 2020, at 12:00 p.m., Eastern time
Virtual Location:
This year’s Annual Meeting will be a completely virtual meeting of stockholders, which will be
conducted via live webcast. You will be able to participate in this year’s Annual Meeting online,
vote your shares electronically and submit your questions during the meeting by visiting
www.virtualshareholdermeeting.com/SYX2020. Because the Annual Meeting is virtual and
being conducted via live webcast, stockholders will not be able to attend the Annual
Meeting in person. Details regarding how to participate in the meeting online are more fully
described in the proxy statement.
Purpose:
(1) To elect the 8 director nominees named in the proxy statement;
(2) To approve a non-binding, advisory resolution regarding the compensation of our Named
Executive Officers, as described under the heading “Executive Compensation”;
(3) To approve the Systemax 2020 Omnibus Long-Term Incentive Plan;
(4) To ratify the appointment of Ernst & Young LLP as our independent auditor for fiscal year
2020; and
(5) To transact such other business as may properly come before the meeting or any
adjournment or postponement.
Who may vote:
Stockholders of record at the close of business on April 6, 2020 are entitled to notice of, and
to vote at, the meeting or any adjournment or postponement.
By order of the Board of Directors,
Eric Lerner
Senior Vice President and General Counsel
April 23, 2020
Important notice regarding the availability of proxy materials for the
Annual Meeting of Stockholders to be held on June 1, 2020:
This Notice of Annual Meeting of Stockholders, the accompanying proxy statement and our 2019 Annual Report to
Stockholders all are available at www.proxyvote.com.
Table of Contents
General Information ....................................................................................................................................
Frequently Asked Questions .......................................................................................................................
Proposal No. 1 – Election Of Directors .......................................................................................................
Corporate Governance ...............................................................................................................................
Board of Directors ........................................................................................................................
Board Leadership Structure ..........................................................................................................
Director Independence .................................................................................................................
Lead Independent Director
...........................................................................................................
Meetings of Non-Management Directors ......................................................................................
Communicating with the Board .....................................................................................................
Committees of the Board ..............................................................................................................
Risk Oversight
..............................................................................................................................
Proposal No. 2 – Non-Binding Advisory Vote on Executive Compensation .................................................
Proposal No. 3 – Approval of the Adoption of the Systemax Inc. 2020 Omnibus Long-Term Incentive Plan
Proposal No. 4 – Ratification of Ernst & Young LLP as our Independent Auditor ........................................
Report of the Audit Committee ....................................................................................................................
Security Ownership Information ..................................................................................................................
Security Ownership of Management
.............................................................................................
Security Ownership of Certain Beneficial Owners .........................................................................
Section 16(a) Beneficial Ownership Reporting Compliance ..........................................................
Equity Compensation Plans ........................................................................................................................
Certain Relationships and Related Transactions ........................................................................................
Related Person Transaction Policy ...............................................................................................
Transactions With Related Persons ..............................................................................................
Executive Officers .......................................................................................................................................
Compensation Discussion and Analysis .....................................................................................................
Executive Summary ......................................................................................................................
Central Objectives and Philosophy of Our Executive Compensation Programs ............................
Risk Management
........................................................................................................................
Elements of Our Executive Compensation Programs ...................................................................
Role of the Compensation Committee and CEO in Compensation Decisions ...............................
Compensation Committee Report
...............................................................................................................
Compensation Committee Interlocks and Insider Participation ...................................................................
Executive Compensation ............................................................................................................................
Summary Compensation Table .....................................................................................................
Grants of Plan-Based Awards .......................................................................................................
Outstanding Equity Awards at Fiscal Year-End for Fiscal 2019 .....................................................
Option Exercises and Stock Vested For Fiscal 2019 ....................................................................
Employment Arrangements of the Named Executive Officers .......................................................
Potential Payments Upon Termination of Employment or Change in Control ................................
Director Compensation ...............................................................................................................................
General Policy ..............................................................................................................................
Non-Management Director Compensation in Fiscal 2019 .............................................................
CEO Pay Ratio Disclosure ..........................................................................................................................
Additional Matters .......................................................................................................................................
Annex A - Systemax Inc. 2020 Omnibus Long-Term Incentive Plan ............................................................
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Annex A-1
Annex B - Audit Committee Charter for Systemax Inc. ................................................................................
Annex B-1
PROXY STATEMENT
General Information
These proxy materials are being furnished to solicit proxies on behalf of the Board of Directors of Systemax Inc. for use
at our Annual Meeting of Stockholders to be held virtually on Monday, June 1, 2020 at 12:00 p.m., Eastern time, or at
any adjournments or postponements thereof.
The Annual Meeting can be accessed by visiting www.virtualshareholdermeeting.com/SYX2020, where you will be able
to listen to and participate in the meeting live, submit questions, and vote online.
These proxy materials include our Notice of Annual Meeting and Proxy Statement and our 2019 Annual Report to
Stockholders, which includes our Fiscal 2019 Form 10-K. In addition, these proxy materials may include a proxy card
for our Annual Meeting. These proxy materials are first being sent or made available to our stockholders commencing
on April 23, 2020.
Notice of Internet Availability of Proxy Materials
We have implemented the Securities and Exchange Commission, or SEC, “Notice Only” rule that allows us to furnish
our proxy materials over the Internet to our stockholders instead of mailing paper copies. As a result, beginning on or
about April 23, 2020, we mailed to most of our stockholders of record on April 6, 2020 a Notice of Internet Availability of
Proxy Materials containing instructions on how to access our proxy materials over the Internet and vote online.
This notice is not a proxy card and cannot be used to vote your shares. If you received a notice this year, you will not
receive paper copies of the proxy materials unless you request the materials by following the instructions on the notice
or on the website referred to in the notice.
If you own shares of common stock in more than one account—for example, in a joint account with your spouse and in
your individual brokerage account—you may have received more than one notice. To vote all of your shares by proxy,
please follow each of the separate proxy voting instructions that you received for your shares of common stock held in
each of your different accounts.
Record Date
We have fixed the close of business on April 6, 2020 as the record date for determining our stockholders entitled to
notice of and to vote at our Annual Meeting.
On that date, we had 37,470,110 shares of common stock outstanding. Stockholders as of the record date will have one
vote per share on each voting matter.
Quorum
The presence of the holders of a majority of the outstanding shares of common stock entitled to vote at our Annual
Meeting, present virtually or represented by proxy, is necessary to constitute a quorum.
Abstentions and “broker non-votes” (discussed below) will be counted as present for purposes of establishing a quorum.
1
How to Vote
Stockholders of record. If you are a “stockholder of record” (meaning your shares are registered in your name with
our transfer agent, Broadridge) you may vote either virtually at our Annual Meeting or by proxy.
If you decide to vote by proxy, you may do so in any one of the following three ways:
You may vote your shares 24 hours a day by logging on to a secure website, www.proxyvote.com,
and following the instructions provided. You will need to enter identifying information that appears
on your proxy card or the Notice. The internet voting system allows you to confirm that your votes
were properly recorded.
You may vote your shares 24 hours a day by calling the toll free number (800) 690-6903, and
following instructions provided by the recorded message. You will need to enter identifying
information that appears on your proxy card or the Notice. As with the internet voting system, you
will be able to confirm that your votes were properly recorded.
If you received a proxy card, you may mark, sign and date your proxy card and return it by mail in
the enclosed postage-paid envelope.
Internet and telephone voting is available through 11:59 PM Eastern time on Sunday, May 31, 2020.
If you vote by mail, your proxy card must be received before our Annual Meeting to assure that your vote is counted.
We encourage you to vote promptly.
Beneficial owners. If, like most stockholders, you are a beneficial owner of shares held in “street name” (meaning a
broker, trustee, bank or other nominee holds shares on your behalf), you may vote virtually at our Annual Meeting only
if you obtain a legal proxy from the nominee that holds your shares. Alternatively, you may vote by completing, signing
and returning the voting instruction form that the nominee provides to you or by following any telephone or Internet voting
instructions described on the voting instruction form, the Notice or other materials that the nominee provides to you.
No matter in what form you own your shares – We encourage you to vote promptly.
Attending the Virtual Annual Meeting
The Annual Meeting will be a completely virtual meeting of stockholders conducted exclusively by a live audio webcast.
If you are a stockholder of record as of the close of business on April 6, 2020, the record date for the Annual Meeting,
you will be able to virtually attend the Annual Meeting, vote your shares and submit your questions online during the
meeting by visiting www.virtualshareholdermeeting.com/SYX2020. You will need to enter the 16-digit control number
included on your notice, on your proxy card or on the instructions that accompanied your proxy materials.
If you are a stockholder holding your shares in “street name” as of the close of business on April 6, 2020, you may gain
access to the meeting by following the instructions in the voting instruction card provided by your broker, bank or other
nominee. You may not vote your shares electronically at the Annual Meeting unless you receive a valid proxy from your
brokerage firm, bank, broker dealer or other nominee holder.
The online meeting will begin promptly at 12:00 p.m., Eastern time. We encourage you to access the meeting prior to
the start time. Online check-in will begin at 11:45 a.m., Eastern time, and you should allow approximately 15 minutes
for the online check-in procedures. If you wish to submit a question for the Annual Meeting, you may do so in advance
at www.virtualshareholdermeeting.com/SYX2020, or you may type it into the dialog box provided at any point during the
virtual meeting (until the floor is closed to questions).
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Votes Required to Adopt the Proposals
Proposal 1 – The affirmative vote of a plurality of the outstanding shares of common stock entitled to vote and
present, virtually or by proxy, at a meeting at which a quorum is present will be required to elect the nominated
directors to the Board.
Proposal 2 – The affirmative vote of a majority of the outstanding shares of common stock entitled to vote and
present, virtually or by proxy, at a meeting at which a quorum is present will be required to approve the non-binding
advisory resolution on executive compensation.
Proposal 3 – The affirmative vote of a majority of the outstanding shares of common stock entitled to vote and
present, virtually or by proxy, at a meeting at which a quorum is present will be required to adopt the 2020 Omnibus
Long-Term Incentive Plan.
Proposal 4 – The affirmative vote of a majority of the outstanding shares of common stock entitled to vote and
present, virtually or by proxy, at a meeting at which a quorum is present will be required to ratify the appointment
of Ernst & Young LLP as our independent auditors.
Messrs. Richard, Bruce and Robert Leeds (each a director and officer of Systemax), together with trusts for the benefit
of certain members of their respective families and other entities controlled by them, as applicable, beneficially owned
as of our record date more than 50% of the shares outstanding, and they have each separately advised us that they
intend to vote all of such shares they each have the power to vote in accordance with the recommendations of the Board
on each of the Proposals identified above, which will be sufficient to constitute a quorum and to determine the outcome
of each Proposal.
How Shares Will Be Voted
Proxies will be voted as specified by the stockholders. Where specific choices are not indicated, proxies will be voted,
per the Board’s recommendations, FOR Proposals 1, 2, 3 and 4. If any other matters properly come before our Annual
Meeting, the persons named in the proxy will vote at their discretion.
List of Stockholders
A list of our stockholders satisfying the requirements of Section 219 of the Delaware General Corporation Law will be
available for inspection for any purpose germane to our Annual Meeting for the ten days prior to our Annual Meeting. If
you want to inspect the stockholder list, call email investinfo@systemax.com to schedule an appointment. In addition,
the list of stockholders will also be available during the annual meeting through the meeting website for those stockholders
who choose to attend.
Changing or Revoking Your Proxy
Your virtual attendance at our Annual Meeting will not automatically revoke your proxy.
Stockholders of record. If you are a stockholder of record, you may change or revoke your proxy at any time before
a vote is taken at our Annual Meeting by executing and forwarding to us a later-dated proxy or by voting a later proxy
over the telephone or the Internet or by virtually attending the Annual Meeting and voting.
Beneficial owners. If you are a beneficial owner of shares, you should check with the broker, trustee, bank or other
nominee that holds your shares to determine how to change or revoke your vote.
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Abstentions
Proposal 1 – Abstentions will have no effect on the election of directors.
Proposal 2 – Abstentions will have the same effect as a negative vote regarding the approval of the non-binding
advisory resolution on executive compensation.
Proposal 3 – Abstentions will have the same effect as a negative vote regarding the adoption of the 2020 Omnibus
Long-Term Incentive Plan.
Proposal 4 – Abstentions will have the same effect as a negative vote regarding the ratification of Ernst & Young
LLP as our independent auditors.
Broker Non-Votes
A “broker non-vote” occurs when a broker or other nominee holding shares for a beneficial owner does not vote on a
particular proposal because they do not have discretionary voting power for that proposal and have not received
instructions from the beneficial owner.
If you are a beneficial owner whose shares are held by a broker, as stated above you must instruct the broker how to
vote your shares. If you do not provide voting instructions, your broker is not permitted to vote your shares on Proposal
1 (Election of Directors), Proposal 2 (Approval of Executive Compensation) and Proposal 3 (Adoption of 2020 Omnibus
Long-Term Incentive Plan).
In the absence of voting instructions, the broker can only register your shares as being present at our Annual Meeting
for purposes of determining a quorum and may vote your shares on Proposal 4 only (Ratification of the Appointment of
our Auditor).
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Frequently Asked Questions
How can I access the proxy materials over the
Internet?
What is “householding”?
Your Notice of the Internet Availability of the proxy
materials, proxy card or voting instruction card will
contain instructions on how to view our proxy materials
for our Annual Meeting on the Internet. Our proxy
materials and Annual Report on Form 10-K for fiscal
2019, as well as the means to vote by Internet, are
available at www.proxyvote.com.
SEC rules allow us to send a single copy of the proxy
materials or the Notice of Internet Availability of Proxy
Materials to multiple stockholders sharing the same
address and last name, or who we reasonably believe
are members of the same family in a manner provided
by such rules. This practice
to as
“householding” and we use this process to achieve
savings of paper and mailing costs.
is referred
How may I obtain a paper copy of the proxy
materials?
How can I find voting results of our Annual
Meeting?
The Notice of the Internet Availability of the proxy
materials, provides instructions about how to obtain a
paper copy of the proxy materials. If you did not receive
the notice, you will receive a paper copy of the proxy
materials by mail.
We will announce preliminary voting results at our
Annual Meeting and we will publicly disclose the results
on a Form 8-K within four business days of our Annual
Meeting, as required by SEC rules.
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Proposal No. 1 – Election of Directors
At our Annual Meeting, eight directors are to be elected to hold office until the 2021 annual meeting and until their
successors have been elected and qualified. All nominees are current Systemax Board members who were elected by
stockholders at the 2019 annual meeting.
There are no family relationships among any of our directors or executive officers or nominees for director or executive
officer, except that Messrs. Richard, Bruce and Robert Leeds are brothers. Except as disclosed herein, there were no
arrangements or understandings between any director or nominee for director and any other person pursuant to which
such person was selected as a director or nominee for director.
The accompanying proxy will be voted FOR the election of the Board’s nominees unless contrary instructions are given.
If any Board nominee is unable to serve, which is not anticipated, the persons named as proxies intend to vote, unless
the Board reduces the number of nominees, for such other person or persons as the Board may designate.
When voting by proxy with respect to the election of directors, stockholders may vote in favor of all nominees, withhold
their votes as to all nominees or withhold their votes for specific nominees.
Richard Leeds
Robert Leeds
Age: 60
Executive Chairman
Director Since: 1995
Richard Leeds joined Systemax in 1982 and served as
our Chairman and CEO from April 1995 until becoming
our Executive Chairman in March 2016. He also served
as President of our Industrial Products Group until 2011.
Mr. Leeds was selected to serve as Executive Chairman
of our Board due to his experience and depth of
knowledge of Systemax and the direct marketing,
computer and industrial products industries, his role in
developing and managing our business strategies and
operations, as well as his exceptional business
judgment and leadership qualities.
Age: 64
Vice Chairman
Director Since: 1995
Robert Leeds joined Systemax in 1977 and has served
as our Vice Chairman since April 1995. He also served
as President of our Domestic Operations until 2005 and
as Chief Executive of the North American Technology
Products Group from 2013 to 2015. Mr. Leeds has
served as a director since April 1995. Mr. Leeds was
selected to serve as a director on our Board because of
his experience and depth of knowledge of Systemax
and the direct marketing, computer and industrial
products industries, his role in developing and managing
our business strategies and operations, his significant
computer and technology industry experience as well
as his exceptional business judgment.
Bruce Leeds
Barry Litwin
Age: 64
Vice Chairman
Director Since: 1995
Bruce Leeds joined Systemax in 1977 and has served
as our Vice Chairman since April 1995. He also served
as President of our International Operations until 2005.
Mr. Leeds was selected to serve as a director on our
Board due to his experience and depth of knowledge of
Systemax and the direct marketing, computer and
industrial products industries, his role in developing and
managing our business strategies and operations, his
experience in international business as well as his
exceptional business judgment.
Age: 53
Chef Executive Officer
Director Since: 2017
Mr. Litwin was appointed Chief Executive Officer of
Systemax in January 2019. Prior to joining Systemax,
he was the Chief Executive Officer of Adorama, Inc., a
leading multi-channel retailer of professional camera,
audio, and video equipment. Previous executive roles
included overseeing e-commerce and marketing for
Sears Holdings,
Inc, Office Depot, and Newark
Electronics, Inc, in addition to serving as an advisor to
several early stage digital and technology companies.
Mr. Litwin graduated from Indiana University with a BS
degree, and an MBA in Operations from Loyola
University, Quinlan School of Business in 1992.
Mr. Litwin was selected to serve as a director on our
Board due to his e-commerce and direct marketing
expertise.
6
Robert D. Rosenthal
Paul S. Pearlman
Age: 71
Independent Director
Director Since: 1995
Robert D. Rosenthal has been the lead independent
director since October 2006. Mr. Rosenthal is Chairman
and Chief Executive Officer of First Long Island
Investors LLC, which he co-founded in 1983. Mr.
Rosenthal is the Chairman and CEO of a wealth
management company that invests in numerous public
companies and is also an attorney and member of the
bar of the State of New York. Mr. Rosenthal was selected
to serve as a director on our Board due to his financial,
investment and legal experience and acumen.
Chad M. Lindbloom
Age: 55
Independent Director
Director Since: 2017
Mr. Lindbloom was employed by C.H. Robinson
Worldwide, Inc. – one of the world’s largest third-party
logistics providers – from June 1990 through March
2018 in various roles, including Chief Information
Officer, Chief Financial Officer and Controller. Mr.
Lindbloom holds BS and MBA degrees from the Carlson
School of Management at the University of Minnesota.
Mr. Lindbloom was selected to serve as a director on
our Board due to his supply chain and logistics expertise.
Age: 66
Independent Director
Director Since: 2019
Since March 2020, Mr. Pearlman has been a partner in
Zeughauser Group, LLC, a nationally prominent law firm
management consulting firm. From August 2000
through December 2019, Mr. Pearlman was the
Managing Partner of Kramer Levin Naftalis & Frankel
LLP, a New York City headquartered international law
firm, and Mr. Pearlman will continue to serve as Counsel,
Managing Partner Emeritus in the firm until June 2020.
Prior thereto, he was a partner in the firm practicing in
the areas of private equity and corporate restructuring.
Mr. Pearlman is a 1978 cum laude graduate of St. John’s
University School of Law and a 1975 graduate of George
Washington University. Mr. Pearlman was selected to
serve as a director on our Board due to his business
and legal experience and acumen as well as his
management and leadership skills as the head of a
prominent international law firm.
Lawrence Reinhold
Age: 60
Director
Director Since: 2009
Lawrence Reinhold joined Systemax as its Chief
Financial Officer in January 2007 and served as
President and CEO from March 2016 through January
2019. In January 2019, Mr. Reinhold entered into a two
year consulting agreement with Systemax. Mr. Reinhold
was previously the CFO of several publicly traded
technology
a Partner with
PricewaterhouseCoopers. Mr. Reinhold is a Certified
Public Accountant. Mr. Reinhold was selected to serve
as a director on our Board due to his contributions while
working at Systemax and his extensive experience and
expertise in business, strategy, finance, accounting,
SEC reporting, public company management, mergers
and acquisitions and financial systems.
companies
and
The Board Recommends That You Vote for the Election
of All the Director Nominees (Proposal No. 1)
7
Corporate Governance
Board of Directors
Our Board currently consists of eight members, three of whom are independent under the rules of the SEC and New
York Stock Exchange, or NYSE. Our Board is led by Executive Chairman Mr. Richard Leeds and Vice Chairmen Messrs.
Bruce Leeds and Robert Leeds. Our independent directors have designated Mr. Rosenthal to be the Lead Independent
Director.
Our Board held eighteen meetings in fiscal 2019. All of the directors attended at least 75% of the meetings of the Board
and the respective committees of the Board on which they were members.
At last year’s annual meeting of stockholders held on June 3, 2019, two directors attended the meeting. We do not have
a policy with regards to directors’ attendance at our annual meeting of stockholders.
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Board Leadership Structure
We believe that the current mix of employee directors and non-employee independent directors that make up our Board,
along with the independent oversight of our Lead Independent Director, benefits Systemax and our stockholders.
Although the Board does not have an express policy on whether or not the roles of CEO and Executive Chairman of the
Board should be separate and if they are to be separate, whether the Executive Chairman of the Board should be
selected from the non-management directors or be an employee, the Board believes that it should have the flexibility to
make a determination from time to time in a manner that is in the best interests of Systemax and our stockholders at
the time of such determination.
Our Board as well as our Board Committees conducts an annual evaluation in order to determine whether it and its
committees are functioning effectively. As part of this annual self-evaluation, the Board evaluates whether the current
leadership structure continues to be optimal for Systemax and our stockholders.
Our Board believes that the most effective Board leadership structure for Systemax at the present time is for the roles
of CEO and Executive Chairman of the Board to be separate. Further, the Board believes that our Executive Chairman
and two Vice Chairmen should also have management roles, so that our Executive Chairman and Vice Chairmen remain
in closer touch with the operations of our business and so that, together with our CEO, they can focus their attention on
different aspects of the strategic and operating challenges and opportunities ahead for the Industrial Products Group.
The Board believes that the independent directors provide effective oversight of management. Moreover, in addition to
feedback provided during the course of Board meetings, the independent directors have regular executive sessions.
Following an executive session of independent directors, the Lead Independent Director acts as a liaison between the
independent directors and the Executive Chairman regarding any specific feedback or issues, provides the Executive
Chairman with input regarding agenda items for Board and Committee meetings, and coordinates with the Executive
Chairman regarding information to be provided to the independent directors in performing their duties.
Our Corporate Governance Guidelines provide the flexibility for our Board to modify or continue our leadership structure
in the future, as it deems appropriate.
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Director Independence
In connection with its annual review of director independence, the Board has determined that each of Messrs. Rosenthal,
Lindbloom and Pearlman has no material relationship with Systemax (directly or as a partner, stockholder, or officer of
an organization that has a relationship with Systemax) and meets the standards for independence required by the NYSE
and SEC rules. The Board has not adopted any other categorical standards of materiality for independence purposes.
The Board made this determination based on
the absence of any of the express disqualifying criteria relating to director independence set forth in Section
303A of the Corporate Governance Rules of the NYSE, and
the criteria for independence required of audit committee directors by Section 10A(m)(3) of the Securities
Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and
information provided by the directors to Systemax, which did not indicate any relationships (e.g., commercial,
industrial, banking, consulting, legal, accounting, charitable, or familial) which would impair the independence
of any of the non-management directors.
In making its determination, the Board took into consideration that certain Systemax directors and executive officers
have each invested funds with or through a private investment firm, of which Mr. Rosenthal is Chairman and CEO (and
which firm receives fees in respect of such investments), and may continue to do so in the future. The Board (in each
case with Mr. Rosenthal and the investing directors being recused) determined that such relationship was not material
to Mr. Rosenthal and does not affect his independence.
As a “controlled company,” Systemax is exempt from the NYSE requirement that listed companies have a majority of
independent directors. A “controlled company” is defined by the NYSE as a company of which more than 50% of the
voting power for the election of directors is held by an individual, group or other company. Systemax is a “controlled
company” in that more than 50% of the voting stock for the election of directors of Systemax, in the aggregate, is owned
by certain members of the Leeds family (including Messrs. Richard, Bruce and Robert Leeds, each of whom is an officer
and director of Systemax) and certain Leeds’ family trusts and other entities controlled by them (collectively, the “Leeds
Group”). The members of the Leeds Group have entered into a Stockholders Agreement with respect to certain shares
they each own. See Transactions with Related Persons / page 28 of this proxy statement.
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Lead Independent Director
The independent directors have designated Mr. Rosenthal to serve as our Lead Independent Director.
In addition to presiding at executive sessions of non-management directors, the Lead Independent Director has the
responsibility to coordinate the activities of the independent directors, and to perform the following functions:
advise the Executive Chairman of the Board as to an appropriate schedule of Board meetings, seeking to
ensure that the independent directors can perform their duties responsibly while not interfering with the flow of
Systemax’s operations;
provide the Executive Chairman with input as to the preparation of agendas for the Board and committee
meetings;
advise the Executive Chairman as to the quality, quantity, and timeliness of the flow of information from our
management that is necessary for the independent directors to effectively and responsibly perform their duties,
and although our management is responsible for the preparation of materials for the Board, the Lead
Independent Director may specifically request the inclusion of certain material;
recommend to the Executive Chairman the retention of consultants who report directly to the Board;
assist the Board and our officers in assuring compliance with and implementation of the corporate governance
policies; and be principally responsible for recommending revisions to the corporate governance policies;
coordinate and develop the agenda for, and moderate executive sessions of, the independent directors of the
Board, and act as principal liaison between the independent directors and the Executive Chairman on sensitive
issues; and
recommend to the Executive Chairman the membership of the various Board committees.
Meetings of Non-Management Directors
The NYSE requires the “non-management directors” or independent directors of a NYSE-listed company meet at regularly
scheduled executive sessions without management and to disclose in their annual proxy statements:
the name of the non-management director who is chosen to preside at all regularly-scheduled executive sessions
of the non-management members of the board of directors, and
a method for all interested parties to communicate directly with the presiding director or with the non-
management directors as a group (this method is described below under “Communicating with the Board”).
The Board’s non-management or independent directors meet separately in executive sessions, chaired by the Lead
Independent Director (currently Mr. Rosenthal), at least quarterly.
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Communicating with the Board
Stockholders and other interested parties may communicate with the Board, any committee of the Board, any individual
director (including the Lead Independent Director) or the independent directors as a group, by directing communication
to:
investinfo@systemax.com
Office of the Corporate Secretary
Systemax Inc.
11 Harbor Park Drive
Port Washington, NY 11050
Communications from stockholders will be distributed to the entire Board unless addressed to a particular committee,
director or group of directors. The Corporate Secretary will not distribute communications that are unrelated to the duties
of the Board, such as spam, junk mail, mass mailings, business solicitations and advertisements.
12
Committees of the Board
The Board has a standing Audit Committee, Nominating/Corporate Governance Committee, and Compensation
Committee. In addition, the Board has an Executive Committee empowered to act for the Board in certain circumstances,
but the Executive Committee did not exercise its power in 2019. See Executive Committee / page 15 of this proxy
statement.
Committee Composition
Robert D. Rosenthal
Chad M. Lindbloom
Paul S. Pearlman
I
I
I
Audit Committee
Nominating/Corporate
Governance
Committee
Compensation
Committee
I = Independent Director
= Chairman
= Member
On January 7, 2019, when Mr. Litwin was appointed as the Chief Executive Officer of Systemax, he resigned his
membership on each of the three Board committees but remains a member of the Board. On such date, Mr. Lindbloom
was appointed the Chairman of the Compensation Committee and Mr. Pearlman became an independent member of
the Board and was appointed as a member of each of the Audit Committee, the Compensation Committee and the
Nominating/Corporate Governance Committee.
Audit Committee
Number of Meetings Held in Fiscal 2019: Fourteen
The Audit Committee is appointed by the Board to assist the Board with oversight of:
•
•
•
•
the integrity of our financial statements;
our compliance with legal and regulatory requirements;
the independence and qualifications of our external auditors; and
the performance of our internal audit function and external auditors.
It is the Audit Committee’s responsibility to retain or terminate our independent registered public accountants, who audit
our financial statements, and to prepare the Audit Committee report that the SEC requires to be included in our annual
proxy statement. See Report of the Audit Committee / page 24 of this proxy statement.
As part of its activities, the Audit Committee meets with our auditors at least annually to review the scope and results of
the annual audit and quarterly to discuss the review of the quarterly financial results.
In addition, the Audit Committee receives and considers the independent registered public accountants’ comments and
recommendations as to internal controls, accounting staff, management performance and auditing procedures.
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The Audit Committee is also responsible for establishing procedures for:
the receipt, retention and treatment of complaints received by Systemax regarding accounting, internal
accounting controls and auditing matters, and
the confidential, anonymous submission by employees of Systemax of concerns regarding questionable
accounting or auditing matters.
In addition, the Audit Committee is responsible for reviewing, and discussing with management and reporting to the
Board regularly, our risk assessment and risk management processes, although it is senior management’s responsibility
to assess and manage our exposure to risk under the oversight of the Board.
In addition, the Audit Committee works together with the Compensation Committee to ensure that our compensation
policies address and promote our risk management goals and objectives. The Audit Committee also discusses with
management our major financial risk exposures and the steps management has taken to monitor and control such
exposures.
The Board has determined that Messrs. Rosenthal, Lindbloom and Pearlman are “audit committee financial experts” as
defined under SEC regulations.
Systemax does not have a standing policy on the maximum number of audit committees of other publicly owned
companies on which the members of the Audit Committee may serve. However, if a member of the Audit Committee
simultaneously serves on the audit committee of more than two other publicly-owned companies, the Board must
determine whether such simultaneous service would impair the ability of such member to effectively serve on the Audit
Committee. Any such determination will be disclosed in our annual proxy statement. Currently no member of the Audit
Committee serves on the audit committee of more than two other publicly-owned companies.
Nominating/Corporate Governance Committee
Number of Meetings Held in Fiscal 2019: Eight
The Nominating/Corporate Governance Committee’s responsibilities include, among other things:
identifying individuals qualified to become Board members and recommending to the Board nominees to stand
for election at any meeting of stockholders,
identifying and recommending nominees to fill any vacancy, however created, in the Board, and
developing and recommending to the Board a code of business conduct and ethics and a set of corporate
governance principles (including director qualification standards, responsibilities and compensation) and
periodically reviewing the code and principles.
In nominating candidates to become Board members, the Nominating/Corporate Governance Committee takes into
consideration such factors as it deems appropriate, including the experience, skill, integrity and background of the
candidates. The Nominating/Corporate Governance Committee may consider candidates proposed by management or
stockholders but is not required to do so. The Nominating/Corporate Governance Committee does not have any formal
policy with regard to the consideration of any director candidates recommended by stockholders or any minimum
qualifications or specific procedure for identifying and evaluating nominees for director as the Board does not believe
that such a formalistic approach is necessary or appropriate at this time. In addition, the Nominating/Corporate
Governance Committee and the Board may engage an independent search firm to assist in identifying qualified board
candidates.
The Nominating/Corporate Governance Committee, in seeking qualified Board members, does not have a policy
regarding utilizing diversity, however defined, in its selection process. The Nominating/Corporate Governance Committee
looks for individuals who have very high integrity, significant business experience and a deep genuine interest in
Systemax. We believe that each of the director nominees bring these qualifications to our Board. Moreover, they provide
our Board with a diverse complement of specific business skills, experience and perspectives.
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Compensation Committee
Number of Meetings Held in Fiscal 2019: Ten
The Compensation Committee’s responsibility is to review and approve corporate goals relevant to the compensation
of the CEO and, after an evaluation of the CEO’s performance in light of such goals, to set the compensation of the
CEO.
The Compensation Committee also approves:
the annual compensation of the other executive officers of Systemax,
the annual compensation of certain subsidiary managers, and
all individual stock-based incentive grants.
The Compensation Committee is also responsible for reviewing and making periodic recommendations to the Board
with respect to the general compensation, benefits and perquisite policies and practices of Systemax including our
incentive-based and equity-based compensation plans. The Compensation Committee also prepares an annual report
on executive compensation for inclusion in our annual proxy statement. See Compensation Committee Report / page
47 of this proxy statement. The Compensation Committee also reviews and approves the performance and compensation
of our Executive Chairman and Vice Chairmen.
In addition, it is the Compensation Committee’s responsibility to consider, and work together with the Audit Committee
to ensure our compensation policies address and promote our risk management goals and objectives.
Executive Committee
Number of Meetings Held in Fiscal 2019: None
Among other duties as may be assigned by the Board from time to time, the Executive Committee is:
authorized to oversee our operations,
supervise our executive officers,
review and make recommendations to the Board regarding our strategic direction, and
review and make recommendations to the Board regarding possible acquisitions or other significant business
transactions.
The Executive Committee is also authorized to manage the affairs of Systemax between meetings of the Board; the
Executive Committee has all of the powers of the Board not inconsistent with any provisions of the Delaware General
Corporation Law, our Certificate of Incorporation or By-Laws or other resolutions adopted by the Board, but the Executive
Committee did not exercise its power in 2019. The current members of the Executive Committee are Messrs. Richard
Leeds, Bruce Leeds, Robert Leeds and Robert D. Rosenthal.
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Risk Oversight
Board’s Role in Risk Oversight
Our Board as a whole is responsible for overseeing our risk management process. The Board focuses on our general
risk management strategy, the most significant risks facing Systemax, and seeks to ensure that appropriate risk mitigation
strategies are implemented by management.
Risk management is a recurring Board quarterly agenda item, and is considered part of business and operations planning.
The Board is also apprised of particular risk management matters in connection with its general oversight and approval
of corporate matters and at least quarterly receives information relating to material risk from management and from our
Legal & Risk Management and Internal Audit Departments.
Delegation to Board Committees
The Board has delegated to each of its Committees oversight of certain aspects of our risk management process.
Among its duties, the Audit Committee reviews with management (a) processes with respect to risk assessment and
management of risks that may be material to Systemax, (b) our system of disclosure controls and system of internal
controls over financial reporting, and (c) our compliance with legal and regulatory requirements.
The Compensation Committee is responsible for considering and working together with the Audit Committee regarding
the compensation policies for all our employees in the context of how such policies affect and promote our risk
management goals and objectives.
The Nominating/Corporate Governance Committee is responsible for working with the Audit and Compensation
Committees to develop and recommend to the Board a set of risk management policies and procedures, including our
compensation policies for all our employees as they relate to risk management, and to review these policies and
procedures annually. All committees report to the full Board as appropriate, including when a matter rises to the level of
a material or enterprise level risk.
Day-to-Day Risk Management
Our senior management is responsible for day-to-day risk management.
Our Internal Audit Department serves as the primary monitoring and testing function for company-wide policies and
procedures and manages the day-to-day oversight of the risk management strategy for the ongoing business of Systemax.
This oversight includes identifying, evaluating, and addressing potential risks that may exist at the enterprise, strategic,
financial, operational, compliance and reporting levels. The Internal Auditor reports directly to our Audit Committee
quarterly, and works closely with our CEO on matters that may impact our exposure to risk.
We believe the division of risk management responsibilities described above is an effective approach for addressing the
risks facing Systemax and that our Board leadership structure supports this approach.
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Proposal No. 2 – Non-Binding Advisory Vote on Executive Compensation
The guiding principles of our compensation policies and decisions include aligning each executive’s compensation with
our business strategy and the interests of our stockholders and providing incentives needed to attract, motivate and
retain key executives who are important to our long-term success. Consistent with this philosophy, a significant portion
of the total incentive compensation for each of our executives is directly related to our financial results and to other
performance factors that measure our progress against the goals of our strategic and operating plans.
Stockholders are urged to read the Compensation Discussion and Analysis section of this proxy statement, which
discusses how our compensation design and practices reflect our compensation philosophy. The Compensation
Committee and the Board believe that our compensation design and practices are effective in implementing our guiding
principles.
We are required to submit a proposal to stockholders for a (non-binding) advisory vote to approve the compensation of
our Named Executive Officers pursuant to Section 14A of the 1934 Act. This proposal, commonly known as a “say-on-
pay” proposal, gives our stockholders the opportunity to express their views on the compensation of our Named Executive
Officers. This vote is not intended to address any specific item of compensation, but rather the overall compensation of
our Named Executive Officers and the principles, policies and practices described in this proxy statement.
Accordingly, the following resolution is submitted for stockholder vote at the 2020 Annual Meeting:
“RESOLVED, that the stockholders of Systemax Inc. approve, on an advisory basis, the compensation of its Named
Executive Officers as disclosed in the Proxy Statement for the 2020 Annual Meeting, including the Summary
Compensation Table and the Compensation Discussion and Analysis set forth in such Proxy Statement and other related
tables and disclosures.”
The affirmative vote of a majority of the votes cast for this proposal is required to approve, on an advisory basis, the
compensation of the Company’s Named Executive Officers, as disclosed in this proxy statement.
As this is an advisory vote, the result will not be binding on the Company, the Board or the Compensation Committee,
although our Compensation Committee will consider the outcome of the vote when evaluating our compensation
principles, design and practices. Proxies submitted without direction pursuant to this solicitation will be voted “FOR” the
approval of the compensation of our Named Executive Officers, as disclosed in this proxy statement.
The Board recommends that you vote for the approval, on an advisory basis, of the compensation
of our Named Executive Officers, as disclosed in this proxy statement (Proposal No. 2)
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Proposal No. 3 – Approval of the Adoption of the Systemax Inc. 2020
Omnibus Long-Term Incentive Plan
Our Board has adopted the Systemax Inc. 2020 Omnibus Long-Term Incentive Plan (the “Plan” or the “2020 Omnibus
Plan”), subject to approval by our stockholders.
Systemax previously sponsored the 2010 Long-Term Stock Incentive Plan (the “2010 Plan”). The 2010 Plan will expire
on April 23, 2020. As a result, no further awards are available for grant under the 2010 Plan and the 2010 Plan cannot
be used for future awards. Therefore, it is necessary for Systemax to adopt the 2020 Omnibus Plan to replace the 2010
Plan in order to continue furthering the goals enabled by the 2010 Plan.
The following is a summary of the principal provisions of the 2020 Omnibus Plan. This description of the 2020 Omnibus
Plan is qualified in its entirety by reference to the full text of the 2020 Omnibus Plan, which is set forth in the attached
Annex A.
Purposes
The purposes of the 2020 Omnibus Plan are to promote the interests of Systemax and our stockholders by (i) attracting
and retaining exceptional directors, including non-employee directors, executive personnel and other key employees,
including consultants and advisors to Systemax and its affiliates; (ii) motivating such directors, executive personnel,
employees, consultants and advisors by means of performance-related incentives to achieve longer-range performance
goals; and (iii) enabling such directors, executive personnel, employees, consultants and advisors to participate in the
long-term growth and financial success of Systemax.
Types of Awards to be Granted
The 2020 Omnibus Plan provides for the granting of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, restricted stock units, performance awards or other stock-based awards. Any of
the foregoing is referred to as an “Award.”
Eligibility and Conditions of Grant
Any director of Systemax, employee of Systemax or of any affiliate and any individual providing consulting or advisory
services to Systemax or an affiliate, shall be eligible to receive an award under the 2020 Omnibus Plan. The committee
that administers the Plan shall determine, in its sole discretion, the terms and conditions of any award.
No award shall be granted under the 2020 Omnibus Plan after the tenth anniversary of the adoption of the Plan by the
Board, except that “restoration options” may be granted after that date. Restoration options are options issued to
optionees who surrender then-owned shares in exercise of an option. Such options are issued with an exercise price
equal to the fair market value at the date of grant and a term equal to the remaining term of the then-exercised options
and for no more than the number of shares delivered in exercise of such options.
Shares Available Under the Plan
Subject to adjustment in the case of certain corporate changes, awards may be granted under the Plan with respect to
an aggregate of 7,500,000 shares of Systemax’s common stock.
During a calendar year, awards may be granted to any individual with respect to a maximum of 1,500,000 shares (or
$10,000,000 in the case of cash performance awards).
Administration
The Compensation Committee (the “Committee”) administers the Plan and determines, in its sole discretion, the terms
and conditions of any Award, unless the Board elects to administer the Plan itself. The Committee or the Board may
delegate to one or more officers or managers of Systemax the authority to designate the individuals who will receive
Awards under the Plan provided that the Committee shall itself grant all Awards to those individuals who could reasonably
be considered to be subject to the insider trading provisions of Section 16 of the 1934 Act.
18
The Committee determines the persons who will receive Awards, the type of Awards granted, and the number of shares
subject to each Award. The Committee also determines the prices, expiration dates, vesting schedules, forfeiture
provisions and other material features of Awards. The Committee has the authority to interpret and construe any provision
of the Plan and to adopt such rules and regulations for administering the Plan as it deems necessary or appropriate. All
decisions and determinations of the Committee are final, binding and conclusive on all parties.
Adjustments
In the event of certain corporate actions affecting Systemax’s stock, including, for example, a recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation or spin-off, the Committee shall adjust the number of shares
of common stock available for grant under the Plan and shall adjust any outstanding Awards (including the number of
shares subject to the Awards and the exercise price of stock options) in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or those Awards.
Amendment and Termination of the Plan
The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder
approval if such approval is necessary to comply with any tax or regulatory requirement. Notwithstanding anything to
the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan
conform to the local rules and regulations in any jurisdiction outside the United States.
The Committee may amend any Award, including an amendment that reduces the exercise price, except that consent
of the Award recipient is necessary if the amendment would impair the recipient’s rights under the Award.
Summary of Awards Available Under the Plan
Non-Qualified Stock Options. The exercise price per share of each non-qualified option (“NQO”) granted under the
Plan is determined by the Committee on the grant date and will not be less than the fair market value of a share of stock
on the grant date. Each NQO is exercisable for a term, not to exceed ten years, established by the Committee on the
grant date. The exercise price must be paid in cash or, subject to the approval of the Committee, in shares of stock
valued at their fair market value on the date of exercise or by such other method as the Committee may from time to
time prescribe.
The Plan contains provisions applicable to the exercise of NQOs subsequent to a grantee’s termination of employment
for “cause,” other than for cause, or due to “disability” (as each such term is defined in the Plan) or death. These
provisions apply unless the Committee establishes alternative provisions with respect to an Award. In general, these
provisions provide that NQOs that are not exercisable at the time of such termination shall expire upon the termination
of employment and NQOs that are exercisable at the time of such termination shall remain exercisable until the earlier
of the expiration of their original term and (i) in the event of a grantee’s termination other than for cause, the expiration
of three months after such termination of employment and (ii) in the event of a grantee’s disability or death, the first
anniversary of such termination. In the event Systemax terminates the grantee’s employment for cause, all NQOs held
by the grantee, whether or not then exercisable, terminate immediately as of the commencement of business on the
date of termination of employment.
Stock options generally are not transferable other than by will or the laws of descent and distribution, except that the
Committee may permit transfers to the grantee’s family members or trusts for the benefit of family members.
Incentive Stock Options. Generally, incentive stock options (“ISOs”) are options that may provide certain federal
income tax benefits to a grantee not available with NQOs. An ISO has the same Plan provisions as an NQO (including
with respect to various termination events as described above, except that:
•
•
In order to receive the tax benefits, a grantee must hold the shares acquired upon exercise of an ISO for
at least two years after the grant date and at least one year after the exercise date.
The aggregate fair market value of shares of stock (determined on the ISO grant date) with respect to
which ISOs are exercisable for the first time by a grantee during any calendar year (whether issued under
the Plan or any other plan of Systemax or its subsidiaries) may not exceed $100,000.
19
•
In the case of an ISO granted to any individual who owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of Systemax, the exercise price per share must be at
least 110% of the fair market value of a share of stock at the time the ISO is granted, and the ISO cannot
be exercisable more than five years from the grant date.
• An option cannot be treated as an ISO if it is exercised more than three months following the grantee’s
termination of employment for any reason other than death or disability, or more than one year after the
grantee’s termination of employment for disability, unless the grantee died during such three-month or one-
year period. ISOs are not transferable other than by will or by the laws of descent and distribution.
Stock Appreciation Rights. A stock appreciation right (“SAR”) entitles the grantee to receive upon exercise, for each
share subject to the SAR, an amount equal to the excess of (i) the fair market value of a share of common stock on the
date of exercise over (ii) the fair market value of a share of common stock on the date of grant. Each SAR shall be
exercisable for a term, not to exceed ten years, established by the Committee on the grant date. A SAR may be settled
in cash or shares of common stock (valued at their fair market value on the date of exercise of the SAR), in the Committee’s
discretion.
Restricted Stock. Prior to the vesting of any restricted shares, the shares are not transferable by the grantee and are
forfeitable. Vesting of the shares may be based on continued employment with Systemax and/or upon the achievement
of specific performance goals, as the Committee determines on the grant date. The Committee may, at the time that
shares of restricted stock are granted, impose additional conditions to the vesting and delivery of the shares. Unless
the Committee provides otherwise, unvested shares of restricted stock are automatically and immediately forfeited upon
a grantee’s termination of employment for any reason.
Restricted Stock Units. A restricted stock unit entitles the grantee to receive a share of stock, or in the sole discretion
of the Committee, the value of a share of common stock, on the date that the restricted stock unit vests subject to any
deferred distribution requirements. Payment shall be in cash, other securities or other property, as determined in the
sole discretion of the Committee. Unless the Committee provides otherwise, unvested restricted stock units are forfeited
upon a grantee’s termination of employment for any reason.
Performance Awards. Performance awards entitle the grantee to either cash or shares of common stock, in the
Committee’s sole discretion, upon the achievement of specified performance goals.
Performance Goals
The Plan provides that granting or vesting of restricted stock, restricted stock units and performance awards may be
conditioned on the achievement of specified performance goals. The maximum amount with respect to which performance
awards may be granted to an individual in a calendar year is $10,000,000 with respect to performance awards
denominated in cash and 1,500,000 shares with respect to performance awards denominated in shares.
The performance goals may be based on one or more of: share price, revenues, earnings (including but not limited to
EBITDA), earnings per share, operating income, adjusted operating income, return on equity, expenses, and objective
strategic business, operations and governance goals. Each such performance goal may (1) be expressed with respect
to Systemax as a whole or with respect to one or more divisions or business units, (2) be expressed on a pre-tax or
after-tax basis, (3) be expressed on an absolute and/or relative basis, (4) employ comparisons with past performance
of Systemax (including one or more divisions) and/or (5) employ comparisons with the current or past performance of
other companies, and in the case of earnings-based measures, may employ comparisons to capital, stockholders’ equity
and shares outstanding.
To the extent applicable, the measures used in performance goals set under the Plan shall be determined in a manner
consistent with the methods used in Systemax’s Forms 10-K and 10-Q, except that adjustments will be made for certain
items, including special, unusual or non-recurring items, acquisitions and dispositions and changes in accounting
principles.
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Summary of Federal Tax Consequences
The following is a brief description of the federal income tax treatment that will generally apply to Awards under the Plan
based on current federal income tax rules.
Non-Qualified Options. The grant of an NQO will not result in taxable income to the grantee. Except as described
below, the grantee will realize ordinary income at the time of exercise in an amount equal to the excess of the fair market
value of the stock acquired over the exercise price for those shares, and Systemax will be entitled to a corresponding
tax deduction. Gains or losses realized by the grantee upon disposition of such shares will be treated as capital gains
and losses, with the basis in such stock equal to the fair market value of the shares at the time of exercise.
Incentive Stock Options. The grant of an incentive stock option will not result in taxable income to the grantee. The
exercise of an incentive stock option will not result in taxable income to the grantee provided that the grantee was,
without a break in service, an employee of Systemax or a subsidiary during the period beginning on the date of the grant
of the option and ending on the date three months prior to the date of exercise (one year prior to the date of exercise if
the grantee is disabled, as that term is defined in the Internal Revenue Code of 1986, as amended (the “Code”). The
excess of the fair market value of the stock at the time of the exercise of an incentive stock option over the exercise
price is an adjustment that is included in the calculation of the grantee’s alternative minimum taxable income for the tax
year in which the incentive stock option is exercised.
If the grantee does not sell or otherwise dispose of the stock within two years from the date of the grant of the incentive
stock option or within one year after the transfer of such stock to the grantee, then, upon disposition of such stock, any
amount realized in excess of the exercise price will be taxed to the grantee as capital gain and Systemax will not be
entitled to a corresponding tax deduction. A capital loss will be recognized to the extent that the amount realized is less
than the exercise price. If the foregoing holding period requirements are not met, the grantee will generally realize
ordinary income at the time of the disposition of the shares, in an amount equal to the lesser of (i) the excess of the fair
market value of the stock on the date of exercise over the exercise price, or (ii) the excess, if any, of the amount realized
upon disposition of the shares over the exercise price and Systemax will be entitled to a corresponding tax deduction. If
the amount realized exceeds the value of the shares on the date of exercise, any additional amount will be capital gain. If
the amount realized is less than the exercise price, the grantee will recognize no income, and a capital loss will be
recognized equal to the excess of the exercise price over the amount realized upon the disposition of the
shares. Systemax will be entitled to a tax deduction to the extent that the grantee recognizes ordinary income because
of a disqualifying disposition.
Stock Appreciation Rights. The grant of a SAR will not result in taxable income to the grantee. Upon exercise of a
SAR, the fair market value of stock received will be taxable to the grantee as ordinary income and Systemax will be
entitled to a corresponding tax deduction. Gains and losses realized by the grantee upon disposition of any such shares
will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of the shares at
the time of exercise.
Restricted Stock. The grant of restricted stock will not result in taxable income at the time of grant and Systemax will
not be entitled to a corresponding tax deduction, assuming that the restrictions constitute a “substantial risk of forfeiture”
for federal income tax purposes. Upon the vesting of shares of restricted stock with concurrent delivery of shares, the
holder will realize ordinary income in an amount equal to the then fair market value of those shares, and Systemax will
be entitled to a corresponding tax deduction. Upon the distribution of vested shares that were subject to delayed delivery
restrictions, the holder will realize ordinary income in an amount equal to the then fair market value of those shares, and
Systemax will be entitled to a corresponding tax deduction. Gains or losses realized by the grantee upon disposition of
such shares will be treated as capital gains and losses, with the basis in such shares equal to the fair market value of
the shares at the time of vesting. Dividends paid to the holder during the restriction period, if so provided, will also be
compensation income to the grantee and Systemax will be entitled to a corresponding tax deduction. A grantee may
elect pursuant to Section 83(b) of the Code to have income recognized at the date of grant of a restricted stock award
and to have the applicable capital gain holding period commence as of that date, and Systemax will be entitled to a
corresponding tax deduction.
Restricted Stock Units. The grant of a restricted stock unit will not result in taxable income at the time of grant and
Systemax will not be entitled to a corresponding tax deduction. Upon the vesting of shares underlying the restricted
stock unit with concurrent delivery of shares, the holder will realize ordinary income in an amount equal to the then fair
market value of those shares, and Systemax will be entitled to a corresponding tax deduction. Upon the distribution of
vested shares underlying the restricted stock unit that were subject to delayed delivery restrictions, the holder will realize
ordinary income in an amount equal to the then fair market value of those shares, and Systemax will be entitled to a
corresponding tax deduction. Gains or losses realized by the grantee upon disposition of such shares will be treated as
21
capital gains and losses, with the basis in such shares equal to the fair market value of the shares at the time of vesting,
when granted to the grantee.
Performance Awards. The grant of a performance award will not result in taxable income at the time of grant and
Systemax will not be entitled to a corresponding tax deduction. The grantee will have compensation income at the time
of distribution equal to the amount of cash received and the then fair market value of the distributed shares and Systemax
will then be entitled to a corresponding tax deduction.
Withholding of Taxes. Systemax may withhold amounts from grantees to satisfy withholding tax requirements. Subject
to guidelines established by the Committee, grantees may have stock withheld from Awards or may tender stock to
Systemax to satisfy tax withholding requirements.
Section 409A. Section 409A of the Code imposes significant restrictions on deferred compensation and may impact
on Awards under the Plan. If the Section 409A restrictions are not followed, a grantee could be subject to accelerated
liability for tax on the non-complying award, as well as a 20% penalty tax. The Plan is intended to comply with the
requirements of Section 409A.
Tax Advice. The preceding discussion is based on federal tax laws and regulations presently in effect, which are subject
to change, and the discussion does not purport to be a complete description of the federal income tax aspects of the
Plan. A grantee may also be subject to state and local taxes in connection with the grant of Awards under the
Plan. Grantees are encouraged to see their own legal, tax and accounting advice.
New Plan Benefits
Awards under the 2020 Omnibus Plan are discretionary. Consequently, it is not possible to determine who will receive
benefits or the number of shares to be included in any future grants.
The Board recommends that you vote for the approval of the
Systemax Inc. 2020 Omnibus Long-Term Incentive Plan (Proposal No. 3)
22
Proposal No. 4 – Ratification of Ernst & Young LLP as our Independent
Auditor
The Audit Committee of the Board is directly responsible for the appointment, compensation, retention and oversight of
our independent auditor and approves the audit engagement letter with Ernst & Young LLP and its audit fees. The Audit
Committee has appointed Ernst & Young LLP as our independent auditor for fiscal 2020 and believes that the continued
retention of Ernst & Young LLP as our independent auditor is in the best interest of Systemax and our stockholders.
While not required by law, we are asking our stockholders to ratify the appointment of Ernst & Young LLP as our
independent auditor for fiscal 2020 at the Annual Meeting as a matter of good corporate governance. If stockholders do
not ratify this appointment, the Audit Committee will consider whether it is appropriate to appoint another audit firm. Even
if the appointment is ratified, the Audit Committee in its discretion may appoint a different audit firm at any time during
the fiscal year if it determines that such a change would be in the best interest of Systemax and our stockholders.
We expect representatives of Ernst & Young LLP to be present at the Annual Meeting. They will have an opportunity to
make a statement if they desire to do so and to respond to appropriate questions from stockholders.
Fees Paid to our Independent Auditor
The following table sets forth the fees billed to us by Ernst & Young LLP for services in fiscal 2019 and 2018, all of which
were pre-approved by the Audit Committee:
Fee Category
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees (4)
Total
2019
($)
2018
($)
1,196,000
1,257,000
0
0
2,000
15,000
0
2,000
1,198,000
1,274,000
(1)
In accordance with the SEC’s definitions and rules, “audit fees” are fees that were billed to Systemax by Ernst & Young LLP for
the audit of our annual financial statements, to be included in the Form 10-K, and review of financial statements included in the
Form 10-Qs; for the audit of our internal control over financial reporting with the objective of obtaining reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects; for the attestation of management’s
report on the effectiveness of internal control over financial reporting; and for services that are normally provided by the auditor
in connection with statutory and regulatory filings or engagements.
(2)
“Audit-related fees” are fees for assurance and related services that are reasonably related to the performance of the audit or
review of our financial statements and internal control over financial reporting, including services in connection with assisting
Systemax in our compliance with our obligations under Section 404 of the Sarbanes-Oxley Act and related regulations.
(3) Ernst & Young LLP did not provide any professional services for tax compliance, planning or advice in 2019 or 2018.
(4) Consists of fees billed for other professional services rendered to Systemax.
Audit Committee Pre-Approval Policy
The Audit Committee is responsible for approving every engagement of Systemax’s independent auditor to perform
audit or non-audit services on behalf of Systemax or any of its subsidiaries before such auditors can be engaged to
provide those services. The Audit Committee does not delegate its pre-approval authority. The Audit Committee is not
permitted to engage the independent auditor to perform any non-audit services proscribed by law or regulation. The
Audit Committee has reviewed the services provided to Systemax by Ernst & Young LLP and believes that the non-
audit/review services it has provided are compatible with maintaining the auditor’s independence.
The Board recommends that you vote for the proposal to ratify the appointment
of Ernst & Young LLP as our independent auditor for fiscal year 2020
(Proposal No. 4)
23
Report of the Audit Committee
The Audit Committee of the Board operates under its Charter, which was originally adopted by the Board in 2000, is
reviewed annually, and was most recently revised in March 2017. As set forth in its Charter, the Audit Committee’s job
is one of oversight. Management is responsible for Systemax’s financial statements, internal accounting and financial
controls, the financial reporting process, the internal audit function and compliance with our policies and legal
requirements. Our independent auditors are responsible for performing independent audits of our consolidated financial
statements and the effectiveness of our internal controls in accordance with standards of the Public Company Accounting
Oversight Board (United States) and for issuance of reports thereon; they also perform limited reviews of our unaudited
quarterly financial statements.
The Audit Committee’s responsibility is to engage the independent registered public accountants, monitor and oversee
these accounting, financial and audit processes and report its findings to the full Board. It also investigates matters
related to our financial statements and controls as it deems appropriate. In the performance of these oversight functions,
the members of the Audit Committee rely upon the information, opinions, reports and statements presented to them by
Systemax management and by the independent registered public accountants, as well as by other experts that the Audit
Committee hires.
The Audit Committee met with our independent auditors to review and discuss the overall scope and plans for the audit
of our consolidated financial statements for the year ended December 31, 2019. The Audit Committee has considered
and discussed with management and the independent auditors (both alone and with management present) the audited
financial statements as well as the independent auditors’ evaluation of our internal controls and the overall quality of our
financial reporting.
Management represented to the Audit Committee that our consolidated financial statements for fiscal 2019 were prepared
in accordance with U.S. generally accepted accounting principles. In connection with these responsibilities, the Audit
Committee met with management and Ernst & Young LLP to review and discuss the December 31, 2019 audited
consolidated financial statements. The Audit Committee also discussed with Ernst & Young LLP the matters required to
be discussed by the Public Company Accounting Oversight Board Auditing Standard No. 1301, Communications with
Audit Committees. The Audit Committee also received written disclosures and the letter from Ernst & Young LLP required
by Rule 3526 of the Public Company Accounting Oversight Board (Communications with Audit Committees Concerning
Independence), and the Audit Committee discussed with Ernst & Young LLP the firm’s independence.
Based on the review of the representations of management, the discussions with management and the independent
registered public accountants and the review of the Report of Ernst & Young LLP, Independent Registered Public
Accounting Firm, to the Committee, the Audit Committee recommended to the Board that the financial statements of
Systemax for fiscal 2019 as audited by Ernst & Young LLP be included in Systemax’s Annual Report on Form 10-K filed
with the SEC.
Submitted by the Audit Committee of the Board,
Chad M. Lindbloom (Chairman)
Robert D. Rosenthal
Paul S. Pearlman
24
Security Ownership Information
The following tables provides certain information
regarding
the beneficial ownership of Systemax
common stock as of April 6, 2020 by:
•
•
•
•
our directors;
our executive officers named in the Summary
Compensation Table / page 48 of this proxy
statement;
all executive officers and directors as a group;
and
each person known by us to own beneficially
more than 5% of our outstanding common
stock
Security Ownership of Management
A person has beneficial ownership of shares if the
person has voting or investment power over the shares
or the right to acquire such power in 60 days. Investment
power means the power to direct the sale or other
disposition of the shares. Except as otherwise described
in the notes below, information on the number of shares
beneficially owned is as of April 6, 2020, and the listed
beneficial owners have sole voting and investment
power. A total of 37,470,110 shares of our common stock
were outstanding as of April 6, 2020.
The address for each beneficial owner, unless otherwise
noted is c/o Systemax Inc., 11 Harbor Park Drive, Port
Washington, NY 11050.
Name of Beneficial Owner
Shares of
Common Stock
(a)
Restricted Stock
Units vesting
within 60 days (1)
Stock Options
currently exercisable or becoming
exercisable within 60 days (1)
Percent of
Common Stock
Richard Leeds (2)
Bruce Leeds (3)
Robert Leeds (4)
Barry Litwin
Robert D. Rosenthal
Chad M. Lindbloom
Paul S. Pearlman
Lawrence Reinhold
Thomas Clark
Robert Dooley
Eric Lerner
Manoj Shetty
14,526,816
13,686,090
13,013,992
5,098
69,401
680
-
159,344 (5)
18,233
70,264
4,147
2,922
-
-
-
1,259
1,259
1,259
849
849
-
-
-
-
-
-
-
10,000
-
-
-
53,737
45,348
18,750
51,063
38%
36%
34%
*
*
*
*
*
*
*
*
*
All of our current directors and executive
officers (16 persons)
25,181,435
5,475
196,496
67%
(a) Amounts listed in this column may include shares held in partnerships or trusts that are counted in more than one individual’s total.
*
less than 1%
(1)
(2)
(3)
(4)
In computing the percentage of shares owned by each person and by the group, these restricted stock units and stock options, as applicable,
were added to the total number of outstanding shares of common stock for the percentage calculation.
Includes 577,462 shares owned by Mr. Richard Leeds directly, 1,000,000 shares owned by the Richard Leeds 2020 GRAT, 1,000,000
shares owned by the Richard Leeds 2019 GRAT, and 1,263,265 shares owned by the Richard Leeds 2018 GRAT. Also, includes 1,838,583
shares owned by a limited partnership of which Mr. Richard Leeds is a general partner, 100 shares owned by the general partner of the
aforementioned limited partnership, 235,850 shares owned by a limited partnership of which a limited liability company controlled by Mr.
Richard Leeds is the general partner, 7,981,756 shares owned by trusts for the benefit of his brothers’ children for which Mr. Richard Leeds
acts as co-trustee, 519,800 shares owned by a limited partnership in which Mr. Richard Leeds has an indirect pecuniary interest, and
10,000 shares owned by trusts for the benefits of other family members for which Mr. Richard Leeds acts as co-trustee.
Includes 1,007,661 shares owned by Mr. Bruce Leeds directly, 1,000,000 shares owned by the Bruce Leeds 2020 GRAT, 1,000,000 shares
owned by the Bruce Leeds 2019 GRAT, and 581,633 shares owned by the Bruce Leeds 2018 GRAT. Also, includes 1,838,583 shares
owned by a limited partnership of which Mr. Bruce Leeds is a general partner, 100 shares owned by the general partner of the aforementioned
limited partnership, 7,728,313 shares owned by trusts for the benefit of his brothers’ children for which Mr. Bruce Leeds acts as co-trustee,
519,800 shares owned by a limited partnership in which Mr. Bruce Leeds has an indirect pecuniary interest, and 10,000 shares owned by
trusts for the benefits of other family members for which Mr. Richard Leeds acts as co-trustee.
Includes 16,429 shares owned by Mr. Robert Leeds directly, 1,000,000 shares owned by the Robert Leeds 2020 GRAT, 1,500,000 shares
owned by the Robert Leeds 2019 GRAT, and 741,817 shares owned by the Robert Leeds 2018 GRAT. Also, includes 1,838,583 shares
owned by a limited partnership of which Mr. Robert Leeds is a general partner, 100 shares owned by the general partner of the aforementioned
limited partnership, 7,397,263 shares owned by trusts for the benefit of his brothers’ children for which Mr. Robert Leeds acts as co-trustee
and 519,800 shares owned by a limited partnership in which Mr. Robert Leeds has an indirect pecuniary interest.
(5)
Includes 1,000 shares held by Mr. Reinhold's spouse, of which Mr. Reinhold disclaims beneficial ownership.
25
Security Ownership of Certain Beneficial Owners
Name and Address of Beneficial Owner
Shares of Common Stock
Percent of
Common Stock
Prescott General Partners LLC (1)
2200 Butts Road, Suite 320
Boca Raton, FL 33431
2,111,944
5.6%
(1) Based on information supplied by Prescott General Partners LLC (“PGP”), Prescott Associates L.P. (“Prescott Associates”), Prescott
Investors Profit Sharing Trust (“PIPS”) and Thomas W. Smith in a Schedule 13G/A filed with the SEC on February 14, 2020.
PGP, as the general partner of three private investment limited partnerships (including Prescott Associates) (collectively, the “Partnerships”),
may be deemed to share the power to vote or to direct the vote and to dispose or to direct the disposition of 2,111,944 shares held by the
Partnerships. Prescott Associates has the shared power to vote or to direct the vote and to dispose or to direct the disposition of 2,042,136
shares. PIPS has the sole power to vote or to direct the vote of and to dispose or to direct the disposition of 75,229 shares. Mr. Smith has
the sole power to vote or to direct the vote of and to dispose or to direct the disposition of 495,359 shares held by Ridgeview Smith
Investments LLC, a limited liability company established by Mr. Smith, the sole member of which is a revocable trust established by Mr.
Smith for the benefit of his family. In his capacity as investment manager for certain managed accounts, Mr. Smith may be deemed to have
the shared power to vote or to direct the vote of 58,000 shares and to dispose or to direct the disposition of 58,000 shares. Voting and
investment authority over investment accounts established for the benefit of certain family members and friends of Mr. Smith is subject to
each beneficiary’s right, if so provided, to terminate or otherwise direct the disposition of the investment account.
The 13G/A is Amendment No. 9 to the joint filing on Schedule 13G by Thomas W. Smith, Scott J. Vassalluzzo and Steven M. Fischer
originally filed with the SEC on July 13, 2009, as amended by Amendment No. 1 filed with the SEC on February 16, 2010, Amendment
No. 2 filed with the SEC on February 14, 2011, Amendment No. 3 filed by PGP, Thomas W. Smith and Scott J. Vassalluzzo with the SEC
on January 5, 2012, Amendment No. 4 filed by PGP, Thomas W. Smith and Scott J. Vassalluzzo with the SEC on February 14, 2013,
Amendment No. 5 filed by PGP, Prescott Associates, Thomas W. Smith and Scott J. Vassalluzzo with the SEC on February 14, 2014,
Amendment No. 6 filed by PGP, Prescott Associates, Thomas W. Smith and Scott J. Vassalluzzo with the SEC on February 13, 2015,
Amendment No. 7 filed by PGP, Prescott Associates, PIPS and Thomas W. Smith with the SEC on February 14, 2017 and Amendment
No. 8 filed by PGP, Prescott Associates, PIPS and Thomas W. Smith (as amended, the “Schedule 13G”).
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 furnished to us and written representations from our officers and directors,
we believe that all of our officers and directors and all beneficial owners of 10% or more of any class of our registered
equity securities timely filed all reports required under Section 16(a) of the Exchange Act during fiscal 2019, with the
exception of a Form 4 filing for Mr. Lawrence Reinhold made on October 30, 2019.
26
Equity Compensation Plans
Information for our equity compensation plans in effect as of the end of fiscal 2019 is as follows:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights (1)
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
764,784
-
764,784
$17.31
-
$17.31
6,223,258
-
6,223,258
Plan Category
Equity compensation plans
approved by stockholders
Equity compensation plans not
approved by stockholders
Total
(1) The weighted-average exercise price does not take into account the shares issuable upon outstanding restricted stock units
vesting, which have no exercise price.
27
Certain Relationships and Related Transactions
Related Person Transaction Policy
Our written corporate approval policy requires transactions with related persons, to be reviewed and approved or ratified
by the following persons on an escalating basis:
our General Counsel,
our CFO,
our CEO, and
our Nominating/Corporate Governance Committee.
In this regard, all such transactions are first discussed with the CFO and are submitted to the General Counsel’s office,
including for an initial determination of whether such further related person transaction review is required.
We utilize the definition of related persons under applicable SEC rules, defined as any executive officer, director or
nominee for director of Systemax, any beneficial owner of more than 5% of the outstanding shares of our common stock,
or any immediate family member of any such person.
In reviewing these transactions, we strive to assure that the terms of any agreement between Systemax and a related
party is at arm’s length, fair and at least as beneficial to Systemax as could be obtained from third parties.
The Nominating/Corporate Governance Committee, in its discretion, may consult with third party appraisers, valuation
advisors or brokers to make such determination.
Transactions With Related Persons
Lease. On December 14, 2016, Global Equipment Company Inc., a wholly owned indirect subsidiary of Systemax entered
into an amended and restated lease (the “Lease”) for its Port Washington, NY headquarters (the “Headquarters”). Systemax
has leased the Headquarters since 1988 from an entity owned by Messrs. Richard, Bruce and Robert Leeds, directors and
officers of, and together with their respective affiliated entities majority stockholders of, Systemax (the “Landlord”). The Lease
provides that it is intended to be a “triple net” lease with Global Equipment Company Inc. to pay, or reimburse Landlord for
paying, all costs and operating expenses, including taxes, insurance and maintenance expenses, associated with the Lease
and the Headquarters. The Lease was reviewed and approved in accordance with the corporate approval policy noted above
for related party transactions. Lease payments totaled $976,201 for fiscal 2019.
Stockholders Agreement. Certain members of the Leeds family (including Messrs. Richard, Bruce and Robert Leeds) and
family trusts of Messrs. Richard, Bruce and Robert Leeds entered into a stockholders agreement pursuant to which the parties
agreed to vote in favor of the nominees for the Board designated by the holders of a majority of the shares held by such
stockholders at the time of our initial public offering of the shares. In addition, the agreement prohibits the sale of the shares
without the consent of the holders of a majority of the shares held by all parties to the agreement, subject to certain exceptions,
including sales pursuant to an effective registration statement and sales made in accordance with Rule 144. The agreement
also grants certain drag-along rights in the event of the sale of all or a portion of the shares held by holders of a majority of
the shares. As of the end of fiscal 2019, the parties bound to the stockholders agreement beneficially owned 25,221,028
shares subject to such agreement (constituting approximately 66.8% of the shares outstanding).
Pursuant to the stockholders agreement, Systemax granted to the parties demand and incidental, or “piggy-back,” registration
rights with respect to the shares. The demand registration rights generally provide that the holders of a majority of the shares
may require, subject to certain restrictions regarding timing and number of shares that Systemax register under the Securities
Act all or part of the shares held by such stockholders. Pursuant to the incidental registration rights, Systemax is required to
notify such stockholders of any proposed registration of any shares under the Securities Act and if requested by any such
stockholder to include in such registration any number of shares of shares held by it subject to certain restrictions. Systemax
has agreed to pay all expenses and indemnify any selling stockholders against certain liabilities, including under the Securities
Act, in connection with the registration of shares pursuant to such agreement.
28
Separation Agreement and Consulting Agreement. Under Mr. Reinhold's previously disclosed separation agreement on
January 7, 2019, he became entitled to receive the following payments: (i) one year’s base salary and the average annual
non-equity incentive compensation paid to Mr. Reinhold for fiscal years 2016 and 2017; and (ii) his auto allowance and
reimbursement of up to 12 months COBRA medical benefits payments. In addition, pursuant to the separation agreement, all
of his unvested restricted stock units accelerated and vested. On the separation date, Mr. Reinhold entered into a two year
consulting agreement with Systemax, pursuant to which he consults regularly with our CEO and is a member of our Board of
Directors; certain option awards previously granted to Mr. Reinhold were terminated, continue to vest or remain exercisable
in accordance with their terms during the ongoing consultancy period. Mr. Reinhold remains a director and receives the
standard cash and equity compensation paid to non-employee directors as described herein.
29
Executive Officers
There are no arrangements or understandings between any officer and any other person pursuant to which such person
was selected as an officer.
Messrs. Richard Leeds, Bruce Leeds, Robert Leeds and Barry Litwin biographical information is on page 6 of this proxy
statement.
Thomas Clark
Senior Vice President and Chief Financial Officer
Age: 38
Thomas Clark was appointed Vice President and CFO
of Systemax in October 2016. Mr. Clark originally joined
Systemax in 2007. Prior to being appointed Vice
President and CFO, Mr. Clark, served in a number of
senior financial positions at Systemax, most recently
as Controller of the Industrial Products Group. Previously
he held the positions of Director of Finance, and Manager
of Financial Planning & Analysis at Systemax.
Eric Lerner
Senior Vice President and General Counsel
Age: 62
Eric Lerner was appointed Senior Vice President and
General Counsel in May 2012. He was previously a senior
corporate partner at Kramer Levin Naftalis & Frankel, a
corporate partner, Co-Chair of the National Corporate
Department and member of the Board of Directors of
Katten Muchin Zavis Rosenman, and a corporate partner
and Chair of the Corporate Department of Rosenman &
Colin.
Robert Dooley
President, Industrial Products Group
Age: 66
Robert Dooley was appointed President of our Industrial
Products Group in January 2012. Mr. Dooley originally
joined Systemax in 1982 and served in numerous roles
until March 2004, including Senior Vice President,
Worldwide Computer Sales and Marketing. He also was
a director of Systemax from June 1995 through March
2004.
Manoj Shetty
Senior Vice President and Chief Information Officer
Age: 59
Manoj Shetty was appointed Senior Vice President and
Chief Information Officer of Systemax in August 2014.
Mr. Shetty originally joined Systemax in 2000 and has
served in several Information Technology roles since that
time. Prior to joining Systemax, Mr. Shetty was employed
at Mercator (ultimately acquired by IBM) and in the
manufacturing sector.
Klaus Werner
Senior Vice President and Chief Marketing Officer
Age: 52
Klaus Werner joined Systemax in February 2020 as
Senior Vice President and Chief Marketing Officer. Prior
to joining Systemax, Klaus worked in various senior
executive roles in marketing, e-commerce, technology,
data and enterprise analytics. During his career he has
held leadership positions with HD Supply, Alex Lee,
Rosetta, Lowe’s and Bellsouth.
Thomas Axmacher
Vice President and Controller
Age: 61
Thomas Axmacher was appointed Vice President and
Controller of Systemax in October 2006. He was
previously Chief Financial Officer of Curative Health
Services, Inc., a publicly traded health care company,
and Vice President and Controller of Tempo Instrument
Group, an electronics manufacturer.
Ritesh Chaturbedi
Senior Vice President and Chief Operations Officer
Age: 42
Ritesh Chaturbedi joined Systemax in April 2019 as
Senior Vice President and Chief Operations Officer. Prior
to joining Systemax, Mr. Chaturbedi worked in various
senior leadership roles with broad responsibility for
operations, procurement, customer service, technology
and other key functions. He has led critical growth
operations across multiple industry environments and his
recent experience includes: Ditech Holding Corporation,
Amazon.com, Sears and Fareportal.
Donna Fielding
Senior Vice President and Chief Human Resources
Officer
Age: 49
Donna Fielding joined Systemax in 2018 as Senior Vice
President and Chief Human Resources Officer. Prior to
joining Systemax, Donna worked in various human
resource leadership roles in Fortune 500 organizations,
including ADP, Credit Suisse, Pfizer and JPMorgan
Chase. Donna has broad experience in traditional human
transformation,
resources as well as cultural
talent models, and
differentiated and specialized
integrated human capital solutions.
30
Compensation Discussion and Analysis
Executive Summary
In this section, we discuss the objectives of our compensation programs and policies, and the reasons why we pay each
material element of our executives’ compensation. Following this discussion, you will find a series of tables containing
more specific details about the compensation of our Named Executive Officers, (referred to as “NEOs”), listed below.
The following discussion relates to the NEOs and their titles as of the end of 2019.
Our NEOs* in 2019 were as follows:
Name
Richard Leeds
Bruce Leeds
Robert Leeds
Barry Litwin
Thomas Clark
Robert Dooley
Eric Lerner
Manoj Shetty
Lawrence Reinhold
Title
Executive Chairman
Vice Chairman
Vice Chairman
Chief Executive Officer
Senior Vice President & Chief Financial Officer
President, Industrial Products Group
Senior Vice President and General Counsel
Senior Vice President and Chief Information Officer
Former President & Chief Executive Officer*
*We define our NEOs for 2019 as each person who served as chief executive officer or chief financial officer at any time
during 2019, and the three other most highly compensated persons serving as executive officers at year end, and three
additional executive officers. Mr. Reinhold's employment with Systemax ceased as of January 7, 2019, at which time
Mr. Litwin became Chief Executive Officer of Systemax. Compensation information for Mr. Reinhold has been included,
as he was the chief executive officer until January 7, 2019.
Central Objectives and Philosophy of Our Executive Compensation Programs
The Compensation Committee designs competitive compensation packages having the proper amount and mix of short
term, annual and long-term incentive programs to serve several important objectives:
•
•
attracting and retaining individuals of superior ability and managerial talent;
rewarding outstanding individual and team contributions to the achievement of our short and long-term financial
and business objectives;
•
promoting integrity and good corporate governance;
• motivating our executive officers to manage for sustained growth and financial performance, and enhanced
stockholder value, for the long-term benefit of our stockholders, customers and employees; and
• mitigating risk and reducing risk taking behavior that might negatively affect financial results, without diminishing
the incentive nature of the compensation (as described below).
31
Risk Management
We believe our programs encourage and reward prudent business judgment and appropriate risk-taking over the long-
term. We believe the following factors are effective in mitigating risk relating to our compensation programs including
the risk that an executive will take action that is detrimental to our long-term interests in order to increase the executive’s
short-term performance-based compensation:
• Management Processes. Our Board is responsible for overseeing, and together with our Audit Committee,
monitors the risk management processes associated with our operations, and together with our Audit Committee
focuses on the most significant risks facing Systemax, and seeks to ensure that appropriate general and specific
risk mitigation considerations are implemented by management and considered in our business and operations
planning. Our Compensation Committee is responsible for considering risk mitigation issues and for including
strategies to mitigate risk in our compensation programs.
• Regular Oversight. Risk management is regularly overseen by the Board and Audit Committee on a quarterly
basis, covering particular risk management matters in connection with general oversight and approval of
corporate matters, and through discussions relating to material risks affecting Systemax presented by
management and by our Legal, Risk Management/Insurance and Internal Audit departments. The
Compensation Committee members also receive these presentations and take risk mitigation into account in
designing our compensation programs.
• Multiple Performance Factors. We use multiple performance factors that encourage executives to focus on
the overall health of the business rather than a single financial measure.
• Award Cap. Our NEO Non-Equity Incentive Plans (“NEO Plans”) cap the maximum award payable to any
individual.
• Clawback Provision. Our NEO Plans provide Systemax the ability to recapture cash awards from our executive
officers:
to the extent a NEO Plan payment resulted from reported financial results that upon restatement of such
results (other than as a result of changes in accounting principles) would not have generated the payment
or would have generated a lower payment; or
if misconduct by the executive officer contributed to Systemax having to restate all or a portion of our
financial statements; or
if the Board determines that the executive engaged in serious ethical misconduct.
•
Long-Term Equity Compensation. From time to time our executives and a limited number of key business
unit leaders and managers have received stock options and/or restricted stock units in varying amounts, in the
discretion of the Compensation Committee. However, all awards are subject to years long vesting periods,
deferred distribution in the case of 2020 restricted stock unit awards and since 2019 may include performance
criteria in the vesting formula. We believe the long-term vesting period for stock options and restricted stock
unit grants causes our executives to focus on long-term achievements and on building stockholder value. In
2020 we made significant changes to our equity compensation philosophy and practices, as discussed below.
We anticipate continuing to make greater use of equity awards as an important component of our compensation
programs in the future.
32
Elements of Our Executive Compensation Programs
To promote the objectives described above, our executive compensation programs consist of the following principal
elements:
•
Base salary;
• Non-Equity Incentive Compensation;
•
•
•
Special Bonus (in special circumstances);
Equity–Based Incentives; and
Benefits, Perquisites and Other Compensation.
The Compensation Committee does not maintain formal policies or any specific allocation percentage or formula for
allocating compensation among current and long-term compensation, or among cash and non-cash compensation
elements, in relation to each other. The Compensation Committee from time to time adjusts different elements of
compensation based upon its evaluation of our key business objectives and related compensation goals set forth above.
We do not have a formal policy regarding internal pay equity. In addition, we provide our stockholders, pursuant to SEC
regulation, with a non-binding “say on pay” advisory vote on our executive compensation every three years; the “say on
pay” vote is this year and addressed elsewhere in this proxy statement. While the Compensation Committee considers
the results of the stockholder “say on pay” vote, the voting results are only one among many factors considered by the
Compensation Committee in evaluating our compensation principles. design and practices.
Base Salary. Historically, base salary levels were primarily subjectively determined based on individual and Systemax
performance as well as an objective assessment of the average prevailing salary levels for comparable companies in
our geographic regions (based on industry, revenues, number of employees, and similar factors), derived from widely
available published reports. Such reports do not identify the component companies. Beginning for 2020, the
Compensation Committee, assisted by the Compensation Committee’s compensation consultant, has adopted a more
objective salary determination process primarily based on benchmarking our executive’s salaries against the salary
levels of similar executives via an extensive library of compensation surveys as well as against comparable companies,
principally based on industry, revenues, and number of employees. This peer set was further supplemented by companies
in our geographic regions as well as other public company competitors that may not have otherwise been included. See
discussion below of "Compensation Consultant” and “Peer Companies”.
Non-Equity Incentive Compensation. Incentive cash compensation of our NEOs under the 2017, 2018 and 2019 NEO
Plans (which operate under our stockholder approved 2010 Long-Term Incentive Plan (“2010 LTIP”), described below)
is based primarily upon an evaluation of Systemax performance as it relates to three general business areas:
• Operational and Financial Performance, such as net sales, operating income, consolidated net income, earnings
before interest and taxes (“EBIT”), gross margin, operating margin, earnings per share, working capital, return
on invested capital, stockholder equity and peer group comparisons);
•
Strategic Accomplishments, such as growth in the business (top line sales and margins), implementation of
systems enhancements, new processes and technology improvements, efficiency and productivity initiatives
in our distribution center network, marketing and advertising initiatives, customer satisfaction and service
enhancements, cost management, turnaround or divestment of unprofitable business units, and growth in the
value of our assets, including through strategic acquisition transactions; and
• Corporate Governance and Oversight, encompassing legal and regulatory compliance and adherence to
Systemax policies including the timely filing of periodic reports with the SEC, compliance with the Sarbanes-
Oxley Act, maintaining robust internal controls, OSHA compliance, environmental, employment and safety laws
and regulations compliance and enforcement of our corporate ethics policy.
The non-financial Strategic Accomplishments and Corporate Governance and Oversight goals are subjectively approved
by the Compensation Committee annually, based on Systemax’s changing needs from time to time, and are intended
to encourage cross functional efforts by our management team to support projects that benefit Systemax. Detailed
discussion of these goals can be found below in the discussion of the 2019 NEO Plan.
33
Our performance goals may be expressed i) with respect to Systemax as a whole or with respect to one or more divisions
or business units, ii) on a pre-tax or after-tax basis, and iii) on an absolute and/or relative basis. The performance goals
may i) employ comparisons with past performance of Systemax (including one or more divisions) and/or ii) employ
comparisons with the current or past performance of other companies, and in the case of earnings-based measures,
may employ comparisons to capital, stockholders’ equity and shares outstanding.
To the extent applicable, the measures used in performance goals set under the 2010 LTIP (and in the 2020 Omnibus
LTIP being submitted for stockholder approval pursuant to this proxy statement) are determined in a manner consistent
with the methods used in our Forms 10-K and 10-Q, except that adjustments will be made for certain items, including
special, unusual or non-recurring items, acquisitions and dispositions and changes in accounting principles.
Pursuant to SEC rules, and except for disclosure of our actual performance relative to any actually achieved 2019 and
future financial targets, Systemax is not disclosing the specific performance targets and actual performance measures
for the financial goals used in our NEO Plans because they represent confidential financial information that Systemax
does not disclose to the public, and Systemax believes that disclosure of this information would cause us competitive
harm. In addition, we do not disclose the specific subjective non-financial goals, since they may directly relate to strategic
initiatives, plans and tactics being undertaken by our business and may indicate where we intend to devote our resources.
We believe that our competitors having detailed knowledge of where we are devoting our strategic resources and
management emphasis could give our competitors an advantage and be harmful to our competitive position.
Financial targets are set such that only exceptional performance will result in payouts above the target incentive and
poor performance will result in diminished or no incentive payment. We set the financial target performance goals at a
level for which there is a reasonably challenged chance of achievement based upon the range of assumptions used to
build our annual budget and forecasted performance. We did not perform specific analysis on the probability of the
achievement of the financial target performance goals, given that the market is difficult to predict. Rather, we relied upon
our experience in setting the goals guided by our objective of setting a reasonably attainable and motivationally meaningful
goal. We set the non-financial goals (which are subjectively established by the Compensation Committee (and subjectively
measured by the Compensation Committee in four incremental levels of achievement, as discussed below) to reflect a
reasonable degree of difficulty to achieve substantial performance.
Special Bonuses. From time to time, the Compensation Committee may make special awards to our executives, in
order to reward special achievement in the year that was not covered by the NEO Plan for that year. These awards may
take the form of cash bonuses or equity awards and are granted pursuant to the 2010 LTIP. No such awards were made
in 2019.
Equity-Based Incentives. Equity based compensation provides an incentive for executives to manage Systemax with
a view to achieving results which would increase our stock price over the long-term and, therefore, the return to our
stockholders. Historically equity grants included only time based vesting conditions, but in 2019 and 2020 certain
executives and other members of management received equity grants that included both time based and performance
based vesting conditions.
Outstanding equity-based incentives consist of:
•
•
non-qualified stock options granted at 100% of the stock’s fair market value on the grant date (based on the
NYSE closing price of our common stock on that date), subject to repricing as occurred in 2019; and
restricted stock units granted subject to vesting conditions including both time and / or performance criteria
(and beginning in 2020 subject to deferred delivery of vested restricted stock unit awards) constitute the long-
term incentive portion of our executive compensation package
The Compensation Committee is cognizant of the timing of the grant of stock based compensation in relation to the
publication of Systemax earnings releases and other public announcements.
Benefits, Perquisites and Other Compensation. Systemax provides various employee benefit programs to our
employees, including NEOs such as:
• medical, dental, life and disability insurance benefits;
•
•
our 401(k) plan, which includes Systemax contributions;
automobile allowances and related reimbursements to all NEOs and certain other Systemax managers which
are not provided to all employees; and
34
•
severance payments, and/or change of control payments pursuant to negotiated employment agreements they
have with Systemax (described below).
Systemax does not provide any pension benefits or deferred compensation under any defined contribution or other plan
on a basis that is not tax-qualified.
Tax Deductibility Considerations. Section 162(m) of the Internal Revenue Code (the “Code”) limits to $1,000,000 the
U.S. federal income tax deductibility of compensation paid in one year to a company's executive officers. While the
Code limits the deductibility of compensation paid to our named executive officers, our Compensation Committee will-
consistent with its past practice-continue to retain flexibility to design compensation programs that are in the best long-
term interests of Systemax and our stockholders, with deductibility of compensation being one of a variety of
considerations taken into account.
Role of the Compensation Committee and
CEO in Compensation Decisions
The Compensation Committee’s role and responsibility covers several distinct aspects of setting compensation:
•
•
•
review and approve the compensation of the Executive Chairman, Vice Chairmen and CEO.
approve, upon the recommendation of the CEO (following consultation with the Executive Chairman and Vice
Chairmen), (a) the annual total compensation of the other executive officers of Systemax, including non-equity
incentive and bonus compensation, (b) the annual compensation of certain subsidiary managers, and (c) all individual
equity incentive grants.
and together with the CEO, review and make periodic recommendations to the Board with respect to our general
compensation, benefits and perquisite policies and practices, including our stock-incentive based compensation
plan.
Engagement of Compensation Consultant
The Compensation Committee is empowered to retain third party compensation consultants to provide assistance with respect
to compensation strategies, market practices, market research data and our compensation goals. The Compensation
Committee did not retain any such consultant in 2017 or 2018. In March 2019, in coordination with and at the recommendation
of Systemax’s Chief Human Resources Officer, and with the approval of the Board, the Compensation Committee directly
retained a compensation consultant (EA Compensation Resources d/b/a Compensation Resources, the “Compensation
Consultant") to advise on and provide data as it relates to corporate executive and senior management compensation for
2020, and the Board consulted with the Compensation Consultant regarding compensation for non-employee directors.
Through a separate engagement approved by the Board, the Chief Human Resources Officer and other members of executive
management further utilizing a different team within EA Compensation Resources, directly engaged the Compensation
Consultant to advise on compensation strategy for a broader employee population as well as to review and advise upon the
structure of our sales commission and compensation plans.
In consultation with the Compensation Consultant, the Compensation Committee and management focused on:
•
•
•
•
•
determining the market competitiveness and structure of Systemax’s executive salaries, as well as of other salaried
positions;
evaluating the appropriate mix of fixed and variable cash compensation;
evaluating the mix of equity and non-equity compensation;
developing a long-term equity incentive plan design and implementation strategy to align with the key strategies of
Systemax to attract, retain, and reward management for performance as well as to further align management with
our stockholders; and
creating a stronger link between incentive compensation and performance, for both equity and non-equity incentive
compensation.
35
In performing its work, the Compensation Committee made use of surveys and analyses prepared by the Compensation
Consultant to benchmark Systemax’s compensation arrangements against those of peer group companies based on revenue,
industry segment and geographic location (“core peers”). An additional set of peers were identified from a "controlled company"
and comparable talent pool perspective ("non-core peers"), in order to gain best practice information from companies against
whom we compete for talent. We did not use the non-core peers as salary benchmark data. The Compensation Committee
further analyzed compensation based on our position descriptions and not historical compensation levels.
The peer group companies were as follows:
Peer Group Companies
Revenue
1-800-Flowers.com, Inc.
Amazon.com Inc.
Bluelinx Holdings Inc.*
DXP Enterprises, Inc.*
Foundation Building Materials Inc.
GMS Inc.*
H&E Equipment Services Inc.*
HD Supply Holdings Inc.
Henry Schein Inc.
Honeywell International Inc.
Huttig Building Products Inc.*
Kaman Corp.*
Lifetime Brands Inc.
Lowe's Companies Inc.
MSC Industrial Direct Co Inc.
Office Depot, Inc.
Pool Corp.*
Siteone Landscape Supply Inc.*
The Hain Celestial Group Inc.
The TJX Companies, Inc.
Tyson Foods, Inc.
W.W. Grainger Inc.
Walmart Inc.
Watsco, Inc.
* core peers
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,248,623,000
280,522,000,000
2,637,268,000
1,300,000,000
2,200,000,000
3,116,032,000
1,300,000,000
6,146,000,000
9,985,803,000
36,709,000,000
812,000,000
761,608,000
734,900,000
72,148,000,000
3,363,800,000
10,600,000,000
3,199,517,000
2,360,000,000
2,302,468,000
41,700,000,000
42,405,000,000
11,500,000,000
524,000,000,000
4,770,362,000
The decisions made by the Compensation Committee following its work in respect of our NEOs are described below under
2020 NEO Plan.
36
2010 Long-Term Incentive Plan
Basic Features and Types of Awards
In 2010, the Board of Directors and our stockholders approved the 2010 LTIP in order to promote the interests of Systemax
and our stockholders by (i) attracting and retaining exceptional executive personnel and other key employees, including
consultants and advisors, to Systemax and our affiliates; (ii) motivating such employees, consultants and advisors by means
of performance-related incentives to achieve longer-range performance goals; and (iii) enabling such employees, consultants
and advisors to participate in our long-term growth and financial success.
The 2010 LTIP sets the basic parameters of our compensation policies and approach to executive compensation, and the
annual NEO Plans adopted by the Compensation Committee under the 2010 LTIP implement that approach by linking
compensation to achievement of Systemax’s goals as the needs of our business change over time. We believe having
consistent compensation policies that permit our compensation programs to adjust to address constantly evolving market
conditions allows us to readily address the business challenges we face and motivate our employees to overcome them.
As explained below, certain basic features of the 2017, 2018 and 2019 NEO Plans historically are the same from year to
year; however, in 2017 we implemented a compensation program that measured quarterly achievement and provided for
quarterly non-equity incentive compensation Awards for certain NEOs. While Systemax believed this quarterly program
had a beneficial effect in motivating our employees to achieve our and their goals, beginning in 2020 we have replaced the
quarterly feature with an annual measurement approach to better align our NEOs with Systemax’s annual and multi-year
initiatives and longer term interests.
The 2010 LTIP provides for the granting of various equity or cash based awards (“Award”), subject to certain limits including
a maximum of 1,500,000 shares (or $10,000,000 in the case of cash performance awards) per individual per year. An aggregate
of 7,500,000 shares of common stock are authorized for stock based Awards, of which as of April 6, 2020 Awards covering
902,379 shares are outstanding and 5,676,016 shares remain available for future issuance.
These awards may be:
•
•
•
•
•
•
•
incentive stock options;
non-qualified stock options;
stock appreciation rights;
restricted stock;
restricted stock units;
cash performance awards (which may take the form of non-equity incentive compensation under the NEO Plans or
may be in the form of special cash “bonuses”); or
other stock-based awards.
In the Summary Compensation Table, cash awards granted as NEO non-equity incentive compensation under the NEO Plan
for that year are reported as such in that column, and special cash bonuses awarded other than pursuant to the parameters
of the NEO Plan are reported as such in the “Bonus” column.
37
Administration
The Compensation Committee has the authority to administer, interpret and construe any provision of the 2010 LTIP Plan
(and the annual NEO Plans adopted under it) and to adopt such rules and regulations for administering the 2010 LTIP Plan
and the NEO Plans as it deems necessary or appropriate. All decisions and determinations of the Compensation Committee
are final, binding and conclusive on all parties.
Further, the Compensation Committee has sole discretion over the terms and conditions of any Award, including:
•
•
•
•
•
•
•
•
•
•
the persons who will receive Awards;
the type of Awards granted;
the number of shares subject to each Award;
exercise price of and Award;
expiration dates;
vesting schedules;
distribution and delivery schedules;
forfeiture provisions;
conditions on the achievement of specified performance goals for the granting or vesting of options, restricted stock,
restricted stock units or cash Awards; and
other material features of Awards.
The Compensation Committee or the Board may delegate to our officers or managers the authority to designate Award
recipients, but the Compensation Committee must grant all Awards to those individuals reasonably considered to be subject
to the insider trading provisions of federal securities law, including our officers and directors.
Individual Achievement and Systemax Performance
In determining the compensation of a particular executive, the Compensation Committee takes into account the ways in which
our executives most directly impact our business and seeks to correlate their compensation objectives to the ways they can
be effectively motivated, and their contribution objectively measured. Accordingly, the NEO Plans adopted under the 2010
LTIP give varied weights and consideration to the executive’s specific corporate responsibilities, in some cases aside from
specific Company metrics and achievements, as they relate to our business and goals, and therefore the performance metrics,
and the amount and mix of compensation elements, may vary from year to year.
For instance, as discussed below, in 2018 Mr. Reinhold’s non-equity incentive compensation was 100% tied to achievement
of the consolidated goals and results of Systemax, while a portion of Mr. Clark’s non-equity incentive compensation is tied to
specific personal objectives. Also, prior to 2017 Mr. Dooley had a portion of his non-equity incentive compensation tied to the
achievement of certain financial and non-financial consolidated results of Systemax, and a larger portion tied to the achievement
of certain financial and non-financial goals of the Industrial Products Group, but beginning in fiscal 2017 Mr. Dooley’s entire
non-equity incentive compensation is tied to such achievements of the Industrial Products Group.
Through 2017, the non-equity incentive compensation of Messrs. Richard, Bruce and Robert Leeds under the applicable NEO
Plan has been 100% tied to achievement of consolidated goals of Systemax, but each of Richard Leeds, Bruce Leeds and
Robert Leeds voluntarily waived a portion ($1,389,800, $1,162,900, and $1,162,900, respectively) of their earned non-equity
incentive compensation for 2017. Beginning in 2018 Messrs. Richard, Bruce and Robert Leeds no longer participated in the
NEO Plan and are no longer eligible for incentive compensation. In addition, Messrs. Richard, Bruce and Robert Leeds have
never received, since our initial public offering, stock options or other stock-based incentives as part of their compensation.
38
Common Elements of the 2017, 2018 and 2019 NEO Plans
Certain features of the 2017, 2018 and 2019 NEO Plans, such as performance categories, annual caps and partial achievement
adjustment mechanisms, are the same under each Plan, and are discussed here for ease of reference.
As explained below, in determining non-equity incentive compensation the financial goals are accorded a more significant
weighting factor than the non-financial goals, reflecting the Compensation Committee’s belief that the financial goals are the
most critical to enhancing stockholder value, maintaining long-term growth, and remaining competitive, and furthermore provide
the funding for implementing the strategic accomplishments and corporate governance goals. Achievement and over-
achievement of the financial goals results in incremental increases to the available incentive compensation pool in which the
participating executives share.
Certain new features and modifications to existing features of our NEO Plans were introduced for the 2020 year, such as
using annual rather than quarterly achievement measurement periods, expansion of the number of recipients of equity incentive
grants, changes to the relative weighting of Company and personal goals, tiered (by position) allocation of non-equity and
equity incentive compensation components, tiered (by position), standard equity award grant levels and award ranges,
minimum and maximum levels of non-equity award payouts, deferred delivery of vested restricted stock units and
benchmarking. These features will be described in more detail below under 2020 NEO Plan / page 44 of this proxy statement.
The discussion that follows relates to our 2017, 2018 and 2019 NEO Plans.
Systemax Consolidated Financial Goals for 2017, 2018 and 2019.
•
•
Adjusted Operating Income Performance. The Compensation Committee believes this is the most important individual
component and aligns the interests of our executives with those of our stockholders, in addition to building long-term
value. Adjusted Operating Income is defined as operating income adjusted for unusual or nonrecurring items as
determined by our Compensation Committee.
Sales Performance. The Compensation Committee believes sales performance is key to Systemax achieving the
scale necessary to remain competitive with larger companies. Sales are defined as sales revenue net of returns on
a constant currency basis. Sales are further adjusted for the impact of any acquisition or disposition which is completed
during the plan year.
Systemax Consolidated Non-Financial Goals for 2017, 2018 and 2019.
•
Strategic Accomplishments. Strategic goals are established surrounding accomplishments within our Industrial
Products Group, European Technology Products Group, and the Corporate and Other Segment. In 2019, following
the divestitures of our European Technology Group, Systemax combined its Industrial Products Group Segment and
its Corporate and Other Segment. For more information, see 2019 NEO Plan 2019--2019 Performance against
Objectives / page 42 of this proxy statement.
• Corporate Governance Goals. These goals relate to continuing improvements in our internal control processes,
ethics compliance procedures and safety protocols that the Compensation Committee believes will generally benefit
stockholders, as evidenced by the absence of material weaknesses in internal controls and financial reporting, prompt
investigation and disposition of any ethical or governance issues that may arise, and the absence of any serious
OSHA matters. For more information, see 2019 NEO Plan 2019--2019 Performance against Objectives / page 42
of this proxy statement.
Business Unit or Individual Financial and Non-Financial Goal for 2017, 2018 and 2019. Business Unit and Individual
Goals were set in each period for Messrs. Clark, Dooley, Lerner and Shetty. These objectives are comprised of a variety of
measurable strategic, financial and operational targets and initiatives including sales growth and margin improvement, cost
management, process improvement, corporate development, and others as deemed appropriate by the CEO in consultation
with the Compensation Committee. In each case, the selected objectives are considered relevant to the scope of each
executive’s functional areas of operation and are designed to incentivize management to accomplish the businesses’ strategic
plan. Starting in 2017 these goals were administered on both a quarterly and full year basis, and beginning in 2020 will be
administered on an annual basis, as described below.
Targets, Caps and Adjustment Mechanisms. Achievement of each of the target financial goals generates a variable non-
equity incentive payment target (base case); reduced amounts are payable on a pro rata basis for each financial goal component
and on a partial basis on the non-financial goal components. The 2017, 2018 and 2019 NEO Plans impose a cap on the total
non-equity incentive compensation that could be payable to each executive based upon the relative weights of each component.
39
Systemax Consolidated Sales Target Financial Component for 2017 and 2018.
•
•
•
•
Sales target amount is payable starting at achievement of in excess of 80% of the sales target financial goal component
amount.
Sales target amount is capped at 140% of the sales target financial goal component amount.
Each 1% variance in actual achievement below the 100% level will generate a 5% negative variance in the target
non-equity incentive amount.
Each 1% variance in actual achievement above the 100% level generates a 5% positive variance in the target non-
equity incentive amount.
• No non-equity incentive compensation is payable in respect of the sales target if achievement is 80% or less of the
sales target while increased payments (up to 300% of the target non-equity incentive compensation amount for this
financial component) are payable on a pro rata basis for over achievement of the sales target component.
Systemax Consolidated Adjusted Operating Income Financial Component for 2017 and 2018.
•
•
•
The adjusted operating income goal is payable at a level of 100% if the target is achieved.
Each $1,500,000 variance in actual achievement ($1,000,000 in 2017) below the 100% level will generate a 5%
negative variance in the target non-equity incentive compensation amount.
Each $1,500,000 variance in actual achievement ($1,000,000 in 2017) above the 100% level will generate a 5%
positive variance in the target non-equity incentive compensation amount up to 300% of the target non-equity incentive
compensation amount for this financial component.
Systemax Consolidated Non-Financial Goals. The non-financial goals are measured based on whether or not the goal is
either accomplished or not accomplished during the fiscal year. Accomplishment can be measured at 0%, 25%, 50%, 75%,
or 100% levels (as subjectively determined by the Compensation Committee) with target non-equity incentive compensation
paid out accordingly.
Business Unit or Individual Goals. Generally, the accomplishment can be measured at 0%, 25%, 50%, 75%, or 100% levels
(as subjectively determined by the CEO and approved by the Compensation Committee) with target non-equity incentive
compensation paid out accordingly. Adjusted Operating Income Performance of each business unit above or below plan,
would result in either higher potential or lower potential target non-equity incentive levels.
Compensation Committee Discretion. The Compensation Committee has the discretion to adjust financial targets based
on such events as acquisitions or other one-time charges or gains, or other unforeseen circumstances that can skew normal
operating results; exercises of such discretion are noted below. Targets and non-equity incentive compensation are also
subject to adjustment to prevent unreasonable results in the strict application of these formulas. Executives must generally
be employed with Systemax at the time the incentive compensation is paid out to receive the payment, though the Compensation
Committee has discretion to waive this requirement. The Compensation Committee exercised its discretion in 2019 as
described below.
40
2019 NEO Plan
In 2019, pursuant to the 2010 LTIP, our Compensation Committee, with input from our CEO, established our 2019 NEO Non-
Equity Incentive Plan (“2019 Plan”). The 2019 Plan pertains specifically to the payment of non-equity incentive compensation
to NEOs for 2019. Performance metrics, caps, and measurement criteria were modified in 2019. The modifications are as
follows for 2019:
Systemax Consolidated Sales Target Financial Component.
•
•
•
•
Sales target amount is payable starting at achievement of in excess of 80% of the sales target financial goal component
amount.
Sales target amount is capped at 102% of the sales target financial goal component amount.
Each 1% variance in actual achievement below the 100% level will generate a 5% negative variance in the target
non-equity incentive amount.
Each 1% variance in actual achievement above the 100% level generates a 5% positive variance in the target non-
equity incentive amount.
• No non-equity incentive compensation is payable in respect of the sales target if achievement is 80% or less of the
sales target while increased payments (up to 110% of the target non-equity incentive compensation amount for this
financial component) are payable on a pro rata basis for over achievement of the sales target component.
Systemax Consolidated Adjusted Operating Income Financial Component.
•
•
•
The adjusted operating income goal is payable at a level of 100% if the target is achieved.
Each $1,500,000 variance in actual achievement below the 100% level will generate a 5% negative variance in the
target non-equity incentive compensation amount.
Each $1,500,000 variance in actual achievement will generate a 5% positive variance in the target non-equity incentive
compensation amount up to 115% of the target non-equity incentive compensation amount for this financial
component.
Systemax Consolidated Non-Financial Goals. The non-financial goals are measured based on whether or not the goal is
either accomplished or not accomplished during the fiscal year. Accomplishment can be measured at 0%, 25%, 50%, 75%,
or 100% levels (as subjectively determined by the Compensation Committee) with target non-equity incentive compensation
paid out accordingly.
Business Unit or Individual Goals. Business Unit and Individual goals are subject to a double trigger mechanism in order
to be earned. For each quarterly period, or annual measurement, the performance of Adjusted Operating Income will fund
the available bonus eligible to be earned based upon the accomplishment of each objective. Each 5% variance below goal
will generate a 10% negative variance in the target non-equity incentive compensation amount and each 5% variance above
goal will generate a 5% positive variance in the target non-equity incentive compensation amount., Generally, the Business
Unit Goals can be measured between 0 and 100% accomplishment, while individual goal accomplishment can be measured
at 0%, 50%, 85%, or 100%, with target non-equity incentive compensation paid out accordingly.
41
Under the 2019 Plan, the Compensation Committee set the following non-equity incentive target amounts, non-equity incentive
compensation cap percentages and relative percentages weights for each plan component for each of our NEOs in 2019 who
are participating in our incentive compensation plans.
As noted above, Messrs Richard, Robert and Bruce Leeds no longer participate in incentive compensation. In addition, as
Mr. Reinhold left Systemax as the Chief Executive Officer in January 2019, he did not participate in the 2019 NEO Plan.
Name
Target
($)
Cap
(%)
Net Sales
(%)
Adjusted
Operating
Income
(%)
Strategic
Objectives
(%)
Corporate
Governance
(%)
Business
Unit /
Individual
Objectives
(%)
Barry Litwin
1,113,750
111
20
60
16
Thomas Clark
225,000
150
Robert Dooley
615,000
150
Eric Lerner
300,900
150
Manoj Shetty
241,535
150
0
0
0
0
0
0
0
0
0
0
0
0
4
0
0
0
0
0
100
100
100
100
2019 Performance against Objectives.
The following table sets out the achievement level (presented as a percentage of target) for each plan component as well as
the relative payout ratio earned based on the mechanics of each plan component. The aggregate payouts, expressed in
dollars, appear in the Summary Compensation Table / page 48 of this proxy statement.
Net Sales
(%)
Adjusted
Operating
Income
(%)
Strategic
Objectives
(%)
Corporate
Governance
(%)
Business Unit/
Individual
Objectives
(%)
Name
Actual
Payout
Ratio Actual
Payout
Ratio Actual
Payout
Ratio Actual
Payout
Ratio Actual
Payout
Ratio
Barry Litwin
93
65
90
80
99
99
100
100
N/A
N/A
Thomas Clark
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Robert Dooley
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Eric Lerner
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Manoj Shetty
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
98
87
98
98
76
69
76
76
Weighted
Average Eligible
Non-Equity
Incentive
Compensation
(%)
81
76
69
76
76
Lawrence Reinhold
Not Applicable due to Separation Agreement entered into in October 2018
In determining the compensation of our CEO for fiscal 2019 and approving the compensation of our other NEOs, the
Compensation Committee considered that management had performed well in addressing a challenging international trade
and tariffs environment. The Compensation Committee further considered that management had executed well in onboarding
and integrating new senior executive management team leaders, opening a new distribution center in Texas, implementing
our ACE (Accelerate the Customer experience) strategy, including new sales, customer service and marketing initiatives and
in implementing our Operational Excellence program in our distribution centers, including new vendor and inventory programs,
freight and shipping process enhancements and distribution center efficiency and productivity initiatives. It was the view of
the Compensation Committee that management had executed these initiatives and had positioned Systemax for further growth
while managing risk in a difficult environment. Based on Systemax and individual performance, the Compensation Committee
believes that compensation levels for fiscal 2019 were consistent with the philosophy and objectives of our compensation
programs.
Systemax Consolidated Net Sales target for 2019 was set based upon Systemax’s continuing operations. The payout ratio
based upon 93% achievement to plan was 65%.
42
Systemax Consolidated Adjusted Operating Income target for 2019 was set based upon Systemax’s continuing operations
In addition, the Compensation Committee exercised its discretion to eliminate the net impact of expenses incurred in 2019
associated with the separation agreement entered into with Mr. Reinhold as well as the elimination of certain income associated
with the favorable resolution of contingent liabilities. The payout ratio based upon underachievement to plan was 80%.
Systemax Consolidated Strategic Objectives were assigned to our Chief Executive Officer covering four objectives of equal
weighting and were based upon accomplishment of key operations and strategic initiatives including the expansion of our
Distribution Network into Texas, implementation of our ACE strategy, mergers and acquisitions plan and executing a key
transition plan for our new Chief Executive Officer. The Compensation Committee subjectively determined that three of these
strategic objectives were fully accomplished in 2019 while the fourth objective was achieved at a 96% level. Based upon each
relative weight, the payout ratio was 99%.
Systemax Consolidated Corporate Governance goals relate to continuing improvements in our internal control processes,
ethics compliance procedures, and safety protocols that the Compensation Committee believes will generally benefit
stockholders as evidenced by the absence of material weaknesses in internal controls and financial reporting, prompt
investigation and disposition of any ethical or governance issues that may arise, and the absence of any serious OSHA Matters.
The Compensation Committed determined that the Corporate Governance objectives in 2019 were achieved 100%.
Business Unit and individual objectives for Mr. Clark, Mr. Dooley, Mr. Lerner and Mr. Shetty related to either discrete quarters
or the full year. Our CEO subjectively determined and the Compensation Committee agreed that Mr. Clark, Mr. Dooley, Mr.
Lerner and Mr. Shetty achieved 98%, 87%, 98% and 98% on a weighted average basis of their objectives, respectively. Mr.
Clark’s objectives primarily were associated with Cost Control, technology and process enhancements, staff development,
and working capital / free cash flow management. Mr. Dooley's objectives primarily were associated with the financial
performance of the Industrial Products Group including Net Sales, Gross Margin, and Operating Income Performance. In
addition, Mr. Dooley was assigned objectives associated with sales force productivity enhancements, product management
enhancements, and technological enhancements to the primary e-commerce sites within the Industrial Products Group. Mr.
Lerner’s objectives were primarily associated with Compliance, Risk Management, Safety, and successfully navigating the
regulatory environment including areas such as California’s Prop 65, as well as tariff and anti-dumping duty mitigation. Mr.
Shetty's objectives were primarily associated with technological enhancements to the primary e-commerce sites within the
Industrial Products Group and cyber-security enhancements. Shared amongst each of these participants were Strategic
Business Unit Objectives which comprised 20% of each of their target bonus. The Strategic Business Unit objectives included
key targets comprising Financial Operations, Customer Experience, Operational Excellence, Talent Management and
Development, and implementation of our ACE strategy. Based upon the performance of Adjusted Operating Income, 78% of
target non-equity incentive compensation was available to be earned. As such, Mr. Clark, Mr. Dooley, Mr. Lerner, and Mr.
Shetty earned 76%, 69%, 76% and 76% of their original target bonus respectively.
The 2019 threshold, target and maximum non-equity incentive amounts for each of our Named Executive Officers are found
in the Grants of Plan-Based Awards table / page 50 of this proxy statement.
43
2020 NEO Plan
In March 2020, pursuant to the 2010 LTIP, our Compensation Committee, with input from our CEO and in consultation with
the Compensation Consultant, established our 2020 NEO Incentive Plan (“2020 Plan”). The 2020 Plan pertains specifically
to the payment of non-equity incentive compensation to NEOs for 2020 and provides for equity compensation as well. Certain
new features and modifications to features of our prior 2017, 2018 and 2019 NEO Plans were introduced for the 2020 year,
such as using annual rather than quarterly achievement measurement periods for all participants, expansion of the number
of recipients of equity incentive grants, changes to the relative weighting of Company and personal goals, tiered (by position)
allocation of non-equity and equity incentive compensation components, tiered (by position) standard equity award grant
levels and award ranges, minimum and maximum levels of non-equity award payouts, deferred delivery of vested restricted
stock unit, and peer benchmarking. In addition, performance metrics, caps, and measurement criteria were also modified for
2020.
Our CEO does not participate in the NEO Plan on the same basis as our other executives. See a description of Mr. Litwin’s
employment and compensation arrangements at page 53 of this proxy statement.
2020 Plan Key Features
In adopting the 2020 Pan, the Compensation Committee changed the relative weightings of Company and personal goals;
previously such goals were weighted in varying degrees for different NEOs and other employees. In 2020, for our NEOs (other
than our CEO) we have assigned weights of 70% to achieving Company objectives and 30% to achieving personal goals in
order to earn incentive compensation awards, to better align our employees’ interests with Systemax’ s objectives. As described
below, the Compensation Committee has assigned measurable personal objectives and business unit goals for each NEO,
aligning them in supporting Systemax’s core business strategies and 2020 Operating Plan. Other executives, business unit
leaders and key contributors have varying tiered weighting levels taking into account their positions and total compensation
arrangements.
In addition, our senior executives, including our NEOs, have a greater percentage of their total compensation “at risk” in the
form of variable compensation (non-equity and equity incentive compensation) than do our other employees.
The Compensation Committee determined that increased use of equity compensation and regular, defined annual equity
grants would be in the best interests of Systemax and would enhance stockholder value by aligning the long-term interests
of a larger group of senior executives, business unit leaders and key managers with Systemax’s goals and objectives.
The new or modified features adopted by the Compensation Committee under the 2020 Plan are as follows
• Measurement Period: we will be measuring financial, strategic, operational and other objectives on an annual rather
than quarterly basis, so that our employees will place greater focus on the long-term, cross-functional initiatives we
have undertaken as part of our Accelerate the Customer Experience (ACE) and Operational Excellence Strategies.
•
•
•
•
•
Expanded pool of equity recipients: we have increased the number of recipients of equity incentive grants to better
align a larger group of senior executives, business unit leaders and key managers with Systemax’s goals and
objectives. The Compensation Committee also believes that providing equity awards to key employees will assist
Systemax in recruiting and retaining high quality members of management.
Annual awards of target non-equity incentive compensation: we will make annual awards of non-equity compensation
within ranges tiered by position. For NEOs (other than the CEO), the non-equity incentive compensation award is
targeted to range from 50% to 60% of annual base salary.
Annual awards of target equity incentive compensation: we will make annual awards of equity compensation within
ranges tiered by position. For NEOs (other than the CEO), equity awards generally can range from 0 to 75% of target
non-equity compensation (or more in exceptional circumstances). Awards will be denominated as 50% stock options
and 50% performance restricted stock units (number of shares based on relative fair market value including applying
Black Scholes formula for options valuation).
Payout Limits: minimum and maximum levels of non-equity award payouts continue to be features of the 2020 Plan,
as modified; see discussion below.
Vesting of equity incentive compensation tied to performance: Other than the CEO, we have provided that restricted
stock unit awards will vest annually in amounts tied to achievement of financial targets for that year (for 2020 awards,
annual adjusted operating income growth plus 10 percentage points). Recipients will have up to four years to earn
the full grant based upon annual performance for each year.
44
• Deferred delivery of vested restricted stock units: we have deferred delivery of any tranches of vested restricted
stock unit awards until the earlier of the grant’s expiration date or 45 days following termination of employment.
•
•
Benchmarking: in order to set our compensation arrangements in line with market conditions and best practices and
to continue to attract and retain quality employees, we have benchmarked our compensation practices against
carefully chosen peer companies.
Alignment of all NEO’s, including the CEO of performance against Systemax’s Balanced Scorecard including the
five key components of 1) Financial Performance, 2) Customer Experience, 3) Operational Excellence, 4) Talent
Management, and 5) Strategic Plan Implementation. As the CEO is not measured against Individual Objectives, the
allocation of weighting between each component is different than the rest of the NEO Group.
Systemax Financial Scorecard
For 2020, the Compensation Committee approved a Financial Scorecard comprised of targets for Revenue, Gross Profit
Dollars, Gross Margin Percent, SG&A, Adjusted Operating Income, and Adjusted Operating Margin. For our CEO, 80% of his
target non-equity compensation is tied to Financial Objectives, 60% is tied to the achievement of Adjusted Operating Income
and 20% is tied to the achievement of Revenue. For our other NEO’s, 42% of their target non-equity compensation is tied to
the achievement of the Financial Scorecard. For each of the metrics, Revenue, Gross Profit Dollars, SG&A Spend, and
Adjusted Operating Income are weighted at 8.4% each, while Gross Margin % and Adjusted Operating Margin % are weighted
at 4.2% each. These goals are all monitored for achievement on a quarterly bases and final achievement is assessed on an
annual basis.
•
The financial bonus target amount is payable at a level of 100% if all the target goal is achieved;
• Non-equity compensation is payable starting at achievement of in excess of 80% of the Financial Scorecard goals
amounts; and
•
80% achievement will result in payout of 50% of the target bonus amount. No bonus is payable for achievement of
less than 80% of the Financial Scorecard goals amounts.
Systemax Non-Financial Scorecards
For 2020, the Compensation Committee set the non-financial goals component to align with the accomplishment of key
strategic initiatives for Systemax. The Non-Financial Scoreboard percentages are set forth in the table below and the
components are:
• Customer Scorecard: measures achievement of new customer, customer retention, account growth, web
conversion and customer satisfaction targets.
• Operational Scorecard: measures achievement of order handling, customer service response, shipment costs,
freight expense and safety targets.
•
•
People Scorecard: measures achievement of employee retention, sales compensation, salary efficiency, talent
management and employee satisfaction targets and projects.
Strategy and Operating Initiatives Scorecard: measures achievement of gross margin initiatives, new product and
private label growth, technology enhancements and our ACE initiative targets.
Individual NEO Objectives Scorecard
Each of our NEOs, other than the CEO, has personal achievement targets that support one or more of the Scorecards described
above. 30% of each of their target non-equity incentive compensation is based on achieving these individual targets and 70%
is based on the Scorecard achievements. In certain cases achievement is measured objectively and in some cases is assessed
subjectively by the Compensation Committee.
Mr. Litwin’s 2020 non-equity incentive compensation is set under his employment agreement (described at page 53 of this
proxy statement). In 2020, Mr. Litwin’s non-equity incentive compensation is based 20% on achieving sales targets, 60%
based on achieving operating income targets, and 20% based on the Non-Financial Scorecard achievements.
Mr. Clark’s individual goals include process improvement and risk mitigation actions, internal audit activities, finance
technology enhancements and management of numerous finance department projects.
45
Mr. Dooley’s individual goals include Sales force productivity, technology enhancements, expansion of product assortment,
and continued development of our private label offering.
Mr. Lerner’s individual goals include oversight of loss prevention and security projects, product and facility safety compliance,
SEC public company and governance compliance, and reduction of legal expenses.
Mr. Shetty’s individual goals include design, development, and implementation of technological enhancements to support E-
Commerce capabilities, distribution center productivity, sales force automation, and customer service self serve models
designed to improve the customer experience. In addition, Mr. Shetty’s goals include oversight or our cybersecurity
infrastructure as well as PCI compliance.
Under the 2020 Plan, the Compensation Committee set the following non-equity incentive target amounts, non-equity incentive
compensation cap percentages and relative percentages weights for each plan component for each of our NEOs (other than
our CEO, whose arrangements are set under his employment agreement) in 2020 who are participating in our incentive
compensation plans. As noted above, Messrs Richard, Robert and Bruce Leeds no longer participate in incentive
compensation. In addition, as Mr. Reinhold left Systemax as the Chief Executive Officer in January 2019, he will not participate
in the 2020 NEO Plan.
Name
Target
($)
Barry Litwin
1,169,438
Thomas Clark
Robert Dooley
Eric Lerner
Manoj Shetty
240,750
615,000
301,900
248,781
Cap
(%)
111
175
175
175
175
Financial
Scorecard
(%)
Customer
Scorecard
(%)
Operational
Scorecard
(%)
80
42
42
42
42
5
7
7
7
7
5
7
7
7
7
Talent
Management
Scorecard
(%)
5
Strategic Plan
Implementatio
n Scorecard
(%)
5
7
7
7
7
7
7
7
7
Individual
Objectives
(%)
0
30
30
30
30
46
Compensation Committee Report
The Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with
management. Based on its review and discussions, the Compensation Committee recommended to the Board that the
Compensation Discussion and Analysis be included in the proxy statement and incorporated by reference into our Annual
Report on Form 10-K for the year ended December 31, 2019.
Submitted by the Compensation Committee of the Board,
Chad M. Lindbloom (Chairman)
Robert D. Rosenthal
Paul S. Pearlman
Compensation Committee Interlocks and Insider Participation
At the end of fiscal 2019, the members of Systemax’s Compensation Committee were Messrs. Lindbloom, Pearlman
and Rosenthal.
Mr. Litwin resigned from the Compensation Committee effective when he became CEO of Systemax on January 7, 2019
and Mr. Pearlman was appointed a member of the Compensation Committee effective as of such date.
Except as noted above with Mr. Litwin, Systemax does not employ any current (or former) member of the Compensation
Committee and no current (or former) member of the Compensation Committee has ever served as an officer of Systemax.
In addition, none of our current (or former) directors serving on the Compensation Committee has any relationship that
requires disclosure under SEC regulations.
47
Executive Compensation
Summary Compensation Table
The following table sets forth the compensation earned by the Named Executive Officers for fiscal years 2019, 2018
and 2017:
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
Option
Awards
($)(2)
Non-Equity
Incentive Plan
Compensation
($)(3)
All Other
Compensation
($)
Total
($)
Richard Leeds
Executive Chairman
Bruce Leeds
Vice Chairman
Robert Leeds
Vice Chairman
Barry Litwin (5)
Chief Executive Officer
Thomas Clark
Senior Vice President &
Chief Financial Officer
Robert Dooley
President, Industrial
Products Group
Eric Lerner (10)
Senior Vice President &
General Counsel
Manoj Shetty (12)
Senior Vice President &
Chief Information
Officer
Lawrence Reinhold
(14)
Former President &
Chief Executive Officer
2019
950,000
2018
960,900
2017
725,600
2019
950,000
2018
954,700
2017
600,600
2019
950,000
2018
956,200
2017
603,000
2019
793,300 614,000 (6)
700,000
969,700
2018
2017
2019
450,000
2018
386,000
2017
361,700
2019
615,000
2018
615,000
241,300
303,500
307,500
412,000
2017
519,400
404,400
2019
602,000
295,000
320,100
2018
2017
30,000 (4)
30,000
30,000
30,000 (4)
30,000
30,000
30,000 (4)
30,000
30,000
980,000
990,900
1,355,600
980,000
984,700
1,130,600
980,000
986,200
1,133,000
128,200 (7)
4,107,400
72,700 (8)
1,238,700
55,500
24,800
634,800
671,500
159,300 (9)
1,917,700
88,400
32,800
1,327,000
1,552,200
76,300 (11)
1,522,300
600,000
500,000
500,000
902,100
171,300
193,300
285,000
423,900
623,600
595,600
229,000
2019
483,100
234,500
282,900
183,900
22,100 (13)
1,206,500
2018
2017
2019
30,100
2018
712,000
2017
714,100
60,000
344,700
2,573,100
3,007,900
358,700
85,200
1,070,700
3,471,300
2,672,000
(1) This column represents the fair value of the stock award on the grant date determined in accordance with the provisions of ASC
718. As per SEC rules relating to executive compensation disclosure, the amounts shown exclude the impact of forfeitures related
to service based vesting conditions. For additional information regarding assumptions made in calculating the amount reflected
in this column, please refer to Note 10 to our audited consolidated financial statements, included in our Annual Report on Form
10-K for fiscal 2019.
(2) This column represents the fair value of the stock option on the grant date determined in accordance with the provisions of ASC
718. As per SEC rules relating to executive compensation disclosure, the amounts shown exclude the impact of forfeitures related
to service based vesting conditions. These amounts were calculated using the Black-Scholes option-pricing model. For additional
information regarding assumptions made in calculating the amount reflected in this column, please refer to Note 10 to our audited
consolidated financial statements, included in our Annual Report on Form 10-K for fiscal 2019.
48
(3) The 2017 figures in this column represent the amount earned in fiscal 2017 (although paid in fiscal 2018) pursuant to the 2017
NEO Plan; and the 2018 figures in this column represent the amount earned in fiscal 2018 (although paid in fiscal 2019) pursuant
to the 2018 NEO Plan; and the 2019 figures in this column represent the amount earned in fiscal 2019 (although paid in fiscal
2020) pursuant to the 2019 NEO Plan. For more information, see Grants of Plan-Based Awards / page 50 of this proxy statement.
Because these payments were based on predetermined performance metrics, these amounts are reported in the Non-Equity
Incentive Plan column.
(4) Auto-allowance.
(5) Mr. Litwin was appointed as the Chief Executive Officer on January 7, 2019 and was not a Named Executive Officer in fiscal years
2017 and 2018 and therefore no amounts are reported for fiscal years 2017 and 2018 in the Summary Compensation Table. The
amount presented for 2019 is Mr. Litwin’s $825,000 base salary pro-rated for 2019.
(6) Sign-on bonus provided under employment agreement.
(7)
(8)
(9)
Includes auto-allowance ($30,000), transportation related expenses ($50,700), gross-up on transportation related expenses
($43,500) and Systemax 401(k) contributions ($4,100).
Includes auto-allowance ($14,400), Systemax 401(k) contributions ($4,100), and dividend equivalent payments on unvested
restricted stock ($54,200).
Includes auto-allowance ($18,000), Systemax 401(k) contributions ($4,100), and dividend equivalent payments on unvested
restricted stock ($137,200).
(10) Mr. Lerner was not a Named Executive Officer in fiscal years 2017 and 2018, and therefore no amounts are reported for fiscal
years 2017 and 2018 in the Summary Compensation Table.
(11) Includes auto-allowance ($18,000), Systemax 401(k) contributions ($4,100), and dividend equivalent payments on unvested
restricted stock ($60,100).
(12) Mr. Shetty was not a Named Executive Officer in fiscal years 2017 and 2018, and therefore no amounts are reported for fiscal
years 2017 and 2018 in the Summary Compensation Table.
(13) Includes auto-allowance ($18,00) and Systemax 401(k) contributions ($4,100).
(14) Under Mr. Reinhold's previously disclosed separation agreement, on January 7, 2019, he became entitled to receive the following
payments: (i) one year’s base salary and the average annual non-equity incentive compensation paid to Mr. Reinhold for fiscal
years 2016 and 2017; and (ii) his auto allowance and reimbursement of up to 12 months COBRA medical benefits payments. In
addition, pursuant to the separation agreement, all of his unvested restricted stock units accelerated and vested. Mr. Reinhold
remains a director and receives the standard cash and equity compensation paid to non-employee directors as described under
Director Compensation / page 62 of this proxy statement.
49
Grants of Plan-Based Awards
The following table sets forth the estimated possible payouts under the cash incentive awards granted to our Named
Executive Officers in respect of 2019 performance under the 2019 NEO Plan.
All Other
Stock
Awards:
Number of
Shares of
Stock or Units
(#)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
Exercise or
Base Price
of Option
Awards
($/Sh)
Grant Date
Fair Value
of Stock
and Option
Awards
Name
Barry Litwin
Thomas Clark
Robert Dooley
Eric Lerner
Manoj Shetty
Grant
Date
Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards (1)
Threshold
($)
Target
($)
Maximum
($)
-
-
-
-
-
100,238
1,113,750
1,237,500
5,062
225,000
337,500
13,837
615,000
922,500
6,773
300,900
451,350
5,435
241,535
362,303
Lawrence Reinhold N/A
N/A
N/A
N/A
(1) Amounts presented assume payment of threshold, target and maximum awards at the applicable level.
50
Outstanding Equity Awards at Fiscal Year-End for Fiscal 2019
The following table sets forth information regarding stock option and restricted stock awards previously granted to our
Named Executive Officers which were outstanding at the end of fiscal 2019.
The market value of the unvested stock award is based on the closing price of one share of our common stock as of
December 31, 2019, the last trading day of the fiscal 2019, which was $25.16.
Option Awards
Stock Awards
Market Value
of Shares or
Units of Stock
That Have Not
Vested
($)
31,676
761,115
209,834
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options
(#)
Un-exercisable
Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Shares
or Units of
Stock That
Have Not
Vested
(#)
0
100,000 (1)
23.14
1/7/29
1,259 (2)
7,500
37,500
6,237
20,348
12,500
25,000
7,950
6,250
6,250
7,627
35,000
7,500
6,063
75,000
2,500 (4)
6.01 (5)
2/1/26
8,340 (8)
30,251 (3)
12,500 (4)
6.02 (5)
11/10/26
18,711 (4)
23.72
01/17/29
0 (4)
16.43 (5)
12,500 (4)
6.01 (5)
3/1/22
2/1/26
15,000 (6)
10,630 (8)
377,400
267,451
12,500 (4)
6.65 (5)
12/14/26
23,849 (4)
23.72
01/17/29
0 (4)
6,250 (4)
8.32 (5)
6.01 (5)
5/2/25
2/1/26
22,880 (4)
23.72
1/17/29
10,198 (8)
256,582
0 (4)
16.43 (5)
03/01/22
8,107 (8)
204,000
2,500 (4)
6.01 (5)
2/1/26
18,187 (4)
23.72
01/17/29
25,000 (4)
6.65 (5)
12/14/26
849 (2)
1,839 (7)
21,361
46,269
Name
Barry Litwin
Thomas Clark
Robert Dooley
Eric Lerner
Manoj Shetty
Lawrence Reinhold
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Options vest as follows: 20% of the stock options will vest on the first anniversary of the grant date, 20% will vest on the 2nd
anniversary and 10% will vest on each subsequent anniversary of the grant date.
Restricted stock units vest on June 4, 2020.
Restricted stock units vest as follows: 20% of the stock options will vest on the first anniversary of the grant date, 20% will
vest on the 2nd anniversary and 10% will vest on each subsequent anniversary of the grant date.
Options vest 25% per year over four years from date of grant. The grant date for each option is ten years prior to the option
expiration date.
On January 17, 2019, the exercise price of each outstanding Employee Stock Option (right to buy) was amended to reduce
such exercise price by $2.30.
Restricted stock units vest in ten equal annual installments of 5,000 beginning March 1, 2013.
Restricted stock units vest on June 3, 2021
Performance stock units vest over four years through 2022 based upon year over year growth in Adjusted Operating Income.
51
Option Exercises and Stock Vested For Fiscal 2019
The table below shows stock options that were exercised, and restricted stock units that vested, during fiscal 2019 for
each of our Named Executive Officers:
Option Awards
Stock Awards
Name
Barry Litwin
Thomas Clark
Robert Dooley
Eric Lerner
Manoj Shetty
Lawrence Reinhold
Number of Shares
Acquired on Exercise
(#)
Value Realized on
Exercise
($)
Number of Shares
Acquired on Vesting
(#)
2,108 (2)
8,333 (3)
1,831 (4)
5,000 (5)
2,334 (4)
8,333 (3)
2,239 (4)
1,779 (4)
35,000 (6)
30,000 (6)
16,666 (6)
-
-
-
-
-
50,000
1,304
3,583
1,257
43,856
228
41,303
25,000
27,091
6,378
-
-
-
-
-
569,200
17,000
46,600
16,300
43,900
4,200
757,900
474,800
497,100
117,000
Value Realized
on Vesting
($) (1)
42,300
192,100
43,300
107,100
55,200
192,100
53,000
42,100
808,500
693,000
385,000
(1)
(2)
(3)
(4)
(5)
(6)
The amount in this column reflects the aggregate dollar amount realized upon the vesting of the restricted stock unit,
determined by the market value of the underlying shares of common stock on the vesting date.
Pursuant to a grant of restricted stock units on June 5, 2017, the restricted stock units vest on June 5, 2019.
Pursuant to a grant of restricted stock units on February 1, 2016, the restricted stock units vest in three installments, 8,334
on February 1, 2017, 8,333 on February 1, 2018 and 8,333 on February 1, 2019.
Pursuant to a grant of performance-based restricted stock units on January 17, 2019.
Pursuant to a grant of restricted stock units on March 1, 2012, the restricted stock units vest in ten equal annual installments
of 5,000 units each, beginning on March 1, 2013.
As noted herein, on January 7, 2019 pursuant to Mr. Reinhold's separation agreement, all of Mr. Reinhold's unvested restricted
stock units accelerated and vested.
52
Employment Arrangements of the Named Executive Officers
The 2020 salary levels discussed below reflect the Compensation Committee’s view that such levels are appropriate in
light of the current business performance and expected performance in 2020, and takes into account the other
compensation elements applicable to each employee.
Richard Leeds – Richard Leeds has no employment agreement and is an “at will” employee. Base salary accounted
for 97% of Mr. Leeds total cash compensation for 2019. Mr. Leeds’ base salary for 2020 is set at $950,000.
Bruce Leeds – Bruce Leeds has no employment agreement and is an “at will” employee. Base salary accounted for
97% of Mr. Leeds total cash compensation for 2019. Mr. Leeds’ base salary for 2020 is set at $950,000.
Robert Leeds – Robert Leeds has no employment agreement and is an “at will” employee. Base salary accounted for
97% of Mr. Leeds total cash compensation for 2019. Mr. Leeds’ base salary for 2020 is set at $950,000.
Barry Litwin – Systemax entered into an employment agreement with Mr. Litwin to employ him as Chief Executive
Officer, commencing January 7, 2019. The agreement provides for a minimum annual base salary of $825,000 and an
annual cash bonus (the “Bonus”) in an amount to be determined by Systemax under its NEO Plan, which Bonus generally
will range from 0%-150% of Mr. Litwin’s annual base salary, with an on-target performance payout of 135% of annual
base salary, assuming Mr. Litwin meets the performance objectives (including the financial and other performance
objectives) established for him by Systemax. In addition, Mr. Litwin is entitled to a car allowance. Mr. Litwin also received
a one-time cash sign-on bonus of $614,000; the sign on bonus is subject to repayment (all if terminated in year one,
and half if terminated before the end of year two, of the his employment period) if Mr. Litwin’s employment terminates
due to his voluntary resignation without “good reason” (as defined) or is terminated by Systemax for “cause” (as defined)
during the first two years of his employment period. Base salary accounted for 33% of Mr. Litwin’s total cash compensation
for 2019. Mr. Litwin's salary for 2020 is set at $866,300. Compensation that may become payable following the termination
of his employment or a change in control of Systemax, are discussed below under Potential Payments Upon Termination
or Change in Control / page 55 of this proxy statement.
Thomas Clark – Mr. Clark has no employment agreement and is an “at will” employee. Base salary accounted for 65%
of Mr. Clark’s total cash compensation for 2019. Mr. Clark’s non-equity incentive compensation for 2019 was determined
as described above under the heading 2019 NEO Plan. Mr. Clark’s base salary for 2020 is set at $481,500. Compensation
that may become payable following the termination of his employment or a change in control of Systemax, are discussed
below under Potential Payments Upon Termination or Change in Control / page 55 of this proxy statement.
Robert Dooley – Mr. Dooley has no employment agreement and is an “at will” employee. Base salary accounted for
51% of Mr. Dooley’s total cash compensation for 2019. Mr. Dooley’s non-equity incentive compensation for 2019 was
determined as described above under the heading 2019 NEO Plan. Mr. Dooley’s base salary for 2020 is set at $615,000.
Compensation that may become payable following the termination of his employment or a change in control of Systemax,
are discussed below under Potential Payments Upon Termination or Change in Control / page 55 of this proxy statement.
Eric Lerner – Systemax entered into an employment agreement with Mr. Lerner on April 12, 2012. The agreement
provides for a minimum base salary of $480,000 (which may be increased at the discretion of Systemax) and a bonus
(which the agreement states is expected to be at least equal to 50% of the base salary) assuming Mr. Lerner meets
certain performance objectives (under a 2020 amendment to the agreement, 70% of such bonus is based on the
performance objectives for Systemax under its NEO cash bonus plan for the applicable year and 30% of such bonus is
based on the achievement of performance objectives established for him by Systemax). He is entitled to receive a car
allowance. Base salary accounted for 66% of Mr. Lerner total cash compensation for 2019. Mr. Lerner’s bonus for 2019
was determined as described above under the heading 2019 NEO Plan. Mr. Lerner’s salary for 2020 is set at $601,800.
Compensation that may become payable following the termination of his employment or a change in control of Systemax,
are discussed below under Potential Payments Upon Termination or Change in Control / page 55 of this proxy statement.
Manoj Shetty – Mr. Shetty has no employment agreement and is an “at will” employee. Base salary accounted for 70%
of Mr. Shetty’s total cash compensation for 2019. Mr. Shetty’s non-equity incentive compensation for 2019 was determined
as described above under the heading 2019 NEO Plan. Mr. Shetty’s base salary for 2020 is set at $497,600. Compensation
that may become payable following the termination of his employment or a change in control of Systemax, are discussed
below under Potential Payments Upon Termination or Change in Control / page 55 of this proxy statement.
Lawrence Reinhold – Under Mr. Reinhold's previously disclosed separation agreement on January 7, 2019, he became
entitled to receive separation payments as follows: (i) one year’s base salary and the average of Mr. Reinhold’s bonus
for fiscal years 2016 and 2017; and (ii) his auto allowance and reimbursement of up to 12 months COBRA medical
53
benefits payments. In addition, pursuant to the separation agreement, all of his unvested restricted stock units accelerated
and vested. On the separation date, Mr. Reinhold entered into a two year consulting agreement with Systemax, pursuant
to which certain option awards previously granted to Mr. Reinhold were terminated, continue to vest or remain exercisable
in accordance with their terms during the ongoing consultancy period. Base salary accounted for 1% of Mr. Reinhold’s
total cash compensation for 2019.
54
Potential Payments Upon Termination of Employment or Change in Control
Barry Litwin. Mr. Litwin’s employment agreement is terminable upon death or total disability, by Systemax for “cause” (as
defined) or without cause, or by Mr. Litwin voluntarily for any reason or for “good reason” (as defined). In the event of
termination for death, total disability, cause or voluntary termination by Mr. Litwin Systemax will owe no further payments
other than as applicable under disability or medical plans and any accrued but unused vacation time (up to four weeks). In
the event of termination for death or total disability, Mr. Litwin would also receive the pro rata portion of any bonus which
would otherwise be paid to him if such termination had not occurred. If Mr. Litwin resigns for good reason or if Systemax
terminates him for any reason other than total disability, death or cause, he shall also receive in addition to the payments
described above for other terminations, severance payments equal to 12 months’ base salary, the target bonus which would
otherwise be paid for the year in which termination occurred, and a reimbursement of costs for COBRA insurance coverage
for twelve months.
Eric Lerner. Mr. Lerner’s employment agreement is terminable upon death or total disability, by Systemax for “cause” (as
defined) or without cause, or by Mr. Lerner voluntarily for any reason or for “good reason” (as defined). In the event of
termination for death, total disability, cause or voluntary termination by Mr. Lerner, Systemax will owe no further payments
other than as applicable under disability or medical plans and any accrued but unused vacation time (up to four weeks). In
the event of termination for total disability or death, Mr. Lerner would also receive the pro rata portion of any bonus which
would otherwise be paid based on the average annual bonus received for the prior two years. If Mr. Lerner resigns for good
reason or if Systemax terminates him for any reason other than total disability, death or cause, he shall also receive in addition
to the payments described above for other terminations, severance payments equal to 12 months’ base salary, one year’s
bonus based on his average annual bonus for the prior two years, and a reimbursement of costs for COBRA insurance
coverage for twelve months.
Barry Litwin, Thomas Clark, Robert Dooley, Eric Lerner, Manoj Shetty and Lawrence Reinhold. Pursuant to the restricted
stock unit agreement with Mr. Dooley (dated March 1, 2012): (i) if Mr. Dooley is terminated for cause, any unvested portion
of his restricted stock units will terminate and be forfeited; (ii) in the event of a change in control, Mr. Dooley will become
immediately vested in all of the restricted stock units held by him as of the date of the change in control; (iii) If Mr. Dooley’s
employment is terminated without cause or for good reason, he will become immediately vested in all non-vested units and
will become immediately entitled to a distribution of that number of shares of common stock of Systemax that are represented
by those vested restricted stock units; and (iv) if Mr. Dooley’s employment is terminated due to total disability or death, his
estate or designated beneficiary(ies), whichever is applicable, will become immediately vested in 50% of the non-vested
restricted stock units, with respect to the restricted stock units held by Mr. Dooley.
Pursuant to the restricted stock unit agreement with Mr. Litwin (dated January 7, 2019): (i) if Mr. Litwin is terminated for cause,
any unvested portion of his restricted stock units will terminate and be forfeited; (ii) if the named executive’s employment is
terminated without cause or for good reason within twelve months following a change in control, he will become immediately
vested in all non-vested units and will become immediately entitled to a distribution of that number of shares of common
stock of Systemax that are represented by those vested restricted stock units; and (iii) if Mr. Litwin's employment is terminated
due to total disability or death, his estate or designated beneficiary(ies), whichever is applicable, will become immediately
vested in all non-vested units and will become immediately entitled to a distribution of that number of shares of common
stock of Systemax that are represented by those vested restricted stock units. In addition, in the event of termination without
cause or by Mr. Litwin for good reason, the next immediate tranche of granted restricted stock that would otherwise have
vested if employment had not been so terminated shall accelerate and be vested as of the date of termination.
Pursuant to the performance restricted stock unit agreements with Mr. Clark (dated January 17, 2019), Mr. Dooley (dated
January 17, 2019), Mr. Lerner (dated January 17, 2019) and Mr. Shetty (dated January 17, 2019): (i) if the named executive
is terminated for cause, any unvested portion of his performance restricted stock units will terminate and be forfeited; (ii) if
the named executive’s employment is terminated without cause or for good reason within six months following a change in
control, he will become immediately vested in all non-vested units and will become immediately entitled to a distribution of
that number of shares of common stock of Systemax that are represented by those vested performance restricted stock
units; and (iii) if the applicable named executive’s employment is terminated due to total disability or death, his estate or
designated beneficiary(ies), whichever is applicable, will become immediately vested in all non-vested units and will become
immediately entitled to a distribution of that number of shares of common stock of Systemax that are represented by those
vested performance restricted stock units.
Pursuant to our standard option agreements, in the event the employment of an above named executive is terminated for
any reason other than death, total disability or cause, the vested portions of his options will be exercisable for up to three
months, and the unvested portion will be forfeited. In the event of death or total disability, the vested portion of his option will
be exercisable for up to one year, and the unvested portion will be forfeited. In the event of termination for cause, all unexercised
options (vested and unvested) will be forfeited.
Pursuant to the stock option agreements with Mr. Litwin (January 7, 2019), Mr. Clark (dated November 10, 2016 and January
17, 2019), Mr. Dooley (dated February 1, 2016, December 14, 2016 and January 17, 2019 ), Mr. Lerner (dated May 2, 2015,
February 1, 2016 and January 17, 2019), Mr. Shetty (dated January 17, 2019), and Mr. Reinhold (dated February 1, 2016
and December 14, 2016), if the named executive’s employment is terminated without cause or for good reason within six
55
months (twelve months for Mr. Litwin) following a “change in control”, such named executive will become immediately vested
in all outstanding unvested stock options, and all of the named executive’s outstanding options shall remain exercisable in
accordance with their terms, but in no event for less than 90 days after such termination. In addition, with respect to Mr.
Litwin's agreement, in the event of termination without cause or by Mr. Litwin for good reason, the next immediate tranche
of granted options that would otherwise have vested if employment had not been so terminated shall accelerate and be
vested as of the date of termination.
Lawrence Reinhold. As noted herein, Mr. Reinhold entered into a separation agreement pursuant to which he received the
compensation described under Employment Arrangements of the Named Executive Officers / page 54 of this proxy statement.
56
The tables below describe potential payments and benefits upon termination of employment or change in control as of
December 31, 2019, the last day of fiscal 2019, and using the closing price of our common stock on December 31, 2019,
the last trading day of fiscal 2019. These amounts are estimates and the actual amounts to be paid can only be determined
at the time of the termination of employment or the date of the change in control.
Barry Litwin
Termination by
Systemax without
“Cause” or
Resignation by
Employee for
“good reason”
($)
Termination Due to
Death or Total
Disability
($)
Change In Control
Only
($)
1,938,800 (1)
902,100 (2)
40,400 (3)
-
152,200 (5)
792,800 (6)
42,200 (7)
2,173,600
-
1,694,900
-
-
-
-
-
Type of Payment
Cash Compensation (Salary &
Non-Equity Incentive
Compensation)
Value of Accelerated Vesting of
Stock Option Awards
Value of Accelerated Vesting of
Restricted Stock Unit Awards
Medical and Other Benefits
Total
Termination by
Systemax without
“Cause” or
Resignation by
Employee for “good
reason”
within a certain
period of time
following a Change in
Control
($)
1,938,800 (1)
202,000 (4)
792,800 (6)
42,200 (7)
2,975,800
(1) Represents one year’s base salary ($825,000) and target bonus for fiscal year 2019 ($1,113,800).
(2) Represents pro-rata share of bonus for fiscal year 2019 ($002,100).
(3) Represents accelerated vesting of 20,000 stock options. Pursuant to Mr. Litwin’s stock option agreement (dated January 7, 2019), if
Mr. Litwin’s employment is terminated without cause or for good reason, the next immediate tranche of granted options that would
otherwise have vested if employment had not been so terminated shall accelerate and be vested as of the date of termination.
(4) Represents accelerated vesting of 100,000 stock options. Pursuant to Mr. Litwin’s stock option agreement (dated January 7, 2019), if
Mr. Litwin’s employment is terminated without cause or for good reason within twelve months following a “change in control”, he will
become immediately vested in all outstanding unvested stock options, and all of Mr. Litwin’s outstanding options shall remain exercisable
in accordance with their terms, but in no event for less than 90 days after such termination.
(5) Represents accelerated vesting of 6,051 unvested restricted stock units. Pursuant to Mr. Litwin’s restricted stock unit agreement (dated
January 7, 2019), if Mr. Litwin’s employment is terminated without cause or for good reason, the next immediate tranche of granted
restricted stock that would otherwise have vested if employment had not been so terminated shall accelerate and be vested as of the
date of termination.
(6) Represents accelerated vesting of 31,510 unvested restricted stock units. Pursuant to Mr. Litwin’s restricted stock unit agreement
(dated January 7, 2019), if Mr. Litwin’s employment is terminated without cause or for good reason within twelve months following a
“change in control” or if Mr. Litwin's employment is terminated due to death or total disability, all non-vested units shall accelerate and
be vested as of the date of termination.
(7) Represents reimbursement of medical and dental insurance payments under COBRA for twelve months.
57
Thomas Clark
Termination by
Systemax without
“Cause” or
Resignation by
Employee for
“good reason”
($)
Termination Due to
Death or Total
Disability
($)
Change In Control
Only
($)
-
-
-
-
-
-
-
-
-
209,800 (2)
-
209,800
-
-
-
-
-
-
Type of Payment
Cash Compensation (Salary &
Non-Equity Incentive
Compensation)
Value of Accelerated Vesting of
Stock Option Awards
Value of Accelerated Vesting of
Restricted Stock Unit Awards
Value of Accelerated Vesting of
Performance Restricted Stock
Unit Awards
Medical and Other Benefits
Total
Termination by
Systemax without
“Cause” or
Resignation by
Employee for “good
reason”
within a certain
period of time
following a Change in
Control
($)
-
314,100 (1)
-
209,800 (2)
-
523,900
(1) Represents accelerated vesting of 33,711 stock options. Pursuant to Mr. Clark’s stock option agreements (dated January 17, 2019), if
Mr. Clark’s employment is terminated without cause or for good reason within six months following a “change in control”, he will become
immediately vested in all outstanding unvested stock options, and all of Mr. Clark’s outstanding options shall remain exercisable in
accordance with their terms, but in no event for less than 90 days after such termination.
(2) Represents accelerated vesting of 8,340 unvested performance restricted stock units. Pursuant to Mr. Clark’s performance restricted
stock unit agreement (dated January 17, 2019), if Mr. Clark’s employment is terminated without cause or for good reason within six
months following a “change in control” or if Mr. Clark's employment is terminated due to death or total disability, all non-vested units
shall accelerate and be vested as of the date of termination.
58
Robert Dooley
Termination by
Systemax without
“Cause” or
Resignation by
Employee for
“good reason”
($)
Termination Due to
Death or Total
Disability
($)
Change In Control
Only
($)
Termination by
Systemax without
“Cause” or
Resignation by
Employee for “good
reason”
within a certain
period of time
following a Change in
Control
($)
-
-
-
-
-
-
-
505,100 (1)
377,400 (2)
188,700 (3)
377,400 (2)
-
-
377,400
267,500 (4)
-
456,200
-
377,400
267,500 (4)
-
772,600
Type of Payment
Cash Compensation (Salary &
Non-Equity Incentive
Compensation)
Value of Accelerated Vesting of
Stock Option Awards
Value of Accelerated Vesting of
Restricted Stock Unit Awards
Value of Accelerated Vesting of
Performance Restricted Stock
Unit Awards
Medical and Other Benefits
Total
(1) Represents accelerated vesting of 48,849 stock options. Pursuant to Mr. Dooley’s stock option agreements (dated January 17, 2019),
if Mr. Dooley’s employment is terminated without cause or for good reason within six months following a “change in control”, he will
become immediately vested in all outstanding unvested stock options, and all of Mr. Dooley’s outstanding options shall remain
exercisable in accordance with their terms, but in no event for less than 90 days after such termination.
(2) Represents accelerated vesting of 15,000 unvested restricted stock units. Pursuant to Mr. Dooley’s restricted stock unit agreement
(dated March 1, 2012), upon a “change in control” all non-vested units shall accelerate and be vested as of the date of the “change in
control” and if Mr. Dooley’s employment is terminated without cause or for good reason, all non-vested units shall accelerate and be
vested as of the date of termination.
(3) Represents accelerated vesting of 7,500 unvested restricted stock units. Pursuant to Mr. Dooley’s restricted stock unit agreement
(dated March 1, 2012), on the event of Mr. Dooley’s death or total disability, 7,500 restricted stock units (50% of the unvested restricted
stock units granted under such agreement at December 31, 2018) would vest.
(4) Represents accelerated vesting of 10,630 unvested performance restricted stock units. Pursuant to Mr. Dooley's performance restricted
stock unit agreement (dated January 17, 2019), if Mr. Dooley’s employment is terminated without cause or for good reason within six
months following a “change in control” or if Mr. Dooley's employment is terminated due to death or total disability, all non-vested units
shall accelerate and be vested as of the date of termination.
59
Eric Lerner
Termination by
Systemax without
“Cause” or
Resignation by
Employee for
“good reason”
($)
Termination Due to
Death or Total
Disability
($)
Change In Control
Only
($)
863,200 (1)
261,200 (2)
-
-
-
33,600 (5)
896,800
-
-
256,600 (4)
-
517,600
-
-
-
-
-
Type of Payment
Cash Compensation (Salary &
Non-Equity Incentive
Compensation)
Value of Accelerated Vesting of
Stock Option Awards
Value of Accelerated Vesting of
Restricted Stock Unit Awards
Value of Accelerated Vesting of
Performance Restricted Stock
Unit Awards
Medical and Other Benefits
Total
Termination by
Systemax without
“Cause” or
Resignation by
Employee for “good
reason”
within a certain
period of time
following a Change in
Control
($)
863,200 (1)
152,600 (3)
-
256,600 (4)
33,600 (5)
1,306,000
(1) Represents one year’s base salary ($602,000) and the average annual non-equity incentive compensation paid to Mr. Lerner for fiscal
years 2018 and 2019 ($261,200).
(2) Represents the average annual non-equity incentive compensation paid to Mr. Lerner for fiscal years 2018 and 2019 ($261,200).
(3) Represents accelerated vesting of 29,130 stock options. Pursuant to Mr. Lerner’s stock option agreements (dated January 17, 2019),
if Mr. Lerner’s employment is terminated without cause or for good reason within six months following a “change in control”, he will
become immediately vested in all outstanding unvested stock options, and all of Mr. Lerner’s outstanding options shall remain exercisable
in accordance with their terms, but in no event for less than 90 days after such termination.
(4) Represents accelerated vesting of 10,198 unvested performance restricted stock units. Pursuant to Mr. Lerner's performance restricted
stock unit agreement (dated January 17, 2019), if Mr. Lerner’s employment is terminated without cause or for good reason within six
months following a “change in control” or if Mr. Lerner's employment is terminated due to death or total disability, all non-vested units
shall accelerate and be vested as of the date of termination.
(5) Represents reimbursement of medical and dental insurance payments under COBRA for twelve months.
60
Manoj Shetty
Termination by
Systemax without
“Cause” or
Resignation by
Employee for
“good reason”
($)
Termination Due to
Death or Total
Disability
($)
Change In Control
Only
($)
-
-
-
-
-
-
-
-
-
204,000 (2)
-
204,000
-
-
-
-
-
-
Type of Payment
Cash Compensation (Salary &
Non-Equity Incentive
Compensation)
Value of Accelerated Vesting of
Stock Option Awards
Value of Accelerated Vesting of
Restricted Stock Unit Awards
Value of Accelerated Vesting of
Performance Restricted Stock
Unit Awards
Medical and Other Benefits
Total
Termination by
Systemax without
“Cause” or
Resignation by
Employee for “good
reason”
within a certain
period of time
following a Change in
Control
($)
-
74,100 (1)
-
204,000 (2)
-
278,100
(1) Represents accelerated vesting of 20,687 stock options. Pursuant to Mr. Shetty's stock option agreement (January 17, 2019), if Mr.
Shetty’s employment is terminated without cause or for good reason within six months following a “change in control”, he will become
immediately vested in all outstanding unvested stock options, and all of Mr. Shetty’s outstanding options shall remain exercisable in
accordance with their terms, but in no event for less than 90 days after such termination.
(2) Represents accelerated vesting of 8,107 unvested performance restricted stock units. Pursuant to Mr. Shetty's performance restricted
stock unit agreement (dated January 17, 2019), if Mr. Shetty’s employment is terminated without cause or for good reason within six
months following a “change in control” or if Mr. Shetty's employment is terminated due to death or total disability, all non-vested units
shall accelerate and be vested as of the date of termination.
61
Director Compensation
General Policy
Our policy is not to pay compensation to directors who are also employees of Systemax or any of our subsidiaries.
Directors are reimbursed for reasonable travel and out-of-pocket expenses incurred for attending Board and Committee
meetings and are covered by our travel accident insurance policy for such travel.
The table below shows the elements and amounts of compensation that we paid our non-management directors for
fiscal 2019.
Compensation Element
Retainers (1)
Restricted Stock Units (2)
Committee Chair Annual Retainers (1)
Audit Committee
Compensation Committee
Nominating/Corporate Governance Committee
Lead Independent Director Retainer (1)
(1) Retainer amounts are paid in quarterly installments.
Amount
($)
65,000
40,000
20,000
10,000
10,000
20,000
(2) Each non-management director receives an annual grant of restricted stock units each year immediately following the annual
stockholders meeting in an amount equal to $40,000 divided by the closing price per share during the 20 trading days preceding
the date of the annual meeting (rounded up to the nearest whole number of shares). Such restricted stock units are generally
subject to forfeiture if the holder is not a director of Systemax on the date of the second annual meeting following such grant, and
cannot be sold while so restricted; such restrictions lapse if the holder dies or becomes disabled or there is a change of control,
as defined in the grant agreement. Cash dividend equivalents are paid on unvested restricted stock.
Non-Management Director Compensation in Fiscal 2019
The non-management directors received the following compensation during fiscal 2019:
Name
Robert D. Rosenthal
Chad M. Lindbloom
Paul S. Pearlman
Lawrence Reinhold
Fees Earned
or Paid in
Cash
($)
95,000
95,000
65,000
65,000
Stock Awards
($)(1)
Option Awards
($)
All Other
Compensation
($) (2)
40,000
40,000
40,000
40,000
-
-
-
-
25,900
13,800
850
850
Total
($)
160,900
148,800
105,850
105,850
(1) This column represents the fair value of the stock award on the grant date determined in accordance with the provisions of ASC 718. As per SEC
rules relating to executive compensation disclosure, the amounts shown exclude the impact of forfeitures related to service based vesting conditions.
For additional information regarding assumptions made in calculating the amount reflected in this column, please refer to Note 10 to our audited
consolidated financial statements, included in our Annual Report on Form 10-K for fiscal 2019.
(2) Dividend equivalent payments on unvested restricted stock.
62
CEO Pay Ratio Disclosure
As permitted under the SEC rules, in order to identify our “median employee” to compare to our CEO, we took into
account our entire employee population (other than our CEO) at December 31, 2019, located in the United States,
Canada, and India, including full, part-time and temporary/seasonal employees (1,400 Employees). We used the
compensation components utilized in the Summary Compensation Table / page 48 of this proxy statement (“SCT”) for
the period from January 1, 2019 to December 31, 2019 as the compensation measure to identify the median employee,
and the median employee’s compensation. We annualized total compensation for those employees who commenced
work during 2019 and excluded our cost of providing health and wellness benefits for all employees.
The pay ratio specified below is a reasonable estimate calculated in a manner that is intended to be consistent with Item
402(u) of Regulation S-K under the Exchange Act. In calculating Total Compensation for our median employee and CEO,
we included, among other things, base salary, overtime, incentive payments, and stock-based compensation (based on
the grant date fair value of awards granted during 2019); therefore, the CEO's Total Compensation for purposes of this
calculation matches the Total Compensation described in the Summary Compensation Table / page 48 of this proxy
statement.
The median team member's estimated Total Compensation for 2019 was $43,500. The ratio of CEO pay to median team
member pay is estimated to be 94 to 1. If the on-time signing bonus and one-time option equity grant were excluded
from the CEO's total compensation, the ratio of CEO pay to the median team member pay is estimated to be 58 to 1.
63
Additional Matters
Solicitation of Proxies
The cost of soliciting proxies for the Annual Meeting will be borne by Systemax. In addition to solicitation by mail and
over the internet, solicitations may also be made by personal interview, fax and telephone. Arrangements will be made
with brokerage houses and other custodians, nominees and fiduciaries to send proxies and proxy material to their
principals and Systemax will reimburse them for expenses in so doing.
Consistent with our confidential voting procedure, directors, officers and other regular employees of Systemax, as yet
undesignated, may also request the return of proxies by telephone or fax, or in person.
Submitting Stockholder Proposals and Director Nominations for the Next Annual Meeting
Stockholder proposals intended to be presented at the 2020 annual meeting, including proposals for the nomination of
directors, must be received by December 24, 2020 to be considered for the 2021 annual meeting pursuant to Rule 14a-8
under the Exchange Act.
Stockholders proposals should be mailed to Systemax Inc., Attention: Investor Relations, 11 Harbor Park Drive, Port
Washington, NY 11050.
Any proposal for a director nominee shall contain at a minimum:
•
•
•
the name and address of the stockholder making the recommendation;
if the stockholder is not a stockholder of record, a representation and satisfactory proof of share ownership;
a description of all direct and indirect related party transactions, compensation and other material monetary
arrangements, agreements or understandings during the past three years, and any other material relationship,
if any, between the stockholder and its respective affiliates or associates, or others with whom they are acting
in concert, on the one hand, and the nominee and his or her respective affiliates, associates and others with
whom they are acting in concert, on the other hand;
• whether the stockholder has been involved in any legal proceeding during the past 10 years;
•
•
•
•
•
•
the nominee’s name, age, address and other contact information;
any direct or indirect holdings, beneficially and/or of record, of our securities by the nominee;
any information regarding the nominee required to be disclosed about directors under applicable securities
laws and/or stock exchange requirements;
information regarding related party transactions with Systemax and/or the stockholder submitting the nomination
and/or the nominee;
any actual or potential conflicts of interest; and
the nominee’s biographical data, current public and private company affiliations, employment history (including
current principal employment) and qualifications and status as “independent” under applicable securities laws
and stock exchange requirements.
Nominees proposed by stockholders will receive the same consideration as other nominees.
64
Other Matters
The Board does not know of any matter other than those described in this proxy statement that will be presented for
action at the Annual Meeting. If other matters properly come before the Annual Meeting, the persons named as proxies
intend to vote the shares they represent in accordance with their judgment.
A COPY OF OUR FORM 10-K FOR FISCAL 2019 IS INCLUDED AS PART OF OUR ANNUAL REPORT ALONG WITH
THIS PROXY STATEMENT, WHICH ARE AVAILABLE AT www.proxyvote.com.
Available Information
We maintain a website at www.systemax.com. We file reports with the SEC and make available free of charge on or
through our 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 or any report we file with, or furnish to, the SEC is not part of this proxy statement.
The Board has adopted the following corporate governance documents:
• Charter for the Audit Committee of the Board (last amended March 2017).
A copy of the Audit Committee Charter is attached hereto as Annex B.
• Charter for the Compensation Committee of the Board (last amended May 2013).
• Charter for the Nominating/Corporate Governance Committee of the Board (last amended January 2015).
• Corporate Ethics Policy (last amended January 2019).
Applies to all of our directors, officers (including our Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer, Controller and any person performing similar functions) and employees.
• Corporate Governance Guidelines and Principles (last amended March 2017).
Establishes our corporate governance principles and practices on a variety of topics, including the
responsibilities, composition and functioning of the Board.
In accordance with the corporate governance rules of the NYSE, each of these corporate governance documents is
available on our web site (www.systemax.com under “Investors—Corporate Governance—Corporate Governance
Documents”).
65
Annex A
SECTION 1
Purpose
SYSTEMAX INC.
2020 Omnibus Long-Term Incentive Plan
The purposes of the Systemax Inc. 2020 Omnibus Long-Term Incentive Plan are to promote the
interests of Systemax Inc. and its stockholders by (i) attracting and retaining exceptional non-employee directors,
executive personnel and other key employees, including consultants and advisors to the Company and its Affiliates, as
defined below; (ii) motivating such non-employee directors, employees, consultants and advisors by means of
performance-related incentives to achieve longer-ranger performance goals; and (iii) enabling such non-employee
directors, employees, consultants and advisors to participate in the long-term growth and financial success of the
Company.
SECTION 2
Definitions
As used in the plan, the following terms shall have the meanings set forth below:
“Affiliate” shall mean any entity that, directly or indirectly, is controlled by the Company, as determined
by the Committee.
Unit, Performance Award or other Stock-Based Award.
“Award” shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock
“Award Agreement” shall mean any written agreement, contract, or other instrument or document
evidencing any Award, including an employment agreement, which may, but need not, be executed or acknowledged
by a Participant.
“Board” shall mean the Board of Directors of the Company.
“Cause” shall be the same as defined under any Award Agreement or any other agreement (including
any employment agreement) (“Employment Agreement”), governing the relationship between the Participant and the
Company. If there is no such definition, Cause shall mean (i) the Participant’s willful and intentional repeated failure or
refusal, continuing after notice that specifically identifies the breach(es) complained of, to perform substantially his or
her material duties, responsibilities and obligations (other than a failure resulting from Participant’s physical or mental
incapacity), and which failure or refusal results in demonstrable direct and material injury to the Company; (ii) any willful
and intentional act or failure to act involving fraud, misrepresentation, theft, embezzlement, dishonesty or moral turpitude
(collectively, “Fraud”) which results in demonstrable direct and material injury to the Company; and (iii) conviction of (or
a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved or which is a misdemeanor in the
jurisdiction involved but which involves Fraud.
“Change in Control” shall be defined as set forth in an Award Agreement or an Employment Agreement,
or if not defined therein, shall be deemed to occur upon the occurrence of any of the following after the Effective Date:
(i) the sale or other disposition of all or substantially all of the assets of the Company or the Industrial Products Group;
(ii) any sale or exchange of the capital stock of the Company or the Industrial Products Group, by the stockholders
thereof, respectively, in one transaction or series of related transactions as a result of which more than fifty percent
(50%) of the outstanding voting securities of the Company or the Industrial Products Group is acquired by a person or
entity or group of related persons or entities; (iii) any reorganization, consolidation or merger of the Company or the
Industrial Products Group where the outstanding voting securities thereof, respectively, immediately before the
transaction represent or are converted into less than fifty percent (50%) of the outstanding voting power of the surviving
entity (or its parent corporation) immediately after the transaction; or (iv) the consummation of the acquisition of fifty-
one percent (51%) or more of the outstanding stock of the Company pursuant to a tender offer validly made under any
federal or state law (other than a tender offer by the Company).
“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.
"Code Section 409A" shall mean Section 409A of the Code and the regulations and guidance
promulgated thereunder.
“Committee” shall mean a committee of the Board designated by the Board to administer the Plan
and composed of not less than two directors, each of whom, to the extent necessary to comply with Rule 16b-3 and to
the extent that such persons are available, is a “Non-Employee Director” within the meaning of Rule 16b-3.
“Company” shall mean Systemax Inc., together with any successor thereto.
“Disability” shall mean any physical or mental condition that would qualify a grantee for a disability
benefit under the long-term disability plan maintained by the Company or, if there is no such plan, a physical or mental
Annex A-1
condition that prevents the grantee from performing the essential functions of the grantee’s position (with or without
reasonable accommodation) for a period of six consecutive months. The existence of a disability shall be determined
by the Committee in its sole discretion.
consulting or advisory services to the Company or any Affiliate as an independent contractor.
“Employee” shall mean (i) an employee of the Company or of any Affiliate; and (ii) an individual providing
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Fair Market Value” shall mean the fair market value of the property or other item being valued, as
determined by the Committee in its sole discretion.
422 of the Code or any successor provision thereto.
“Incentive Stock Option” shall mean an Option that is intended to meet the requirements of Section
of Global Industrial Holdings LLC, EIN: 45-4040586) throughout North America.
“Industrial Products Group” shall mean: the business carried out by the direct and indirect subsidiaries
“Non-Qualified Stock Option” shall mean an Option that is not an Incentive Stock Option.
the Plan and may be either a Non-Qualified Option or an Incentive Stock Option.
“Option” shall mean a right to purchase Shares from the Company that is granted under Section 6 of
“Other Stock-Based Award” shall mean any right granted under Section 10 of the Plan.
“Participant” shall mean any Employee and/or non-employee director of the Company selected by the
Committee to receive an Award under the Plan.
“Performance Award” shall mean any right granted under Section 9 of the Plan.
unincorporated organization, government or political subdivision thereof or other entity.
“Person” shall mean any individual, corporation, partnership, association, joint-stock company, trust,
“Plan” shall mean this Systemax 2020 Omnibus Long-Term Incentive Plan.
“Restoration Option” shall mean an Option granted pursuant to Section 6(e) of the Plan.
restrictions on transferability and is subject to forfeiture.
“Restricted Stock” shall mean any Share granted under Section 8 of the Plan and that is subject to
“Restricted Stock Unit” shall mean any unit granted under Section 8 of the Plan.
Act, or any successor rule or regulation thereto as in effect from time to time.
“Rule 16b-3” shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange
“SEC” shall mean the Securities and Exchange Commission or any successor thereto and shall include
the Staff thereof.
the Company as may be designated by the Committee from time to time.
“Shares” shall mean the common stock of the Company, $0.01 par value, or such other securities of
“Stock Appreciation Right” shall mean any right granted under Section 7 of the Plan.
awards previously granted by a company acquired by the Company or with which the Company combines.
“Substitute Awards” shall mean Awards granted in assumption of, or in substitution for, outstanding
SECTION 3
Administration
(a)
The Plan shall be administered by the Committee. Subject to the terms of the Plan and
applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and authority to (i) designate Participants; (ii) determine the type or types of Awards to
be granted to an eligible Employee and non-employee director; (iii) determine the number of Shares to be covered by,
or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine
the terms and conditions of any Award, including any performance requirements, as well as term, vesting, distribution
and delivery terms and conditions; (v) determine whether, to what extent, and under what circumstances Awards may
be settled or exercised in cash, Shares, other securities, other Awards or other property, or cancelled, forfeited, or
suspended and the method or methods by which Awards may be settled, exercised, cancelled, forfeited, or suspended;
(vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards,
other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the
election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement
relating to, or Award made under, the Plan; (viii) establish, amend, suspend or waive rules and regulations and appoint
such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination
Annex A-2
and take any other action that the Committee deems necessary or desirable for the administration of the Plan. If the
Committee does not exist or for any other reason determined by the Board, the Board may act as the Committee.
(b)
Unless otherwise expressly provided in the Plan, all designations, determinations,
interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of
the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the
Company, and Affiliate, and Participant, any holder or beneficiary of any Award, any stockholder and any Employee.
SECTION 4
Shares Available for Awards
(a)
Subject to adjustment as provided in Section 12, the number of Shares with respect to which
Awards maybe granted under the Plan shall be 7,500,000. The maximum number of Shares which may be the subject
of Awards granted to any individual during any calendar year shall not exceed 1,500,000. If, after the Effective Date of
the Plan any Shares covered by an Award granted under the Plan, or to which such an Award relates, are forfeited, or
if an Award is settled for cash or otherwise terminates or is cancelled without the delivery of Shares, the Shares covered
by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate
number of Shares with respect to which Awards may be granted, to the extent of any such settlement, forfeiture,
termination or cancellation, shall again be, or shall become, Shares with respect to which Awards granted. In the event
that any Option or other Award granted hereunder is exercised through the delivery of Shares, the number of Shares
available for Awards under the Plan shall be increased by the number of Shares surrendered.
may consist, in whole or in part, of authorized and unissued and unissued Shares or of treasury Shares.
(b)
Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award
SECTION 5
Eligibility
Any non-employee director or Employee, including any officer of the Company, shall be eligible to be
designated a Participant.
SECTION 6
Stock Options
(a)
Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete
authority to determine the Employees and non-employee directors to whom Options shall be granted, the number of
Shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the
exercise of the Option. The Award Agreement with respect to each Option shall specify if the Option is an Incentive Stock
Option or a Non-Qualified Stock Option. If the applicable Award Agreement does not so specify, such Option shall be a
Non-Qualified Stock Option. Incentive Stock Options only may be granted to employees of the Company.
Exercise Price. The Committee in its sole discretion shall establish the exercise price at the
time each option is granted, but in no event shall the exercise price be less than the Fair Market Value of a share on the
date of grant.
(b)
(c)
Exercise. Each Option shall be exercisable at such times and subject to such terms and
conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The
Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating
to the application of federal or state securities laws, as it may deem necessary or advisable.
(d)
Payment. No Shares shall be delivered pursuant to any exercise of an Option until payment
in full of the Option price thereof is received by the Company. Such payment may be made in cash, or its equivalent, or,
if and to the extent permitted by the Committee, by exchanging Shares owned by the optionee (which are not the subject
of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all
cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date
of such tender is at least equal to such Option price.
(e)
Restoration Options. In the event that any Participant delivers Shares in payment of the
exercise price of any Option granted hereunder in accordance with Section 6(d), the Committee shall have the authority
to grant or provide for the automatic grant of a Restoration Option to such Participant. The Grant of a Restoration Option
shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish
from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of Shares equal to the
number of such Shares so delivered upon exercise of the original Option. A Restoration Option shall have a per share
exercise price of not less than 100% of the per Share Market Value on the date of grant of such Restoration Option, a
Annex A-3
term no longer than the remaining term of the original option at the time of exercise thereof, and such other terms and
conditions as the Committee in its sole discretion shall determine.
Termination of Employment and/or Termination of Service as a Non-Employee Director.
Except as otherwise provided in the applicable Award Agreement, upon a Participant’s termination of employment and/
or termination of service as a non-employee director, the following shall apply:
(f)
(i)
(ii)
(iii)
(iv)
(v)
Generally. If a Participant’s employment and/or service terminates for any reason other than
death, disability or cause, then: (x) all Options not yet exercisable as of the date of such
termination shall expire on the date of such termination and (y) all options that are exercisable
as of the date of such termination shall remain exercisable for the three-month period following
such termination of employment.
Death or Disability. If a Participant’s employment and/or service terminates due to the
Participant’s death or Disability, then: (x) all Options not yet exercisable as of the date of
such termination shall expire on the date of such termination and (y) all options that are
exercisable as of the date of such termination shall remain exercisable until the first
anniversary of the Participant’s termination of employment.
Cause. If a Participant’s employment and/or service is terminated for cause, all Options not
theretofore exercised shall terminate upon the commencement of business on the date of
the Participant’s termination of employment.
Restrictions on Exercise Following Death. Any exercise of an Option following a Participant’s
death shall be made only by the Participant’s executor or administrator or other duly appointed
representative reasonably acceptable to the Committee, unless the Participant’s will
specifically disposes of such Option, in which case such exercise shall be made only by the
recipient of such specific disposition. If a Participant’s personal representative or the recipient
of a specific disposition under the Participant’s will shall be entitled to exercise any Option
pursuant to the preceding sentence, such representative or recipient shall be bound by all
the terms and conditions of the Plan and the applicable Award Agreement which would have
applied to the Participant.
Special Rules for Incentive Stock Options. No Option that remains exercisable for more than
three months following a Participant’s termination of employment and/or service for any
reason other than death (including death within three months after the termination of
employment or within one year after a termination due to disability) or disability, or for more
than one year following a Participant’s termination of employment and/or service as the result
of disability, may be treated as an Incentive Stock Option.
(g)
Incentive Stock Options: $100,000 Limitation. To the extent that the aggregate Fair Market
Value (determined as of the time the Option is granted) of the Shares with respect to which Incentive Stock Options are
first exercisable by any employee during any calendar year shall exceed $100,000, or such higher amount as may be
permitted from time to time under section 422 of the Code, such Options shall be treated as Non-Qualified Stock Options.
(h)
Incentive Stock Options: 10% Owners. Notwithstanding the foregoing provisions of this
Section 6, an Incentive Stock Option may not be granted under the Plan to an individual who, at the time the Option is
granted, owns Shares possessing more than 10% of the total combined voting power of all classes of stock of the
Company or of its parent or subsidiary (as such ownership may be determined for purposes of section 422(b)(6) of the
Code) unless (i) at the time such Incentive Stock Option is granted the Option exercise price is at least 110% of the Fair
Market Value of the Shares subject thereto and (ii) the Incentive Stock Option by its terms is not exercisable after the
expiration of 5 years from the date it is granted.
SECTION 7
Stock Appreciation Rights
(a)
Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete
authority to determine the Employees and/or non-employee directors to whom Stock Appreciation Rights shall be granted,
the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions
and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another
Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted
in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time.
Annex A-4
(b)
Exercise and Payment. A Stock Appreciation Right shall entitle the Participant to receive an
amount equal to the excess of the Fair Market Value of a Share on the date of exercise of the Stock Appreciation Right
over the grant price thereof. The Committee shall determine whether a Stock Appreciation Right shall be settled in cash,
Shares or a combination of cash and Shares.
(c)
Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award
Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of
exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any
such determination by the Committee may be changed by the Committee from time to time and may govern the exercise
of Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions
on the exercise of any Stock Appreciation Right as it shall deem appropriate.
SECTION 8
Restricted Stock and Restricted Stock Units
(a)
Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete
authority to determine the Employees and/or non-employee directors to whom Shares of Restricted Stock and Restricted
Stock Units shall be granted, the number of Shares of Restricted Stock and/or the number of Restricted Stock Units to
be granted to each Participant, the vesting schedule for such awards, the delivery schedule for such awards, and the
other terms and conditions of such Awards.
(b)
Transfer Restrictions. Restricted Stock and Restricted Stock Units may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award agreements.
Certificates issues in respect of Restricted Stock shall be registered in the name of the Participant and deposited by
such Participant, together with a stock power endorsed in the blank with the company. Upon the lapse of the restrictions
applicable to such Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant's
legal representative.
Termination of Employment. Except to the extent that the applicable Award Agreement
provides otherwise, if the Participant’s employment and/or service is terminated for any reason, all unvested Shares of
Restricted Stock and unvested Restricted Stock Units shall be forfeited as of the date of termination.
(c)
(d)
Payment. Except to the extent that the applicable Award Agreement provides otherwise:
(i)
(ii)
Upon vesting of a Restricted Stock Unit, the Company shall pay the holder of the Restricted
Stock Unit the Fair Market Value of a Share on the date of vesting, unless the Award
Agreement covering such Shares provides for deferred delivery of such Fair Market Value
to a later date, in which case payment shall be as provided in the Award Agreement. Such
payment shall be in cash, other securities or other property, as determined in the sole
discretion of the Committee.
Dividends paid on any Shares of Restricted Stock may be paid directly to the Participant, or
may be reinvested in additional Shares of Restricted Stock or in Restricted Stock Units, as
determined by the Committee in its sole discretion.
SECTION 9
Performance Awards
(a)
Grant. The Committee shall have sole and complete authority to determine Employees and/
or non-employee directors who shall receive a “Performance Award”, which shall consist of a right which is (i) denominated
in cash or Shares, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance
goals during such performance periods as the Committee shall establish, and (iii) payable at such time and in such form
as the Committee shall determine.
(b)
Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement,
the Committee shall determine the performance goals to be achieved during any performance period, the length of any
performance period, the amount of any Performance Award and the amount and kind of any payment of transfer to be
made pursuant to any Performance Award.
Payment of Performance Awards. Performance Awards may be paid in a lump sum or in
installments following the close of the performance period or, in accordance with procedures established by the Committee
at the time the Performance Award is granted.
(c)
Annex A-5
Maximum Award. The maximum amount with respect to which Performance Awards may be
granted to a Participant in a calendar year shall be (i) $10,000,000 with respect to Performance Awards denominated
in cash and (ii) 1,500,000 Shares with respect to Performance Awards denominated in Shares.
(d)
SECTION 10
Performance-Based Awards
(a)
Objective Performance Goals, Formulae or Standards. The grant of Restricted Stock,
Restricted Stock Units or Performance Awards, or the lapse of restrictions or vesting or delivery with respect to such
Awards may be based on the attainment of one or more objective performance goals. In such a case, the following shall
apply:
(i)
(ii)
The Committee shall establish a “performance period,” which may be the fiscal year or any
other specified period.
The applicable performance goals shall be based on one or more of the following performance
criteria: share price, revenues, earnings (including but not limited to EBITDA), earnings per
share, operating income, adjusted operating income, return on equity, expenses, and
objective strategic business, operations and governance goals. Each such performance goal
may (1) be expressed with respect to the Company as a whole or with respect to one or more
divisions or business units, (2) be expressed on a pre-tax or after-tax basis, (3) be expressed
on an absolute and/or relative basis, (4) employ comparisons with past performance of the
Company (including one or more divisions) and/or (5) employ comparisons with the current
or past performance of other companies, and in the case of earnings-based measures, may
employ comparisons to capital, stockholders’ equity and shares outstanding. Prior to the
lapse of restrictions or vesting of Restricted Stock or Restricted Stock Units which are based
on one or more of the performance goals hereunder, the Committee shall certify in writing
(which may be by approved minutes) that the applicable performance goals were in fact
satisfied.
To the extent applicable, the measures used in determining adjusted operating income shall
be determined in a manner consistent with the methods used in the Company’s regular
reports on Forms 10-K and 10-Q, without regard to any of the following:
(A)
(B)
(C)
(D)
All items of gain, loss or expense for a fiscal year that are directly or indirectly related
to the businesses or parts thereof formerly operated by Systemax or its subsidiaries
known as the European Technology Group, North American Technology Group, or
Rebates Holding Group.
All items of gain, loss or expenses including transactions costs for a fiscal year that
are directly or indirectly related to, whether in a stock, asset, merger or other form
of corporate transaction involving the (i) disposal of a business or discontinued
operation or (ii) the operations of any business acquired by the Company during
the fiscal year and generating operating income of more than 5% of the aggregate
Company total.
All items of gain, loss or expense for a fiscal year that are related to changes in
accounting principles or to changes in applicable law or regulations.
All items of gain or loss resulting from i) separation costs or consultancy costs with
any current or former section 16 executive officer, (ii) restructuring, recapitalization,
or reorganization actions, (iii) significant litigation exceeding $500,000 in fees or
settlements, (iv) losses and / or insurance recoveries associated with damage,
destruction, or impairment to any intangible or tangible asset and/or business
interruption event, and (v) resolution of significant contingencies exceeding
$500,000.
To the extent any objective performance goals are expressed using any earnings or sales-
based measures that require deviations from the manner in which the Company’s Forms 10-
K and 10-Q are prepared, such deviations shall be at the discretion of the Committee and
established at the time the applicable performance goals are established.
Annex A-6
SECTION 11
Other Stock-Based Awards
(a)
General. The Committee shall have authority to grant to eligible Employees and/or non-
employee directors an “Other Stock-Based Award”, which shall consist of any right which is (i) not an Award described
in Sections 6 through 9 above and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or
in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible
into Shares), as deemed by the Committee to be consistent with the purposes of the Plan. Subject to the terms of the
Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other
Stock-Based Award. Except in the case of an Other Stock-Based Award that is a Substitute Award, the price at which
securities may be purchased pursuant to any Other Stock Based Award granted under the Plan or the provision, if any,
of any such Award that is analogous to the purchase of exercise price, shall not be less than 100% of the Fair Market
Value of the securities which such an Award relates on the date of grant.
(b)
Dividend Equivalents. In the sole and complete discretion of the Committee, an Award,
whether made as an Other Stock-Based Award under this Section 10 or as an Award granted pursuant to Sections 6
through 9 hereof, may provide the Participant with dividend equivalents, payable in cash, Shares, other securities or
other property on a current or deferred basis, provided that any deferred payment shall be structured in accordance with
Section 409A of the Code.
SECTION 12
Amendment and Termination
(a)
Amendments to the Plan. The Board may amend, alter, suspend, discontinue, or terminate
the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation
or termination shall be made without stockholder approval if such approval is necessary to comply with any mandatory
tax or regulatory requirement. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in
such manner as may be necessary so as to have the Plan conform with the local rules and regulations in any jurisdiction
outside the United States.
(b)
Amendments to Awards. The Committee may waive any conditions or rights under, amend
any terms of, or alter, suspend discontinue, cancel or terminate, any Award theretofore granted, prospectively or
retroactively, including to reduce the exercise price of an Award; provided that any such waiver, amendment, alteration,
suspension, discontinuance, cancellation or termination that would impair the rights of any Participant or any holder of
an Award theretofore granted shall not to that extent be effective with the consent of the affected Participant or holder.
(c)
Cancellation. Any provision of the Plan or any Award Agreement to the contrary
notwithstanding, the Committee may cause an Award granted hereunder to be cancelled in consideration of a cash
payment or alternative Award made to the holder of such cancelled Award equal in value to the Fair Market Value of
such cancelled Award.
SECTION 13
Adjustments
(a)
Shares Available for Grants. In the event of any change in the number of Shares outstanding
by reason of any stock dividend or split, reverse stock split, recapitalization, merger, consolidation, combination or
exchange of shares or similar corporate change, the maximum number of Shares with respect to which the Committee
may grant awards under the Plan and the individual annual limit, both as described in Section 4(a), shall be appropriately
adjusted by the Committee. In the event of any change in the number of Shares outstanding by reason of any other
event or transaction, the Committee may, but need not, make such adjustments in the number and class of shares with
respect to which awards: (i) may be granted under the Plan and (ii) granted to any one employee of the Company or a
subsidiary during any one calendar year, in each case as the Committee may deem appropriate.
(b)
Outstanding Restricted Stock, Restricted Stock Units and Performance Awards. Unless the
Committee in its sole discretion otherwise determines, any securities or other property (including dividends paid in cash)
received by a grantee with respect to a share of Restricted Stock, which has not yet vested, as a result of any dividend,
stock split, reverse stock split, recapitalization, merger, consolidation, combination, exchange of shares or otherwise,
will not vest until such share of restricted stock vests, and shall be promptly deposited with the Company or other
custodian designated by the Company.
The Committee shall adjust any grant of Restricted Stock Units or Performance Awards payable in
Shares, to reflect any dividend, stock split, reverse stock split, recapitalization, merger, consolidation, combination,
exchange of shares or similar corporate change, as the Committee may deem appropriate to prevent the enlargement
or dilution of rights of grantees.
Annex A-7
(c)
Outstanding Options and Stock Appreciation Rights – Increase or Decrease in Issued Shares
Without Consideration. Subject to any required action by the stockholders of the Company, in the event of any increase
or decrease in the number of issued Shares resulting from a subdivision or consolidation of Shares or the payment of
a stock dividend, or any other increase or decrease in the number of such shares effected without receipt of consideration
by the Company, the Committee shall proportionally adjust the number of Shares subject to each outstanding Option
and Stock Appreciation Right and the exercise price-per-share of each such Option and Stock Appreciation Right.
(d)
Outstanding Options and Stock Appreciation Rights – Certain Mergers. Subject to any
required action by the stockholders of the Company, in the event that the Company shall be the surviving corporation
in any merger or consolidation (except a merger or consolidation as a result of which the holders of shares of Common
Stock receive securities of another corporation), each Option and Stock Appreciation Right outstanding on the date of
such merger or consolidation shall pertain to and apply to the securities which a holder of the number of Shares subject
to such Option and Stock Appreciation Right would have received in such merger or consolidation.
(e)
Outstanding Options and Stock Appreciation Rights – Certain Other Transactions. In the
event of (i) a dissolution or liquidation of the Company, (ii) a sale of all or substantially all of the Company’s assets, (iii)
a merger or consolidation involving the Company in which the Company is not the surviving corporation or (iv) a merger
or consolidation involving the Company in which the Company is the surviving corporation but the holders of Shares
receive securities of another corporation and/or other property, including cash, the Committee shall, in its sole discretion,
have the power to:
(i)
(ii)
cancel, effective immediately prior to the occurrence of such event, each Option and Stock
Appreciation Right outstanding immediately prior to such event (whether or not then
exercisable), and, in full consideration of such cancellation, pay to the grantee to whom such
Option and Stock Appreciation Right was granted an amount in cash, for each Share subject
to such Option and Stock Appreciation Right, respectively, equal to the excess of (x) the
value, as determined by the Committee in its sole discretion, of the property (including cash)
received by the holder of a Share as a result of such event over (y) the exercise price of such
Option or Stock Appreciation Right; or
provide for the exchange of each Option and Stock Appreciation Right outstanding
immediately prior to such event (whether or not then exercisable) for an Option on or Stock
Appreciation Right with respect to, as appropriate, some or all of the property which a holder
of the number of Shares subject to such Option or Stock Appreciation Right would have
received and, incident thereto, make an equitable adjustment as determined by the
Committee in its sole discretion in the exercise price of the Option or Stock Appreciation
Right, or the number of shares or amount of property subject to the Option or Stock
Appreciation Right, or, if appropriate, provide for a cash payment to the grantee to whom
such Option or Stock Appreciation Right was granted in partial consideration for the exchange
of the Option or Stock Appreciation Right.
(f)
Outstanding Options and Stock Appreciation Rights – Other Changes. In the event of any
change in the capitalization of the Company, special dividends or a corporate change other than those specifically
referred to in this Section 12, the Committee may, in its sole discretion, make such adjustments in the number and class
of shares subject to Options and Stock Appreciation Rights outstanding on the date on which such change occurs and
in the per-share exercise price of each such Option and Stock Appreciation Right as the Committee may consider
appropriate to prevent dilution or enlargement of rights. In addition, if and to the extent the Committee determines it is
appropriate, the Committee may elect to cancel each Option and Stock Appreciation Right outstanding immediately prior
to such event (whether or not then exercisable), and, in full consideration of such cancellation, pay to the grantee to
whom such Option or Stock Appreciation Right was granted an amount in cash, for each Share subject to such Option
or Stock Appreciation Right, respectively, equal to the excess of (i) the Fair Market Value of Shares on the date of such
cancellation over (ii) the exercise price of such Option or Stock Appreciation Right.
(g)
Change in Control. Unless otherwise provided in an Award Agreement or an Employment
Agreement, upon the occurrence of a Change in Control of the Company, the Committee may in its sole and absolute
discretion, provide on a case by case basis that (i) some or all outstanding Awards may become immediately exercisable
or vested or distributed as the case may be, without regard to any limitation imposed pursuant to the Plan, (ii) that all
Awards shall terminate, provided that Participants shall have the right, immediately prior to the occurrence of such
Change in Control and during such reasonable period as the Committee in its sole discretion shall determine and
designate, to exercise any vested Award in whole or in part, (iii) that all Awards shall terminate, provided that Participants
shall be entitled to a cash payment equal to the Change in Control price with respect to shares subject to the vested
Annex A-8
portion of the Award net of the exercise price thereof (if applicable), (iv) provide that, in connection with a liquidation or
dissolution of the Company, Awards shall convert into the right to receive liquidation proceeds net of the exercise price
(if applicable) and (v) any combination of the foregoing or none of the foregoing. Unless otherwise provided in an Award
Agreement or an Employee’s employment agreement, in the event that the Committee does not terminate or convert
an Award upon a Change in Control of the Company, then the Award shall be assumed, or substantially equivalent
Awards shall be substituted, by the acquiring, or succeeding corporation (or an affiliate thereof).
(h)
Change in Status of an Affiliate. Unless otherwise provided in an Award Agreement or an
Employment Agreement, or otherwise determined by the Committee, in the event that an entity or business unit which
was previously a part of the Company is no longer a part of the Company, as determined by the Committee in its sole
discretion, the Committee may, in its sole and absolute discretion: (i) provide on a case by case basis that some or all
outstanding Awards held by a Participant employed by or performing service for such entity or business unit may become
immediately exercisable or vested, without regard to any limitation imposed pursuant to the Plan; (ii) provide on a case
by case basis that some or all outstanding Awards held by a Participant employed by or performing service for such
entity or business unit may remain outstanding, may continue to vest, and/or may remain exercisable for a period not
exceeding one (1) year, subject to the terms of the Award and the Plan; and/or (ii) treat the employment or other services
of a Participant employed by such entity or business unit as terminated if such Participant is not employed by the Company
or any entity that is a part of the Company immediately after such event.
(i)
No Other Rights. Except as expressly provided in the Plan, no grantee shall have any rights
by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase
or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger or consolidation of the
Company or any other corporation. Except as expressly provided in the Plan, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number of Shares subject to an award or the exercise price of any Option or
Stock Appreciation Right.
SECTION 14
General Provisions
(a)
Nontransferability. Each Award, and each right under any Award, shall be exercisable only
by the Participant during a Participant's lifetime, if permissible under applicable law, by the Participant's guardian or legal
representative or by a transferee receiving such Award pursuant to a qualified domestic relations order (“QDRO”), as
determined by the Committee.
No Rights to Awards. No Employee, Participant, or other Person shall have any claim to be
granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or
beneficiaries of Awards. The terms and conditions of Awards need not be same with respect to each recipient.
(b)
(c)
Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate
delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the plan or the rules, regulations, and other requirements
of the Securities and Exchange Commission, and stock exchange upon which such Shares or other securities are then
listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any
certificates to make appropriate references to such restrictions.
(d)
Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate
to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers,
the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to, or to cancel,
modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate Awards held by, Employees who
are not officers or directors of the Company for purposes of section 16 of the Exchange Act, or any successor section
thereto, or who are otherwise not subject to such section.
(e)
Withholding. Any Participant may be required to pay the Company or any Affiliate with respect
to, and the Company or any Affiliate shall have the right and is hereby authorized to withhold from, any Award, from any
payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to
a Participant the amount (in cash, and to the extent approved by the Committee, Shares, other securities, other Awards
or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer
under an Award or under the Plan and to take such other action as may be necessary in the opinion of the company to
satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders
of Awards to help defray or offset any tax arising from the grant, vesting, delivery, exercise or payments of any Award.
Annex A-9
(f)
Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement which
shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable
thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment
of a Participant and the effect, if any, of a change in control of the Company.
(g)
No Limit in Other Compensation Arrangements. Nothing contained in the Plan shall prevent
the Company or any Affiliate from adopting or continuing in effect other compensation arrangements, which may, but
need not, provide for the grant of options, Restricted Stocks, Shares and other types of Awards provided for hereunder
(subject to stockholder approval if such approval is required), and such arrangements may either be generally applicable
or applicable only in specific cases.
(h)
No Right to Employment. The grant of an Award shall not be construed as giving a Participant
the right to be retained in the employ or service of the Company or any Affiliate. Further, the company or Affiliate may
at any time dismiss a Participant or service from employment, free from any liability or any claim under the Plan, unless
otherwise expressly provided in the Plan or in any Award Agreement.
(i)
No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant
or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed
under the Plan until he or she has become the holder of such Shares. Notwithstanding the foregoing, in connection with
each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall
not be entitled to the rights of a stockholder in respect of Restricted Stock.
(j)
Code Section 409A. The Award Agreement for any Award that the Committee reasonably
determines to constitute “nonqualified deferred compensation plan” under Code Section 409A (a “Section 409A Plan”),
and the provisions of the Plan applicable to that Award, shall be construed in a manner consistent with the applicable
requirements of Code Section 409A, and the Committee, in its sole discretion and without the consent of any Participant,
may amend any Award Agreement (and the provisions of the Plan applicable thereto) if and to the extent that the
Committee determines that such amendment is necessary or appropriate to comply with the requirements of Code
Section 409A. If any Award constitutes a Section 409A Plan, then the Award shall be subject to the following additional
requirements, if and to the extent required to comply with Code Section 409A:
(i)
(ii)
(iii)
(iv)
(v)
Payments under the Section 409A Plan may not be made earlier than (u) the Participant’s
“separation from service”, (v) the date the Participant becomes “disabled”, (w) the Participant’s
death, (x) a “specified time (or pursuant to a fixed schedule)” specified in the Award Agreement
at the date of the deferral of such compensation, (y) a “change in the ownership or effective
control of the corporation, or in the ownership of a substantial portion of the assets” of the
corporation, or (z) the occurrence of an “unforeseeable emergency”;
The time or schedule for any payment of the deferred compensation may not be accelerated,
except to the extent provided in applicable Treasury Regulations or other applicable guidance
issued by the Internal Revenue Service;
Any elections with respect to the deferral of such compensation or the time and form of
distribution of such deferred compensation shall comply with the requirements of Code
Section 409A(a)(4); and
In the case of any Participant who is a “specified employee”, a distribution on account of a
“separation from service” may not be made before the date which is six months after the date
of the Participant’s “separation from service” (or, if earlier, the date of the Participant’s death).
For purposes of the foregoing, the terms in quotations shall have the same meanings as
those terms have for purposes of Code Section 409A, and the limitations set forth herein
shall be applied in such manner (and only to the extent) as shall be necessary to comply
with any requirements of Code Section 409A that are applicable to the Award.
Governing Law. The validity, construction, and effect of the Plan and any rules and regulations
relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of Delaware.
(k)
Severability. If any provision of the Plan or any Award is or becomes or is deemed to be
invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under and law deemed applicable by the Committee, such provision shall be construed or deemed amended to
(l)
Annex A-10
conform the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the
Committee, materially altering the intent of the Plan or Award, such provision shall be stricken as to such jurisdiction,
Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.
(m)
Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration
under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such
consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section
16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary.
Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities
of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has
determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal
securities laws.
(n)
No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to
create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant
or any other Person. To the extent that any person acquires a right to receive payments from the Company or any Affiliate
pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company
or any Affiliate.
(o)
No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan
or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or
transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be cancelled,
terminated, or otherwise eliminated.
Headings. Headings are given to the Sections and subsections of the Plan solely as a
convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof.
(p)
SECTION 15
Term of the Plan
the Company (the “Effective Date”).
(a)
Effective Date. The Plan shall be effective as of the date of its approval by the directors of
(b)
Expiration Date. No Award shall be granted under the Plan after the tenth anniversary of the
date the Plan was approved; provided that the authority for grant of Restoration Options hereunder in accordance with
Section 6(e) shall continue, subject to the provisions of Section 4(a), as long as any option granted hereunder remains
outstanding. Unless otherwise expressly provided in the Plan or an applicable Award Agreement, any Award granted
hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or
terminate any such Award or to waive any conditions or rights under any such Award shall, continue after such tenth
anniversary of the Plan’s approval.
Annex A-11
Annex B
AUDIT COMMITTEE CHARTER
FOR
SYSTEMAX INC.
(revised March 15, 2017)
Purpose of Committee
The purpose of the Audit Committee (the “Committee”) of the Board of Directors (the “Board”) of Systemax Inc. (the
“Company”) is to (a) assist the Board with oversight of (i) the integrity of the Company’s financial statements, (ii) the
Company’s compliance with legal and regulatory requirements, (iii) the Company’s independent auditor’s
qualifications and independence, and (iv) the performance of the Company’s internal audit function and independent
auditors; and (b) prepare the report that U.S. Securities and Exchange Commission rules require be included in the
Company’s annual proxy statement.
The function of the Committee is oversight. It is not the Committee’s responsibility to certify the Company’s financial
statements or to guarantee the report of the independent auditor. The Company’s management is responsible for the
(i) preparation, presentation and integrity of the Company’s financial statements, (ii) maintenance of appropriate
accounting and financial reporting principles and policies, and (iii) maintenance of internal controls and procedures
designed to assure compliance with accounting standards and applicable laws and regulations. The independent
auditor is responsible for planning and carrying out a proper audit and reviews. In fulfilling their responsibilities
hereunder, it is recognized that members of the Committee are not full-time employees of the Company. As such, it is
not the duty or responsibility of the Committee or its members to conduct auditing or accounting reviews or
procedures, except to the extent described below under “Performance Evaluation”.
Each member of the Committee shall be entitled to rely on (i) the integrity of those persons and organizations within
and outside the Company from which it receives information and (ii) the accuracy of the financial and other
information provided to the Committee by such persons and organizations absent actual knowledge to the contrary
(which shall be promptly reported to the Company’s Board). In addition, the evaluation of the Company’s financial
statements by the Committee is not of the same scope as, and does not involve the extent of detail as, audits
performed by the independent auditor, nor does the Committee’s evaluation substitute for the responsibilities of the
Company’s management for preparing, or the independent auditor for auditing, the financial statements.
Committee Duties and Responsibilities
The duties and responsibilities of the Committee are to:
1.
2.
Retain and terminate the Company’s independent auditors (subject, if applicable, to shareholder
ratification). The Committee shall oversee the rotation of the audit partners of the independent
auditors as required by the Sarbanes-Oxley Act of 2002. The Committee shall have the sole
authority to approve and/or pre-approve all audit engagement fees and terms, as well as all non-
audit engagement fees and terms with the independent auditor. The Committee shall not engage
the independent auditor to perform non-audit services proscribed by law or regulation. The
Committee need not pre-approve non-audit services that fall within the “De Minimis Exception” set
forth in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended;
At least annually, obtain and review a report by the independent auditor consistent with
Independence Standards Board of Directors Standard No.1, describing: (a) the independent
auditor’s internal quality-control procedures; (b) any material issues raised by the most recent
internal quality-control review, or peer review, of the independent auditor, or by any inquiry or
investigation by governmental or professional authorities, within the preceding five years,
respecting one or more independent audits carried out by the independent auditor, and any steps
taken to deal with any such issues; and (c) (to assess the auditor’s independence) all relationships
between the independent auditor and the Company. After reviewing the foregoing report and the
independent auditor’s work throughout the year, the Committee shall evaluate the auditor’s
qualifications, performance and independence. This evaluation shall include the review and
evaluation of the lead partner of the independent auditor. In making its evaluation, the Committee
Annex B-1
3.
4.
5.
6.
7.
8.
shall take into account the opinions of management and the Company’s internal auditors (or other
personnel responsible for the internal audit function). The Committee shall present its conclusions
with respect to the independent auditor to the full Board;
Review and discuss the annual audited financial statements and quarterly financial statements with
management and the independent auditor, including the Company’s disclosures under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
provide the annual Audit Committee report required by the SEC for inclusion in the Company’s
annual report on Form 10-K, and otherwise report to the stockholders of the Company in
accordance with the rules and regulations of the SEC.
Review and discuss with management earnings press releases, as well as financial information and
earnings guidance provided to analysts and rating agencies. This discussion may be done
generally (i.e., discussion of the types of information to be disclosed and the type of presentation to
be made). The Committee is not required to discuss in advance each earnings press release or
each instance in which the Company provides earnings guidance;
As appropriate, obtain advice and assistance from outside legal, accounting or other advisors;
Review and discuss with management policies with respect to risk assessment and risk
management. While it is the job of the chief executive officer and senior management to assess
and manage the Company’s exposure to risk under the oversight of the Board of Directors, the
Committee shall discuss guidelines and policies to govern the process by which this is handled,
including working together with the Compensation Committee regarding the Company’s
compensation policies for all its employees as they relate to the Company’s risk management goals
and objectives. The Committee shall discuss the Company’s major financial risk exposures and the
steps management has taken to monitor and control such exposures;
Periodically meet separately with management, with internal auditors (or other personnel
responsible for the internal audit function), and with independent auditors;
Annually discuss with the independent auditor the matters required to be discussed by Statement
on Auditing Standards No. 61 relating to the conduct of the audit, including any difficulties
encountered in the course of the audit work, any restrictions on the scope of activities or access to
requested information, and any significant disagreements with management. The discussion shall
address, to the extent applicable, any accounting adjustments that were noted or proposed by the
independent auditor but were "passed" (as immaterial or otherwise), any communications between
the audit team and the auditor's national office with respect to auditing or accounting issues
presented by the engagement and any “management” or “internal control” letter issued, or
proposed to be issued, by the independent auditor. The Committee shall discuss with the
independent auditor:
(a)
(b)
(c)
the responsibilities, budget and staffing of the Company’s internal audit function;
the Company's critical accounting policies and practices;
alternative treatments of financial information within generally accepted accounting
principles related to material items the independent auditors have discussed with
management, ramifications of use of the alternative disclosures and treatments, and the
treatment preferred by the independent auditors; and
(d)
other material written communications between the independent auditor and
management, such as any management letter or schedule of unadjusted differences.
The Company’s directors of internal audit shall report directly to the chief financial officer and the
Committee at least four times per fiscal year, or more often as necessary;
9.
The Committee shall periodically review and discuss with management and the independent
auditor: (a) any major issues regarding accounting principles and financial statement presentations,
including any significant changes in the Company's selection or application of accounting
principles, and major issues as to the adequacy of the Company's internal controls and any special
audit steps adopted in light of material control deficiencies; (b) analyses prepared by management
Annex B-2
and/or the independent auditor setting forth significant financial reporting issues and judgments
made in connection with the preparation of the financial statements, including analyses of the
effects of alternative GAAP methods on the financial statements; and (c) the effect of regulatory
and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the
Company.
The Committee shall review disclosures made to the Committee by the Company's Chief Executive
Officer and Chief Financial Officer during their certification process for the Form 10-K and Forms
10-Q about significant deficiencies or material weaknesses in the design or operation of internal
control over financial reporting and any fraud involving management or other employees who have
a significant role in the Company's internal control over financial reporting. The Committee shall
review with management, the senior internal auditing executive, and the independent auditor, as
appropriate, attestations and reports by the independent auditor on internal control over financial
reporting.
Set clear hiring policies for the hiring by the Company of employees or former employees of the
independent auditors;
Establish procedures for (i) the receipt, retention and treatment of complaints received by the
Company, regarding accounting, internal accounting controls, or auditing matters and (ii) the
confidential, anonymous submission by employees of the Company of concerns regarding
questionable accounting or auditing matters;
Report regularly to the Board. The Committee shall review with the full Board any issues that arise
with respect to the quality or integrity of the Company’s financial statements, the Company’s
compliance with legal or regulatory requirements, the performance and independence of the
Company’s independent auditors, or the performance of the internal audit function;
Review the content of CEO and CFO disclosures and certifications under Sections 302 and 906 of
the Sarbanes-Oxley Act of 2002; and
The Committee shall obtain from the independent auditor assurance that Section 10A(b) of the
Exchange Act (relating to reports by the independent auditor made to the Company of illegal acts
discovered by the independent auditor) has not been implicated.
10.
11.
12.
13.
14.
15.
Committee Membership
The Committee shall consist of at least three members of the Board, each of whom is, in the business judgment of
the Board, “independent” under Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended, the rules of
the New York Stock Exchange and any other securities exchange on which the Company’s securities are listed. Each
member of the Committee shall be financially literate (or shall become so within a reasonable period of time after
appointment to the Committee), and at least one member of the Committee shall have “accounting or related financial
management expertise” as such qualifications are interpreted by the Board in its business judgment, and qualify as a
“financial expert” as defined by the U.S. Securities and Exchange Commission. No Committee member may serve on
the audit committees of more than two other public companies, unless the Board has determined that such service
will not impair the effectiveness of the member’s service on the Committee. The Board shall periodically determine (a)
whether each Committee member meets such independence and experience requirements and (b) whether or not
any member of the Committee is an "audit committee financial expert" as that term is defined by the rules and
regulations of the Commission.
The members of the Committee shall be appointed by the Board, and shall serve at the pleasure of the Board for
such term or terms as the Board may determine.
The compensation to be paid by the Company to any Committee member must consist solely of director’s fees;
provided, however, that pension or other deferred compensation that is not contingent on future service to the
Company will not be deemed to violate this requirement.
Committee Structure and Operations
Annex B-3
A majority of the Committee shall constitute a quorum. The Board shall designate a member of the Committee as its
chairperson. The Committee may act by a majority of the members present at a meeting of the Committee. In the
event of a tie vote on any issue, the chairperson’s vote shall decide the issue. The Committee shall meet in person or
telephonically at least four times a year at a time and place determined by the Committee chairperson, with further
meetings to occur when deemed necessary or desirable by the Committee or its chairperson. The Committee may
delegate some or all of its duties to a subcommittee comprising one or more members of the Committee. The
Committee may ask members of management or others whose advice and counsel are relevant to the issues then
being considered by the Committee to attend any meetings and to provide such pertinent information as the
Committee may request.
Performance Evaluation
The Committee shall review the adequacy of this charter and evaluate its performance hereunder at least annually
and present such report to the full Board. Such report shall include any recommended changes to this charter. The
Board shall also review and approve this charter at least annually.
While the fundamental responsibility for the Company’s financial statements and disclosures rests with management
and the independent auditor, the Committee shall review: (i) major issues regarding accounting principles, and
financial statement presentations, including any significant changes in the Company’s selection or application of
accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit
steps adopted in light of material control deficiencies; (ii) analyses prepared by management and/or the independent
auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of
the financial statements, including analyses of the effects of using alternative methods under generally accepted
accounting principles (“GAAP”) on the financial statements; (iii) the effect of regulatory and accounting initiatives, as
well as off-balance sheet structures, on the financial statements of the Company; and (iv) earnings press releases
(paying particular attention to any use of “pro forma,” or “adjusted” non-GAAP, information), as well as financial
information and earnings guidance provided to analysts and rating agencies.
Resources and Authority of the Committee
In discharging its oversight responsibilities, the Committee shall have unrestricted access to the Company’s
management, books and records and the authority to retain outside counsel, accountants or other consultants in the
Committee’s sole discretion. The Committee may direct any officer of the Company, the independent auditor and/or
the Company’s internal audit staff to inquire into and report to the Committee on any matter.
Nothing contained in this charter is intended to, or should be construed as, creating any responsibility or liability of the
members of the Committee except to the extent otherwise provided under applicable Delaware law which shall
continue to set the legal standard for the conduct of the members of the Committee.
Annex B-4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-13792
Systemax Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Delaware
11-3262067
11 Harbor Park Drive
Port Washington, New York 11050
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (516) 608-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $ .01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and "emerging growth company” in
Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer ☐
Non-Accelerated Filer ☐
Accelerated Filer ☒
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2019, which is the last business day of the registrant’s
most recently completed second fiscal quarter, was approximately $264,668,802. For purposes of this computation, all executive officers and directors of the
Registrant and all parties to the Stockholders Agreement dated as of June 15, 1995 have been deemed to be affiliates. Such determination should not be deemed to
be an admission that such persons are, in fact, affiliates of the Registrant.
The number of shares outstanding of the registrant’s common stock as of March 5, 2020 was 37,752,774 shares.
Documents incorporated by reference: Portions of the Proxy Statement of Systemax Inc. relating to the Annual Meeting of Stockholders to be held in 2020 are
incorporated by reference in Part III hereof.
TABLE OF CONTENTS
Part I
Item 1.
Business
General
Products
Sales and Marketing
Customer Service, Order Fulfillment and Support
Suppliers
Competition and Other Market Factors
Employees
Environmental Matters
Financial Information About Domestic and Foreign Operations
Available Information
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
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5
5
6
7
7
7
7
8
9
9
17
17
18
18
19
20
20
33
34
34
34
37
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37
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40
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. Any such statements 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 and are based on management’s estimates,
assumptions and projections and are not guarantees of future performance. Forward-looking statements may include, but are not limited to statements regarding:
i) projections or estimates of revenue, income or loss, exit costs, cash flow needs and capital expenditures; ii) fluctuations in general economic conditions; iii)
future operations, such as risks regarding strategic business initiatives, plans relating to new distribution facilities, plans for utilizing alternative sources of supply
in response to government tariff and trade actions, and plans for new products or services; iv) plans for acquisition or sale of businesses, including expansion or
restructuring plans, such as our exit from and winding down of our North American Technology Group (“NATG”) and European operations; v) financing needs,
and compliance with financial covenants in loan agreements; vi) assessments of materiality; vii) predictions of future events and the effects of pending and
possible litigation; and viii) 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 relating to 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.
Forward-looking statements in this report are based on the Company’s beliefs and expectations as of the date of this report and are subject to risks and
uncertainties which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-
looking statements are inherently uncertain and undue reliance should not be placed on them. We undertake no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected
events.
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:
•
•
•
•
•
•
general economic conditions, such as customer inventory levels, interest rates, borrowing ability and economic conditions in the manufacturing
industry generally, or global events that adversely impact economies generally such as pandemics (e.g., the coronavirus outbreak) will continue to
impact our business;
delays in the timely availability of products from our suppliers could delay receipt of needed product and result in lost sales;
global supply chains and the timely availability of products, particularly products, or product components used in domestic manufacturing, imported
from China and other Asian nations could be materially disrupted by quarantines, factory slowdowns or shutdowns, border closings and/or travel
restrictions resulting from pandemics such as the coronavirus outbreak in China;
the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, have caused us to raise the prices on certain of our products
and seek alternate sources of supply, which could negatively impact our sales or disrupt our operations;
other trade developments, such as anti-dumping proceedings or actions by U.S. or foreign governmental authorities, have occurred in the past and
although were addressed by us without material impact to our business, there can be no assurance that future such events will not have a material
impact;
our use of alternate sources of supply, such as utilizing new vendors in additional countries, entails various risks, such as identifying, vetting and
managing new business relationships, reliance on new vendors and maintaining quality control over their products, and protecting our intellectual
property rights;
3
•
•
•
•
•
•
increases in freight and shipping costs could affect our margins to the extent the increases cannot be passed along to customers, as has occurred in the
past, and factors affecting the shipping and distribution of products imported to the United States by us or our domestic vendors, such as global
availability of shipping containers and fuel costs;
our reliance on common carrier delivery services for shipping inventoried merchandise to customers;
our reliance on drop ship deliveries directly to customers by our product vendors for products we do not hold in inventory;
•
•
our ability to maintain available capacity in our distribution operations for stocked inventory and to enable on time shipment and deliveries, such as
by timely implementing additional temporary or permanent distribution resources, whether in the form of additional facilities we operate or by
outsourcing certain functions to third-party distribution and logistics partners;
we compete with other companies for recruiting, training, integrating and retaining talented and experienced employees, particularly in markets
where we and they have central distribution facilities; this aspect of competition is aggravated by the current tight labor market in the U.S.;
risks involved with e-commerce, including possible loss of business and customer dissatisfaction if outages or other computer-related problems
should preclude customer access to our products and services;
our information systems and other technology platforms supporting our sales, procurement and other operations are critical to our operations and
disruptions or delays have occurred and could occur in the future, and if not timely addressed could have a material adverse effect on us;
a data security breach due to our e-commerce, data storage or other information systems being hacked by those seeking to steal Company, vendor,
employee or customer information, or due to employee error, resulting in disruption to our operations, litigation and/or loss of reputation or business;
• managing various inventory risks, such as being unable to profitably resell excess or obsolete inventory and/or the loss of product return rights from
•
•
our vendors;
• meeting credit card industry compliance standards in order to maintain our ability to accept credit cards;
•
rising interest rates, increased borrowing costs or limited credit availability, including our own ability to maintain satisfactory credit agreements and
to renew credit facilities, could impact both our and our customers’ ability to fund purchases and conduct operations in the ordinary course;
pending or threatened litigation and investigations, as well as anti-dumping, unclaimed property and other government trade and customs
proceedings, could adversely affect our business and results of operations;
sales tax laws or government enforcement priorities may be changed which could result in e-commerce and direct mail retailers having to collect
sales taxes in states where the current laws and/or prior interpretations do not require us to do so; and
extreme weather conditions could disrupt our product supply chain and our ability to ship or receive products, which would adversely impact sales.
•
•
•
4
Item 1. Business.
General
Systemax Inc., through its operating subsidiaries, is primarily a direct marketer of brand name and private label industrial and business equipment and supplies in
North America going to market through a system of branded e-commerce websites and relationship marketers. 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.
Current Operations
The Company sells a wide array of industrial and general business hard goods and supplies and to a lesser extent products that would fall into the generally
recognizable category of maintenance, repair and operations (“MRO”) products, which are marketed in North America. Many of these products are manufactured
by other companies. Some products are manufactured for us and sold under our brand as a white label product, and some are manufactured to our own design and
marketed under the trademarks: Global™, GlobalIndustrial.com™, Nexel™ Paramount™ and Interion™.
See Note 4 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.
Products
WE CAN SUPPLY THAT™
We offer over one million brand name and private label products through our e-commerce sites and have access to over 1.7 million products available in our
database. We endeavor to expand and keep current the breadth of our product offerings to fulfill the increasingly wide range of product needs of our customers, and
periodically remove certain products from our offering to improve efficiencies or to address vendor or market changes. Sourcing hard to find, and non-standard
product helps to differentiate our business from our competitors and we believe provides us with a competitive advantage.
Historically the Company has focused on products within the following categories: storage and shelving; material handling; janitorial and maintenance; furniture
and office; and workbench and shopdesks. We have become a destination and trusted supplier of these products by offering competitive pricing, high service
levels, broad and deep product offering, extensive product and sales expertise, and a well-developed Private Label product portfolio offering both high quality and
attractively priced alternatives to leading national brands. Other emerging or growing categories are becoming a larger portion of our product portfolio; these
include HVAC/R and fans, safety and security, outdoor and grounds maintenance, tools and instruments, office and school supplies, plumbing and pumps,
packaging and supplies, electrical and lighting, food service and appliances, raw materials and building supplies, motors and power transmission, pneumatics and
hydraulics, medical and laboratory equipment, metalworking and cutting tools, vehicle maintenance, and fasteners and hardware. Within these categories we intend
to use the go to market strategy that we successfully employed to grow our legacy core product categories, as discussed below.
Sales and Marketing
We market our products primarily to business customers, which include for-profit businesses, state, local, and private educational organizations and government
entities including federal, state, and local municipalities. We have an established multi-faceted direct marketing system and customer life cycle marketing program
which tends to begin with customer acquisition via keyword or branding search, supported by strategic account managers, leading e-commerce and account
management tools, and deep pre and post sales product expertise which are intended to drive customer retention and penetration and to maximize sales. From time
to time we adjust or re-allocate our marketing and advertising spend to best take advantage of changes in market conditions, changes in product mix and/or to drive
special sales initiatives and product promotions and in 2019 we implemented various new strategies to further focus our online advertising spend to achieve
improved results and return on investment.
5
Relationship Marketers
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. 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 e-mail campaigns
and periodic catalog mailings, both of which are designed to generate inbound telephone sales, and visits to our interactive websites, which allow customers to
purchase products directly online. 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 email campaigns, and to a lesser extent catalog mailings, which feature our websites results in greater internet-related sales.
E-commerce
We currently operate multiple e-commerce sites, including:
www.globalindustrial.com
www.globalindustrial.ca
www.industrialsupplies.com
We are continually upgrading the capabilities and performance of these websites in our significant markets. In 2019, we launched a new version of our
globalindustrial.com website which provides advanced features and self-serve capabilities that increases ease of use, while supplying a premier customer
experience. The new website allows customers to conduct more of their order and service-related tasks such as returns, auto reorder, replacement parts and order
tracking online.
Our internet sites feature over one million MRO and industrial and general business supplies. 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
As the Company increased its focus on online and e-commerce advertising, marketing and sales activities over the years, its use of hard copy catalogs decreased as
compared to earlier periods, but over the last several years, it has distributed a stable number of regular and specialty catalogs and anticipates continuing to do so in
the near term.
Customer Service, Order Fulfillment and Support
In 2019 we launched several initiatives with our vendors and freight partners, and in our own distribution centers, to improve our customer’s experience such as
our Voice of the Customer initiative, involving phone and online surveys to obtain our customer’s input on
their experiences with us and our products to ensure we deliver on the promise, to better focus our sales, service and marketing efforts and to target areas of
improvement to enhance the overall customer experience.
A growing proportion of our orders are received electronically via internet, extranet, EDI, customer punch out catalog, online chat, or through broadly utilizing
vendor and customer portals such as Ariba or Coupa. Manual orders are received by telephone to our Inbound call center, direct dial to our Inside account
management team, placement through one of our field sales representatives, and to a small extent via 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.
The Company utilizes a sourcing strategy encompassing sales of in stock items that are either national brands, private label, or white label products as well as
supplementing its stocking strategy with product fulfilled directly by our vendor partners via a
6
drop ship relationship. In stock items tend to be higher in velocity, higher in gross margin, and offer a higher service level to our customers. In August 2019, we
also launched a new distribution facility in De Soto Texas to better serve our business in the West and Southwest. In stock items are distributed via a network of
five large distribution centers in the U.S. located in the Northeast, Midwest, West, Southeast and South Central regions and two additional smaller distribution
facilities in Canada. We tend to stock items in our distribution center, and invest the requisite working capital in inventory position, after demonstrating sales
volume success in the drop ship sales of that item effected through our suppliers. Orders are generally shipped by third-party delivery services and we maintain
relationships with thousands of distributors and product vendors in the United States and Canada.
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 both large and small manufacturers as well as large wholesale distributors. No supplier
accounted for 10% or more of our product purchases related to continuing operations in 2019, 2018 and 2017. Most private label products are manufactured by
third parties to our specifications.
Competition and Other Market Factors
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 face competition from large diversified MRO
distributors such as Grainger Inc., MSC Industrial Direct Inc., Fastenal Inc., and other large retailers, including Amazon. We also face competition from
manufacturers’ own sales representatives, who sell industrial equipment directly to customers, and from regional or local distributors. Many purchasers begin
sourcing products via search engine or mobile application on desktops, laptops, or mobile devices. In the industrial products market, customer purchasing decisions
are primarily based on price, product selection, product availability, level of service, access to open account terms, and convenience. We believe that direct
marketing via sales representatives, the internet and catalogs are effective and convenient distribution methods to reach both our core small and mid-sized customer
as well as large enterprises. Further we believe that our customer engagement approach allows for high levels of service to accounts that may purchase high
volume capital or durable goods infrequently or that place many small orders for supplies and other consumables that require a wide selection of products. In
addition, because the industrial products market is highly fragmented and generally less brand oriented, we believe it is well suited to private label and white label
products.
Employees
As of December 31, 2019, we employed a total of approximately 1,430 employees, of whom 1,290 were in North America and 140 were in Asia. Approximately
39% of our employees are customer facing including customer service, quota bearing sales representatives, inbound call center representatives, and other pre and
post sales management and support. Approximately 38% of our team members are employed within distribution, logistics, and fulfillment areas, while 22% of our
employee base works within administrative functions including: IT, Marketing, Product Management, Human Resources, Accounting and Finance, and general
administrative and management roles.
Seasonality
Seasonality does have some effect on the Company’s sales. Certain product lines are highly seasonal in nature, including HVAC products, snow removal products
and outdoor furniture and equipment. In addition, certain customer segment buying cycles, including those of education and government, may tend to be more
seasonal than others. Given these trends, financial results tend to vary quarter to quarter with sales and margin in the second and third quarters moderately higher
than those in the first and fourth quarters respectively.
Environmental Matters
7
Under various national, state and local environmental laws and regulations in North America and Asia, 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 all 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 Domestic and Foreign Operations
We currently sell substantially all of our products through established sales channels to our customers in North America (primarily the United States and Canada).
Approximately 4.8%, 4.7%, and 4.1% of our net sales from continuing operations during 2019, 2018 and 2017, respectively were made by subsidiaries located
outside of the United States. The following sets forth selected information with respect to our continuing operations net sales and operating income (loss), in those
two geographic markets (in millions):
2019
Net sales
Operating income
Identifiable assets
2018
Net sales
Operating income
Identifiable assets
2017
Net sales
Operating income (loss)
Identifiable assets
North
America
Europe and
Asia
Total
$
$
$
$
$
$
$
$
$
946.9 $
64.8 $
393.8 $
896.9 $
61.5 $
526.6 $
0.0 $
1.3 $
3.1 $
0.0 $
0.2 $
3.4 $
791.8 $
46.1 $
362.4 $
0.0 $
(0.4) $
189.0 $
946.9
66.1
396.9
896.9
61.7
530.0
791.8
45.7
551.4
See Item 7, “Management’s Discussions and Analysis of Financial Condition and Results of Operations”, for further information with respect to our operations.
8
Discontinued Operations
For information regarding certain discontinued operations and former lines of business, see Item 7, "Management's Discussions and Analysis of Financial
Condition and Results of Operations" and Note 5 to the consolidated financial statements included in Item 15 of this Form 10-K.
Available Information
We maintain an internet website at www.systemax.com. We file reports with the Securities and Exchange Commission (“SEC”) 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, as well as other SEC Filings as appropriate. 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”):
•
•
•
•
•
Corporate Ethics Policy for officers, directors and employees
Charter for the Audit Committee of the Board of Directors
Charter for the Compensation Committee of the Board of Directors
Charter for the Nominating/Corporate Governance Committee of the Board of Directors
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).
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, including those that can result in decreased customer confidence and spending, could result in our failure to achieve our
historical sales growth rates and profit levels. Pandemics, such as the global coronavirus outbreak threatens to disrupt global supply chains, including those
we rely on in China, which could materially adversely affect our operations.
Both we and our customers are subject to global political, economic and market conditions, including trade and tariff uncertainties, customer inventory levels
in the marketplace, borrowing ability, economic conditions in the manufacturing industry, increases in inflation, interest rates, freight costs and energy costs,
as well as the impact of natural disasters, military action, the threat of terrorism, and global pandemic or other health crises. Our consolidated results of
operations are directly affected by economic conditions in North America, and our supply chain for imported product is affected by conditions in Asia
(particularly China).
In this regard, global supply chains and the timely availability of products, particularly products, or product components used in domestic manufacturing,
imported from China and other Asian nations could be materially disrupted by quarantines, factory slowdowns or shutdowns, border closings, and travel
restrictions resulting from the coronavirus outbreak in China. The coronavirus could become even more widespread in the United States, leading to health
screenings, domestic quarantines, lower domestic economic activity and productivity and resultant lower demand for our products, which could adversely
impact our business. These events may result in imported products not being timely received and resultant lost sales. We depend to a significant extent on
products imported from China for our Private Label lines, and on domestic manufacturers who utilize components imported from Asia. While we have not
experienced lost sales due the coronavirus and are making efforts to secure satisfactory levels of inventory, certain of our vendors have indicated
9
they are experiencing constrained supply and are deferring delivery dates, and there can be no assurance that our supply chain will not experience further
disruptions significant enough to adversely affect our operations.
We may experience a decline in sales as a result of poor economic conditions and the lack of visibility relating to future orders, (as well as due to the other
risks discussed below). 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 manage price increases, our ability to manage freight and shipping costs and maintain our margins, our ability to attract
new customers and increase our market share, 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 or that hampers their ability to pay for products would likely adversely affect our sales, prices and profitability as
well. We cannot predict with any certainty whether we will be able to maintain or improve upon historical sales volumes with existing customers, maintain or
grow our historical margins, and 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, including
workforce reductions. However, these actions 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 levels of profitability we experienced in the past.
• The imposition of tariffs and other trade barriers, as well as retaliatory trade measures, have caused us to raise the prices on certain of our products and seek
alternate sources of supply, which could negatively impact our sales or disrupt our operations.
Our industry is subject to risks associated with U.S. and foreign laws relating to importing products, including quotas, duties, tariffs or taxes, as well as other
charges or restrictions, which could adversely affect our ability to import products at desired cost or volume levels.
During 2018 the United States enacted three sets of tariffs on a variety of foreign sourced goods. While we experienced minimal impact from the first two
tariff lists during 2018, the third list, which went into effect at the end of the third quarter of 2018, imposed tariffs on a broader group of products and
impacted a number of the private label products we source directly from China as well as third-party branded product our U.S. suppliers source from China.
We strategically increase prices in an effort to offset the incremental costs on certain products and shift certain products to alternative sources where available.
The Company may not be able to fully offset any such tariffs through product price increases as increases in product prices in a competitive market would
likely decrease demand for the Company’s products. Our use of alternate sources of supply, such as utilizing new vendors in additional countries, entails
various risks, such as identifying, vetting and managing new business relationships, reliance on new vendors, maintaining quality control over their products,
and protecting our intellectual property rights.
These tariffs have increased and will continue to increase our costs of procurement. If the Company is able to adequately review its supply chain and monitor
sell prices in the market, and successfully work with suppliers to mitigate costs, the Company does not expect any material impact on its business from the
2018 tariff actions and continues to believe that any impact from the tariffs currently in effect will be gradual and not material to the business, although there
can be no assurance.
We strategically increase prices to offset the incremental costs on certain products and shift certain products to alternative sources where available. However,
our use of alternate sources of supply, such as utilizing new vendors in additional countries, entails various risks, such as identifying, vetting and managing
new business relationships, reliance on new vendors, maintaining quality control over their products, and protecting our intellectual property rights. Further,
the Company may not be able to fully offset any such tariffs through product price increases as increases in product prices in a competitive market would
likely decrease demand for the Company’s products.
Since 2018 the U.S. has been conducting an industry wide anti-dumping investigation of “steel racks” product imported from China. The investigation will
likely result in the assessment of anti-dumping duties and countervailing duties assessed against U.S. distributors of these products, such as the Company.
While the Company does not believe the outcome of the investigation or any resultant assessments will have a material adverse effect on the Company, there
can be no assurance that the fines and duties will not be significant in the period within which they occur.
There can be no assurance that we will be able to effectively or expeditiously mitigate these challenges, which could disrupt our operations, negatively impact
our sales and would have a material adverse effect on our financial results.
10
However, we do not believe that we will be disproportionately impacted by these costs as compared to our competitors, and we will continue to evaluate
marketplace conditions and implement other actions or strategies as the need arises.
Finally, we cannot predict whether additional U.S. and foreign customs quotas, duties (including anti-dumping or countervailing duties), tariffs, taxes or other
charges or restrictions, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports will be
imposed in the future and if so, what effect such actions would have on our costs of operations.
• There is a tight labor market for the employees we hire, which can impact our growth plans.
Many of our competitors also compete with us for recruiting and retaining talented and experienced employees, particularly in markets where we and they
have significant distribution facilities. We have also experienced high levels of turnover in our warehouse/distribution operations, consistent with current
market conditions. This aspect of competition is aggravated by the current tight labor market in the U.S. There can be no assurance the Company will be able
to timely recruit, train and retain employees sufficient to support its growth strategies or will not have to incur increased compensation costs in order to do so.
Our results of operations have been and in the future could be adversely affected by increased costs due to increased competition for employees, higher
employee turnover or increased employee benefit costs. In the event of significant numbers of employees having to miss work due to a widespread health
situation or pandemic such as the coronavirus, we may not be able to quickly source replacement or temporary workers, which could adversely affect our
operations, particularly in our distribution centers.
• Our industry is evolving and consolidating, which could adversely affect our business and financial results.
The MRO and industrial equipment industry are consolidating as customers are increasingly aware of the total costs of fulfillment and of the need to have
consistent sources of supply at multiple locations. This consolidation has and will continue to cause the industry to become more competitive as greater
economies of scale are achieved by competitors, or as competitors with a new lower cost business models are able to operate with lower prices.
• Sales tax laws may be interpreted in a manner that could result in ecommerce and direct mail retailers to being held to have been required to collect sales
taxes in states where we believe the then current laws did not require us to do so. This could result in us having substantial tax liabilities for past sales.
Our United States subsidiaries historically collected and remitted sales tax in states in which the subsidiaries have physical presence or in which we believed
sufficient nexus existed which obligated us to collect sales tax. During the first quarter of 2018, the Company voluntarily registered its primary selling
subsidiary in the U.S. that generates taxable sales for sales tax collection in substantially all states. States may, from time to time in the future, claim that we
had state-related activities constituting physical nexus to have required such collection, or that our sale of goods to customers in their state, or directly to the
state and its political subdivisions, created nexus for sales tax purposes prior to our registration. Such efforts by states have increased recently, as states seek to
raise revenues without increasing the income tax burden on residents. We relied 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 had with a particular state in the past will be deemed enough to have required us to
collect sales tax in that state. A successful assertion by one or more states that we should have collected sales tax on the sale of merchandise in such state
could result in substantial tax liabilities related to past sales.
• Volatility in commodity prices may adversely affect gross margins.
Some of our products contain significant amounts of commodity-priced materials, such as steel, copper, petroleum derivatives or rare earth minerals,
and are subject to price changes based upon fluctuations in the commodities market. Fluctuations in the price of fuel could affect transportation costs. Our
ability to pass on such increases in costs in a timely manner depends on market conditions. The inability to pass along cost increases could result in lower
gross margins. In addition, higher prices could impact demand for these products, resulting in lower sales volumes.
• Events such as acts of war or terrorism, natural disasters, data security breaches, changes in law, or large losses could adversely affect our insurance
coverage and insurance expense, resulting in an adverse effect on our profitability and financial condition.
11
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, data security breaches, judicial decisions, legislation, natural disasters and large losses could
materially affect our insurance obligations and future expense. Furthermore, the occurrence of an uninsured significant event could materially adversely affect
our business and results of operations.
• Adverse weather events or natural disasters, as well as pandemics such as the coronavirus, could negatively affect or disrupt our operations. We may be
affected by global climate changes or by legal, regulatory or market responses to such potential change.
Certain areas in which we operate are susceptible to severe weather events, such as hurricanes, tornadoes, floods and pandemics can impact any location. Our
ability to provide efficient distribution of core business products from our or third-party drop ship distribution centers is critical to our business strategy.
Disruptions at distribution centers or shipping ports, or the unavailability of employees needed by us or third parties to operate key functions at such locations,
may affect our ability to both maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect
our results of operations. We cannot predict whether or to what extent damage caused by these events will affect our operations or the economies in regions
where we operate. These adverse events could result in disruption of our operations, our purchasing or distribution capabilities, interruption of our business
that exceeds our insurance coverage, our inability to collect from customers and increased operating costs. Our business or results of operations may be
adversely affected by these and other negative effects of these events.
• Environmental Matters
Under various national, state and local environmental laws and regulations in North America, 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 substance at such real property. Such laws and regulation often impose
liability without regard to fault. We lease all 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.
Risks Related to Our Company
• Distribution facilities
Our ability to maintain available capacity in our distribution operations for stocked inventory and to enable on time shipment and deliveries, such as
by timely implementing additional distribution resources, whether in the form of expanded or additional temporary and permanent facilities we operate or by
outsourcing certain functions to third-party distribution and logistics partners, is critical to our ability to service our growing business. If we do not accurately
forecast our future warehousing and distribution center needs, and then timely plan, fund on budget, launch and efficiently operate new distribution resources
and facilities when needed, our operations and financial results could be materially adversely impacted. In addition, expanding and/or enhancing our
distribution network would have an adverse impact on operating expenses as a percentage of sales, inventory turnover, and working capital requirements in the
periods prior to and for some time following the commencement of operations for each such expansion or enhancement. In this regard, in August 2019 we
launched our new 490,000 square foot distribution center in De Soto Texas, to better service customers in the Southwest and West. This facility is not yet at
full capacity and accordingly will incur relatively high expenses relative to volume handled until such time as utilization is increased.
• 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.
We purchase a portion of our products from major distributors and directly from large manufacturers who may deliver those products directly to our
customers (“drop ship”), as well as from smaller more regional vendors. These drop ship delivery relationships enable us to make available to our customers a
wide selection of products without having to maintain
12
large amounts of inventory. The termination or interruption of our relationships with any of these drop ship suppliers could materially adversely affect our
business.
We purchase a number of our products, particularly private label and white label products, from vendors located outside of the United States. Raw
material costs used in our vendors’ products (steel, tungsten, etc.) and energy costs may increase, which may result in increased production costs for our
vendors, which they may seek to pass along to us. 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. In this regard, in response to the tariffs imposed by the U.S. on goods
imported from China, we are seeking alternative sources of supply, such as utilizing new vendors in additional countries, which entails various risks, such as
identifying, vetting and managing new business relationships, reliance on these new vendors maintaining quality control over their products, and protecting
our intellectual property rights.
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 are beyond our control. These and other
issues affecting our vendors could materially adversely affect our revenue and gross profit.
See also the discussion above for information regarding the risks posed by the spread of the coronavirus on our supply chain and economic activity
generally.
• We rely on third-party suppliers for shipping and delivery services and managing the logistics of a distribution business can impact our results of operations
and margins.
We face certain risks due to our reliance on common carrier delivery services for shipping inventoried merchandise to customers and our reliance on
drop ship deliveries directly to customers by our product vendors for products we do not hold in inventory (such as freight increases, timely delivery and
customer service, delays due to work stoppages, etc.). We also must effectively manage our ability to maintain available capacity in our distribution operations
for stocked inventory and to enable on time shipment and deliveries, such as by timely implementing additional or alternative distribution resources, whether
in the form of additional facilities we operate or by outsourcing certain functions to third-party distribution and logistics partners.
Increases in freight and shipping costs charged to us by third parties could adversely affect our margins to the extent the increases cannot be passed
along to customers, and factors affecting the shipping and distribution of products imported to the United States by us or our domestic vendors, such as global
availability of shipping containers and fuel costs, can also affect our business. The fuel costs of our independent freight companies have been volatile. Our
vendors and independent freight carriers typically look to pass increased costs along to us through price increases. When we are forced to accept these price
increases, we may not be able to pass them along to our customers, resulting in lower margins.
• Changes in customer, product, vendor, sourcing or channel sales mix, could cause the gross margin and ultimately operating margins to decline; failure to
mitigate these pressures could adversely affect our operating results and financial condition.
Our gross margins are dependent on the mix of products we sell, decisions to drop ship rather than stock products in our distribution centers,
decisions to offer private label alternatives or branded offerings, price changes by manufacturers, and pricing actions by competitors. In addition, we could be
adversely affected by a continuation of our customers’ shift to lower-priced products.
• 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 effect on our results
of operations.
We rely on a variety of information and telecommunications systems including internally developed software, third-party purchased software and
third-party cloud-based software in order to manage our business, including our customer, vendor, employee, facilities, finance, management and corporate
operations. Our success is dependent in large part on the accuracy and proper use of our information systems, including our telecommunications systems,
which are utilized in all aspects of our business. To manage our growth, we need to continually evaluate the effectiveness and adequacy of our existing
13
systems and procedures to ensure they are keeping pace with changes in our business. These systems, whether internally developed, purchased or cloud-based
may need to be modified, upgraded or replaced from time to time. System modifications, upgrades or replacements involve costs as well as the risk of
implementation delays and not operating as intended. We rely on third parties such as telecommunication carriers, internet service providers and our own
employees to provide the technology services and expertise on which we depend. There are risks that third parties may incur outages or circumstances where
they cannot provide the services we require as intended or that our employees do not have the expertise to remediate system outages or technical problems that
may arise. We have experienced some delays and operational problems in implementing new IT systems in the past. 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. We have disaster recovery systems and system backups are routinely done for certain critical systems, but not for every system. The
occurrence of a significant system failure, electrical or telecommunications outages or our failure to ensure our IT employees are properly trained and
technically proficient, or that our systems are adequate, effective and beneficial to our business, or our failure to expand or successfully implement new
systems could have a material adverse effect on our results of operations.
• Use of Cloud-Based Systems and Infrastructure Provided by Third Parties Present Significant Risks to Our Business.
In 2018, we moved certain of our operating systems and management information systems resources and storage to a leading cloud-based platform
operated by a well-known third-party provider of technology services, and we no longer operate or maintain such systems or store related data on our own
servers. This managed cloud-based platform is operated on a “infrastructure as a service” model (“IAAS”). Accordingly, exposure to third-party service
outages and data loss, or a failure of the network or loss of connectivity can adversely affect our business. In addition, since the data resides on the cloud, we
and our customers are forced to rely on the physical and information security of the vendor to protect their valuable information. There can be no assurance
that the cloud-based systems on which we rely will not experience such outages or failures or that data privacy/information security will not be breached.
• Data and security breaches, and other disruptions in our information technology systems, could compromise confidential or private information and expose us
to liability, which could cause our business and reputation to suffer.
Our operations are dependent upon information technology that encompasses all of our major business functions. We use our information systems to,
among other things, monitor our supply chain, make purchasing decisions, manage and replenish inventories, coordinate our sales and marketing activities, fill
and ship customer orders on a timely basis and to monitor and record our financial transactions and results of operations. These systems also process, transmit
and store sensitive electronic data, including employee personal information, supplier and customer records, allow vendors and customers to register on our
portals and websites, as applicable, or otherwise allow third parties to communicate or interact with us. In addition, we depend on IT systems of third parties,
to, among other things, market and distribute products, to operate our websites, host and manage our services, store data, and process transactions. We may
share information with these third parties that participate in certain aspects of our business, and we obtain external auditor certification on the controls and
security of any significant outsourced service provider according to the SSAE 18 standard. However, there is always a risk that the confidentiality of data held
or accessed by them may be compromised.
In processing our sales orders, we often collect personal information and transmit credit card information of our customers. If there was a security
breach resulting in unauthorized access to or use of such information, we could be subject to 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, 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.
We measure our data security effectiveness through industry accepted methods and remediate significant findings. We maintain and routinely test
backup systems and disaster recovery, along with external network security penetration testing by an independent third-party as part of our business continuity
preparedness. We also have processes in place to prevent disruptions resulting from the implementation of new software and systems of the latest technology.
We have implemented solutions, processes, and procedures to help mitigate the risk of cyber-attacks, such as conducting annual vulnerability testing, and in
2018 engaged consultants to assist us in implementing stronger security measures, identifying remediation initiatives and establishing emergency response
plans, but there can be no assurance these efforts will successfully deter future cyber-attacks. Our Board of Directors is responsible for oversight of the
activities of our IT department (which reports to our Chief Executive Officer) and receives a quarterly presentation from our Chief Information Officer that
covers, among other things, data security and cyber liability matters.
14
Although our IT systems are protected through various network security measures, our facilities and systems, and those of our third-party service
providers with which we do business, may nevertheless be vulnerable to security breaches, cyber-attacks (any adverse event that threatens the confidentiality,
integrity or availability of our information resources) vandalism, power outages, natural disasters, computer system failures, telecommunication or network
failures, computer viruses, malware, misplaced or lost data, programming and/or human errors or other similar events. From time to time. we have
experienced efforts by unknown persons, including “bots”, to access or breach our information systems, and these efforts can be expected to continue in the
future. While we have successfully defended against such efforts in the past, there can be no assurance we will be able to protect sensitive data and/or the
integrity of the Company's information systems and to defend against such efforts in the future.
Any security breach involving the misappropriation, loss or other unauthorized disclosure of our confidential information or confidential information
of our customers, employees, or suppliers, whether by us or by our third-party service providers, could disrupt our business, expose us to risks of litigation
(such as customer or third-party claims that their data has been compromised) and liability, result in a loss of assets or cause reputational damage, and
otherwise have a material adverse effect on our operations and financial condition. Any substantial disruption of our systems could impair our ability to
process orders, maintain proper levels of inventories, manage customer billings and collections, prepare and present accurate financial statements and related
information, and otherwise materially adversely affect our ability to manage our business.
We maintain cyber liability risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems,
or to cover the cause of the future specific situation/loss at hand. In addition, as privacy and information security laws and standards evolve, we may need to
incur significant additional investment in technology and other processes to meet new legal requirements.
• 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. Although the carrying amounts of intangible assets and goodwill are
relatively small as of December 31, 2019, 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 foreign product procurement operations are subject to risks such as foreign regulatory trade and customs requirements such as the tariffs and duties
matters discussed above, and the political and economic conditions of the jurisdictions from which we procure products.
Because we sell products all across North America and procure product from abroad, including from China, 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:
• Changes in a country’s economic or political conditions;
• Tariff and trade uncertainties;
• Changes in foreign currency exchange rates;
• Difficulties with staffing and managing international relationships;
• Unexpected changes in regulatory requirements;
• Changes in transportation and shipping costs; and
• 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 Canadian Dollar and the India Rupee. 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 countries outside the United States, and non-U.S. sales accounted for approximately 4.8% of our net sales from continuing
operations during 2019. 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.
15
• 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 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 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. The elimination of purchase return privileges 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.
• We may encounter difficulties with acquisitions and other strategic transactions which could harm our business.
We expect to pursue acquisitions and other strategic transactions that we believe will either expand or complement our business in new or existing
markets or further enhance the value and offerings we are able to provide to our existing or future potential customers.
Acquisitions and other strategic transactions involve numerous risks and challenges, including the following:
• diversion of management’s attention from the normal operation of our business;
• potential loss of key associates and customers of the acquired companies;
• difficulties managing and integrating operations in geographically dispersed locations;
• the potential for deficiencies in internal controls at acquired companies;
• increases in our expenses and working capital requirements, which reduce our return on invested capital;
• lack of experience operating in the geographic market or industry sector of the acquired business; and
• exposure to unanticipated liabilities of acquired companies.
To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate
and manage the personnel of the acquired operations. The difficulties of this integration may be further complicated by geographic distances. The integration
of acquired businesses may not be successful and could result in disruption to other parts of our business.
• Our business is dependent on certain key personnel, including the recent engagement of new senior executives.
Our business depends largely on the efforts and abilities of certain key senior management employees. The loss of the services of one or more of such
key personnel could have a material adverse effect 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 include 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 effect on our business. See “Legal
Proceedings”.
• 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.
16
The carrying value of our deferred tax assets is dependent on our ability to generate future taxable income in those jurisdictions. In the case of where
several years of losses occur in a jurisdiction, there is a risk that the Company would need to reserve its deferred tax assets which would likely result in a
material tax expense being recorded in the period that such reserve is established. Similarly, in the case where a reserve against deferred tax assets has
previously been established, successive years of profitability would require the reversal of deferred tax asset reserves which would likely result in a material
tax benefit in the period that the reserve is deemed to be no longer necessary. 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.
• We exited our France business in 2018 and our NATG business in 2015 and could incur costs in excess of our estimated exit expenses.
The Company has completed the wind-down activities related to the sale of the France business, but may incur additional charges related to statutory
tax and other indemnities given at closing. The Company has substantially completed the wind-down activities related to the NATG business, although certain
NATG activities related to sublet facilities, settling accounts payable and other contingent liabilities continue. The Company expects that additional NATG
wind-down costs incurred during 2020 or later may aggregate up to $1.0 million, which will be presented in discontinued operations. There can be no
assurance the Company will be able to timely exit its existing NATG lease commitments at currently recorded cost levels. Failure to achieve these
expectations will result in increased cash exit costs for the Company.
• 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 66.8% 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 of
directors; the Company does however currently have an independent Audit Committee, Compensation Committee and Corporate Governance and Nominating
Committee.
• 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.
Item 2. Properties.
17
We operate our business from numerous facilities in North America and Asia. These facilities include our headquarters location, administrative offices, telephone
call centers and distribution centers. Certain facilities handle multiple functions. All of our facilities are leased.
North America
As of December 31, 2019, we have seven operational distribution centers in North America which aggregate approximately 2.5 million square feet.
Our headquarters, administrative offices and call centers aggregate approximately 192,000 square feet.
The Company has two retail stores, one B2B call center and one warehouse from its discontinued NATG business that are sublet. These properties aggregate to
approximately 0.4 million square feet.
Asia
As of December 31, 2019, we leased three administrative offices in Asia aggregating approximately 9,300 square feet.
Please refer to Note 3 to the consolidated financial statements for additional information about leased properties.
Item 3. Legal Proceedings.
The Company and its subsidiaries are from time to time involved in various lawsuits, claims, investigations and proceedings which may include commercial,
employment, tax, customs and trade, customer, vendor, personal injury, creditors rights and health and safety law matters, which are handled and defended in the
ordinary course of business. In addition, the Company is from time to time subjected to various assertions, claims, proceedings and requests for damages and/or
indemnification concerning sales channel practices and intellectual property matters, including patent infringement suits involving technologies that are
incorporated in a broad spectrum of products the Company sells or that are incorporated in the Company’s e-commerce sales channels, as well as
trademark/copyright infringement claims. The Company is also audited by (or has initiated voluntary disclosure agreements with) various U.S. Federal and state
authorities, as well as Canadian authorities, concerning potential income tax, sales tax and/or "unclaimed property" liabilities. These matters are in various stages
of investigation, negotiation and/or litigation. The Company's former NATG operations is also being audited by an entity representing 28 states seeking recovery
of “unclaimed property” and has received separate demands from 20 states requesting payments of their claimed amounts. The Company is complying with the
unclaimed property audit, is providing requested information and is corresponding with the states regarding possible further discussions. The Company intends to
vigorously defend these matters and believes it has strong defenses. In September 2017 the Company and certain subsidiaries comprising its former NATG "Tiger"
consumer electronics business were sued in United States District Court, Northern District of California by a software publisher alleging that the NATG
subsidiaries violated certain contractual sales channel restrictions resulting in claims of breach of contract and trademark/copyright infringement. This matter was
settled in 2019 without material impact to the Company.
Although the Company does not expect, based on currently available information, that the outcome in any of these matters, individually or collectively, will have a
material adverse effect on its financial position or results of operations, the ultimate outcome is inherently unpredictable. Therefore, judgments could be rendered
or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company regularly assesses all of its
litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it
assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for its various lawsuits, claims, investigations
and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably
estimated. At December 31, 2019 the Company has established accruals for certain of its various lawsuits, claims, investigations and proceedings based upon
estimates of the most likely outcome in a range of loss or the minimum amounts in a range of loss if no amount within a range is a more likely estimate. The
Company does not believe that at December 31, 2019 any reasonably possible losses in excess of the amounts accrued would be material to the financial
statements.
Item 4. Mine Safety Disclosures.
Not applicable.
18
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Systemax's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol “SYX.” The following table sets forth the high and low closing
sales price for the common stock and the dividends declared per share for each quarter during 2019 and 2018.
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividends
$
25.19 $
20.23 $
24.04
23.12
26.37
20.01
18.71
21.40
$
34.52 $
27.62 $
39.39
46.04
32.59
27.76
32.60
22.69
0.12
0.12
0.12
0.12
0.11
1.11
0.11
6.61
On December 27, 2019, the last reported sale price of our common stock on the NYSE was $25.48 per share. As of December 31, 2019, we had 164 shareholders
of record.
In February 2020, the Company's Board of Directors declared a special cash dividend of $1.00 per share and increased the regular quarterly cash dividend to $0.14
per share to common stock shareholders of record at the close of business on March 9, 2020, payable on March 16, 2020.
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 anticipate continuing a regular quarterly dividend 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 7 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 2020 Annual Meeting of Shareholders and is incorporated by reference herein.
Purchases of Equity Securities
In 2018, the Company's Board of Director's approved a share repurchase program with a repurchase authorization of up to two million shares of the Company's
common stock. Under the share repurchase program, the Company is authorized to purchase shares from time to time through open market purchases, tender
offerings or negotiated purchases, subject to market conditions and other factors. In 2018, the Company repurchased 232,550 common shares for approximately
$9.1 million from certain executive officers and directors. Details of the purchase is as follows:
Fiscal Month/Year
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
July 2018
232,550
$38.96
232,550
1,767,450
19
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 2019, 2018 and 2017 and the selected balance sheet data as of
December 31, 2019 and 2018 are derived from the audited consolidated financial statements which are included elsewhere in this report. The selected balance
sheet data as of December 31, 2017, 2016 and 2015 and the selected statement of operations data for fiscal years 2016 and 2015 are derived from the audited
consolidated financial statements of the Company which are not included in this report. The results of operations shown here have been adjusted to reflect the
presentation of the ETG and NATG discontinued operations (See Note 1 of the Notes to Consolidated Financial Statements).
Statement of Operations Data:
Net sales
Gross profit
Operating income (loss) from continuing operations
Net income (loss) from continuing operations
Per Share Amounts:
Net income (loss) from continuing operations — diluted
Weighted average common shares — diluted
Cash dividends declared per common share
Balance Sheet Data:
Working capital
Total assets
Shareholders’ equity
Years Ended December 31,
(In millions, except per share data)
2019
2018
2017
2016
2015
$
$
$
$
$
$
$
$
$
946.9 $
325.7 $
66.1 $
50.0 $
1.32 $
37.7
0.48 $
144.5 $
396.9 $
175.5 $
896.9 $
307.7 $
61.7 $
49.5 $
1.31 $
37.9
7.94 $
117.8 $
530.0 $
137.7 $
791.8 $
273.2 $
45.7 $
65.5 $
1.74 $
37.6
1.85 $
178.3 $
551.4 $
211.8 $
753.1 $
238.2 $
8.0 $
3.9 $
0.10 $
37.2
0.10 $
186.2 $
566.1 $
214.4 $
860.9
248.0
(20.0)
(32.8)
(0.88)
37.1
0.00
214.2
710.1
253.9
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Systemax Inc., through its subsidiaries, is primarily a direct marketer of brand name and private label industrial and business equipment and supplies in North
America going to market through a system of branded e-commerce websites and relationship marketers.
Continuing Operations
The Company sells a wide array of industrial and general business hard goods and supplies and to a lesser extent products that would fall into the generally
recognizable category of maintenance, repair and operations (“MRO”) products, which are marketed in North America. Many of these products are manufactured
by other companies. Some products are manufactured for us and sold under our brand as a white label product, and some are manufactured to our own design and
sold under our brand as a private label product, in each case marketed under our trademarks: Global™, GlobalIndustrial.com™, Nexel™ Paramount™ and
Interion™.
Discontinued Operations
The Company's discontinued operations include the results of the France business sold in August 2018, the SARL Businesses sold in March 2017 and the NATG
business sold in December 2015 (see Note 1 and Note 5). Total net sales from discontinued operations were $0.0 million, $352.0 million and $590.6 million in
2019, 2018, and 2017, respectively.
20
Operating Conditions
The North American industrial products market is highly fragmented and we compete against numerous competitors in multiple distribution channels. Industrial
products 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.
The primary component of our operating expenses historically has been employee-related costs, which includes items such as wages, commissions, bonuses,
employee benefits and equity-based compensation, as well as marketing expenses, primarily comprised of digital marketing spend, and occupancy related charges
associated with our leased distribution and call center facilities. 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, 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.
In order to provide more meaningful information to investors, the Company is presenting its operating income and operating margin on a non-GAAP basis in the
"Reconciliation of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing
Operations" table, as it depicts the operations that are currently generating sales and that will continue to do so in future periods. This Non-GAAP presentation
reflects the Misco Germany and the entire NATG operations as discontinued operations for all periods presented. Additional non-GAAP adjustments for executive
separation and transition costs, one-time benefit from state audit settlements, net of impairment charges recorded on certain intangible assets, intangible
amortization and equity compensation are made to continuing operations.
The Company has elected to omit discussion of the earliest year presented, December 31, 2017, in MD&A. This discussion can be found in Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for the year ended December 31, 2018, filed on March 14, 2019.
21
Highlights from 2019
The following discussion of our results of operations and financial condition 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 5.6% to $946.9 million compared to $896.9 million in the prior year.
On a constant currency basis, average daily sales increased 5.7% compared to prior year.
Consolidated operating income grew 7.1% to $66.1 million compared to $61.7 million last year.
Net income per diluted share from continuing operations increased 0.8% to $1.32.
22
Key Performance Indicators* (in millions):
GAAP Results of Operations
Years Ended December 31,
Change
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Net sales of continuing operations:
Consolidated net sales
Consolidated gross profit
Consolidated gross margin
Consolidated SD&A costs**
Consolidated SD&A costs** as % of sales
Consolidated operating income
Consolidated operating margin from continuing
operations
Effective income tax rate
Net income from continuing operations
Net margin from continuing operations
$
$
$
$
$
Income (loss) from discontinued operations, net of tax $
946.9
325.7
34.4 %
260.4
27.5 %
66.1
7.0 %
24.4 %
50.0
5.3 %
(1.5)
$
$
$
$
$
$
$
$
$
$
896.9
307.7
34.3 %
245.2
27.3 %
61.7
6.9 %
21.3 %
49.5
5.5 %
791.8
273.2
34.5 %
227.2
28.7 %
45.7
5.8 %
(44.0) %
65.5 (1)
8.3 %
5.6 %
5.8 %
0.1 %
6.2 %
0.2 %
7.1 %
0.1 %
3.1 %
1.0 %
(0.2) %
175.2
$
(25.1)
(100.9) %
13.3 %
12.6 %
(0.2) %
7.9 %
(1.4) %
35.0 %
1.1 %
65.3 %
(24.4) %
(2.8) %
798.0 %
*
**
excludes discontinued operations (See Note 5 of Notes to Consolidated Financial Statements).
excludes special charges, net (See Note 5 of Notes to Consolidated Financial Statements).
Includes $20.0 million of income tax benefits primarily related to the reversal of valuation allowances against the Company's deferred tax assets and the
impacts of U.S. tax reform enacted in Q4 of 2017.
1
23
SYSTEMAX INC.
Reconciliation of Consolidated GAAP Operating Income from Continuing Operations to Consolidated Non-GAAP Operating Income from Continuing
Operations – Unaudited
(In millions)
GAAP:
Net sales
Average daily sales*
Operating income
Operating margin%
Years Ended December 31,(2)
Change
2019
2018(1)
2017(1)
2019 vs. 2018
2018 vs. 2017
$
$
$
946.9
3.7
66.1
$
$
$
896.9
3.5
61.7
$
$
$
791.8
3.1
45.7
7.0%
6.9%
5.8%
5.6%
5.7%
7.1%
0.1%
13.3%
13.3%
35.0%
1.1%
Non-GAAP adjustments:
Executive separation & transition costs
Stock based compensation
Intangible amortization
Reverse results of Germany and NATG included in GAAP
operating income continuing operations
One-time benefit from state audit settlements, net of
impairment charge recorded on certain intangible assets
Total Non-GAAP Adjustments:
1.2
4.7
0.2
(1.4)
0.0
4.7
1.0
0.9
1.0
0.8
(3.1)
0.6
0.0
1.6
1.0
1.1
0.0
3.7
Non-GAAP operating income
Non-GAAP operating margin %
$
70.8
$
62.3
$
49.4
7.5%
6.9%
6.2%
13.6%
0.6%
26.1%
0.7%
Average daily sales is calculated based upon the number of selling days in each period, converted to US Dollars on a constant currency basis. IPG had
253 selling days for the year ended December 31, 2019, 2018 and 2017.
*
1 On August 31, 2018, the Company closed on the sale of the France operations. Prior and current year results of these divested operations, along with the
associated gain, have been classified as discontinued operations. On March 24, 2017, the Company closed on the sale of its European Technology Group
businesses, other than its operations in France. Prior and current year results of these divested businesses, along with the associated loss on the sale
recorded in 2017, have been classified as discontinued operations. The Company believes that the non-GAAP presentation conveys additional
meaningful information to investors as it depicts the operations that are currently generating sales and that will continue to do so in future periods. See
accompanying GAAP reconciliation tables.
2 Systemax manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of
presentation, fiscal years and quarters are described as if they ended on the last day of the respective calendar month. The actual fiscal quarter ended on
December 28, 2019, December 29, 2018 and December 30, 2017, respectively. The years ended 2019, 2018 and 2017 included 52 weeks.
24
Management’s discussion and analysis that follows will include current operations and discontinued operations. The discussion is based upon the GAAP Results of
Operations table.
NET SALES
The Company's net sales increased 5.6% compared to prior year reflecting solid demand across key product categories as the business experienced a soft market
environment and a cautious but committed customer base during 2019. Growth rates slowed in 2019 to 2.1% in the fourth quarter as a result of the ongoing
challenging trade environment. Overall, the Company's product categories generally had mixed results with continued strength in key categories where we are
making investments in our offering and subject matter expertise. Additionally, in the fourth quarter of 2019, the Company experienced softness in its heating
products categories primarily the result of the mild winter weather in the U.S. Net sales benefited from growth in the Canada business which delivered a sales
increase of approximately 7.8%, 10.5% on a constant currency basis, compared to prior year. U.S. revenue increased 5.5% compared to prior year. On a constant
currency basis, average daily sales increased 5.7% compared to prior year.
GROSS MARGIN
Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, cooperative advertising funds
classified as a reduction of cost of sales, free freight and freight discounting arrangements, inventory valuation and obsolescence and other variables, any or all of
which may result in fluctuations in gross margin.
Gross margin was 34.4% compared to 34.3% in the prior year reflecting a moderate increase in product and freight margins. The stable gross margin performance
reflects proactive management of our inventory, purchasing and pricing to address tariff increases. These tariffs have increased and will continue to increase our
costs of procurement. If the Company is able to adequately review its supply chain and monitor sell prices in the market, and successfully work with suppliers to
mitigate costs, the Company does not expect any material impact on its business from the 2018 and 2019 tariff actions and continues to believe that any impact
from the tariffs currently in effect will be gradual and not material to the business, although there can be no assurance.
SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (“SD&A”), EXCLUDING SPECIAL GAINS AND CHARGES
Selling, distribution and administrative expenses totaled $260.4 million, $245.2 million and $227.2 million for the years ended December 31, 2019, 2018 and 2017,
respectively.
SD&A costs as a percentage of sales increased in 2019 compared to 2018 by 20 basis points as a result of increased salary and related costs of approximately $9.2
million due to compensation rate increases, increased staffing levels in our distribution centers, executive separation and transition costs and increased equity-
based compensation expense. Included within the $9.2 million is increased executive separation and transition costs of approximately $0.2 million, increased
equity-based compensation expense of approximately $3.8 million, of which approximately $0.7 million was recorded for the year for the repricing of
approximately 0.6 million of outstanding stock options. Included in SD&A is approximately $3.9 million of operating expenses for the year ended December 31,
2019, for our new Texas distribution facility which commenced receiving and shipping operations in the third quarter of 2019. In the fourth quarter of 2018, the
Company recorded a net gain of approximately $3.1 million related to the settlement of previously disclosed state audits offset by an impairment charge against
certain intangible assets. Excluding this net gain, the Company's SD&A costs as a percentage of sales decreased 20 basis points in 2019 compared to prior year, as
a result of improved leverage within our fixed cost structure, which allowed the Company to absorb the incremental cost of our new Texas operations.
CONTINUING OPERATIONS SPECIAL GAINS AND CHARGES
During the third quarter of 2019 and for the year ended December 31, 2019, the Company's former German branch recorded special gains of approximately $0.8
million related to a change in estimate of its outstanding lease obligation.
The Company's NATG business incurred special charges of approximately $0.8 million for the year ended December 31, 2018 related to updating lease reserves on
an outstanding lease obligation.
DISCONTINUED OPERATIONS
The Company's discontinued operations include the results of the France business sold in August 2018, the SARL Businesses sold in March 2017 and the NATG
businesses sold in December 2015 (see Note 1).
25
Total special gains and charges included in discontinued operations totaled $0 million, $0.6 million and $30.6 million for the years ended December 31, 2019,
2018 and 2017, respectively.
For the year ended December 31, 2018, the Company recorded $178.9 million of pre-tax book gain on the sale of the France business and recorded $0.6 million of
special charges related to the discontinued NATG business.
OPERATING MARGIN
The Company's operating margin increase of 10 basis points in 2019 compared to 2018 was driven by increased net sales, improved leverage within our fixed cost
structure, good spend discipline in regards to marketing and general operating expenses and a gain related to settlements of outstanding obligations of our former
German branch.
Consolidated operating margin was impacted by special gains and charges of $0.8 million, $0.8 million and $0.3 million for the years ended December 31, 2019,
2018 and 2017, respectively.
INTEREST AND OTHER (INCOME) EXPENSE, NET
Interest and other (income) expense, net from continuing operations was $0.0 million for 2019 and $1.6 million income in 2018, primarily attributable to the
interest earned on our short-term investments from the cash repatriated to the United States from the sale of the France business, net of interest charges related to
our credit facility.
INCOME TAXES
The Company recorded net tax expense in continuing operations for 2019 of $16.1 million, or 24.4%, and a net tax benefit in discontinued operations of $0.6
million. Tax expense from continuing operations was primarily the result of pretax income in the U.S. and was benefited by approximately $0.5 million of stock
option exercises and approximately $0.2 million from dividend equivalent payments. Non-deductible expense, including executive compensation, was
approximately $0.8 million. Tax benefit in discontinued operations is primarily attributed to pretax losses incurred in the discontinued NATG business.
The Company recorded net tax expense in continuing operations for 2018 of $13.4 million and net tax expense in discontinued operations of $23.0 million. Tax
expense from continuing operations was primarily the result of pretax income in the U.S. and was benefited by approximately $1.5 million of stock option
exercises. During 2018 the Company completed its accounting for the impacts of the Tax Cut and Jobs Act and adjusted its provisional repatriation tax to
approximately $4.5 million. Tax expense in discontinued operations is attributed to tax on the operations of the Company's French operations for the eight months
of ownership in 2018 and U.S. tax on the sale of the French operations in 2018.
Financial Condition, Liquidity and Capital Resources
Selected liquidity data (in millions):
Cash
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Accounts payable
Dividend payable
Accrued expenses and other current liabilities
Operating lease liabilities
Working capital
December 31,
2019
2018
$ Change
97.2 $
88.2 $
112.5 $
6.4 $
115.9 $
0.0 $
34.0 $
9.9 $
144.5 $
295.4 $
84.1 $
107.3 $
10.6 $
101.1 $
243.5 $
35.0 $
0.0 $
117.8 $
(198.2)
4.1
5.2
(4.2)
14.8
(243.5)
(1.0)
9.9
26.7
$
$
$
$
$
$
$
$
$
26
Historical Cash Flows
Net cash provided by operating activities from continuing operations
Net cash (used in) provided by operating activities from discontinued operations
Net cash used in investing activities from continuing operations
Net cash provided by (used in) investing activities from discontinued operations
Net cash used in financing activities from continuing operations
Effects of exchange rates on cash
Net (decrease) increase in cash and cash equivalents
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
$
$
70.3 $
(1.9) $
(6.9) $
0.0 $
(259.6) $
(0.1) $
(198.2) $
9.8 $
(32.1) $
(4.5) $
249.6 $
(115.0) $
3.1 $
110.9 $
44.1
1.5
(2.4)
(0.4)
(11.5)
3.5
34.8
Our primary liquidity needs are to support working capital requirements in our business, funding recently declared and any future dividends, funding capital
expenditures, continuing investment in upgrading and expanding our technological capabilities and information technology infrastructure, 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
our credit facility will be sufficient to fund our working capital and other cash requirements for at least 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 increased $26.7 million primarily related to net income for the year ended December 31, 2019, increased accounts receivable and inventory
balances offset by decreased balance in prepaid expenses and other current assets compared to increased accounts payable balances, dividends paid in 2019 and the
recording of $9.9 million of current operating lease liabilities. Accounts receivable days outstanding were at 35.9 in 2019 compared to 34.0 in 2018. Inventory
turns were 5.9 in 2019 compared to 6.3 in 2018 and accounts payable days outstanding were 68.7 in 2019 compared to 66.3 in 2018. We expect that future
accounts receivable, inventory and accounts payable balances will fluctuate with net sales and the product mix of our net sales.
Operating Activities
Net cash provided by operating activities from continuing operations was $70.3 million resulting from changes in our working capital accounts, which provided
$9.1 million in cash compared to $56.1 million used in 2018, primarily the result of increased accounts payable, accrued expenses, other current liabilities and
other liabilities balances in 2019. Cash generated from net income from continuing operations adjusted by other non-cash items provided $61.2 million compared
to $65.9 million provided by these items in 2018, primarily related to the change in the provision for deferred income taxes, increased stock-based compensation in
2019 offset by a gain from the settlement of an outstanding lease obligation of our former German branch. In the first quarter of 2019, the Company repriced
approximately 0.6 million of outstanding stock options and recorded approximately $0.6 million of related compensation expense and for the year ended December
31, 2019, total related compensation expense related to these repriced options was $0.7 million.
Net cash provided by operating activities from continuing operations in 2018 was $9.8 million resulting from changes in our working capital accounts, which used
$56.1 million in cash compared to $6.7 million used in 2017, primarily the result of increased accounts receivable and inventory balances and the fluctuation in our
accounts payable and accrued expenses balances. Cash generated from net income from continuing operations adjusted by other non-cash items provided $65.9
million in 2018 compared to $50.8 million provided by these items in 2017, primarily related to the change in the provision for deferred income taxes. Net cash
used in operating activities from discontinued operations was $1.9 million and $32.1 million in 2019 and 2018, respectively, and net cash provided by discontinued
operations was $1.5 million in 2017. Cash used in discontinued operations in 2018 was primarily related to the Company's sold France-based IT business.
Investing Activities
Net cash used in investing activities from continuing operations totaled $6.9 million, $4.5 million and $2.4 million for 2019, 2018 and 2017, respectively. In 2019,
investing activities primarily related to the opening of a new distribution center in Texas and other warehouse projects including wire decking, in-rack sprinkler
systems, video security systems and warehouse lighting. In 2018, investing activities primarily included costs for a warehouse lighting project, warehouse lift
trucks and batteries, information technology equipment and leasehold improvements for the business. Net cash used in investing activities in 2017 included
warehouse pick modules and mobile sales application software for the business. Net cash used in discontinued operations was
27
zero for 2019. In 2018, discontinued operations provided $249.6 million primarily from cash received on the sale of the France business of approximately $250.0
million, offset by $0.4 million of fixed asset purchases from the France business during the first eight months of 2018 compared to $0.4 million used in 2017.
Financing Activities
Net cash used in financing activities was $259.6 million, $115.0 million and $11.5 million in 2019, 2018 and 2017, respectively. In 2019, cash used in financing
activities was primarily related to the payment of the special dividend declared in December 2018 of $243.5 million and regularly quarterly dividends that totaled
approximately $18.1 million. Proceeds from stock option exercises, net of payments for payroll taxes through shares withheld, totaled $1.2 million and proceeds
from the issuance of common stock from our employee stock purchase plan totaled $0.8 million. In 2018, cash used in financing activities was primarily related to
the special dividend and regular quarterly dividend payments in total of $109.3 million. These payments included $55.7 million dividend declared in December
2017 but paid in January 2018, the special dividend of $37.2 million paid in June 2018 and the regular quarterly dividends of $4.1 million for each of the four
quarters of 2018. The Company repurchased $9.1 million of treasury shares under the share repurchase program and repaid $0.1 million of outstanding capital
lease obligations. Proceeds from stock option exercises of $5.4 million were offset by payments of payroll taxes on stock-based compensation through shares
withheld of $1.9 million. In 2017, cash used in financing activities was primarily for dividends paid during 2017 totaling $13.0 million, $0.1 million used to repay
outstanding capital lease obligations and $0.8 million used as payment of payroll taxes on stock-based compensation through shares withheld offset by $2.4 million
from proceeds from stock option exercises.
On July 31, 2018 the Company's Board of Director's approved a share repurchase program with a repurchase authorization of up to two million shares of the
Company's common stock. Under the share repurchase program, the Company is authorized to purchase shares from time to time through open market purchases,
tender offerings or negotiated purchases, subject to market conditions and other factors. During the third quarter of 2018, the Company repurchased 232,550
common shares for approximately $9.1 million. Details of the purchase is as follows:
Fiscal Month/Year
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
July 2018
232,550
$38.96
232,550
1,767,450
The Company maintains a $75.0 million secured revolving credit agreement with one financial institution which has a five-year term, maturing on October 28,
2021 and provides for borrowings in the United States. 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 the inventory advance rate computed as the lesser of 60% or 85% of the net orderly liquidation value (“NOLV”). Borrowings are secured
by substantially all of the Borrower’s assets, as defined, including all accounts receivable, inventory and certain other assets, subject to limited exceptions,
including the exclusion of certain foreign assets from the collateral. The interest rate under the amended and restated facility is computed at applicable market
rates based on the London interbank offered rate (“LIBOR”), the Federal Reserve Bank of New York (“NYFRB”) or the Prime Rate, plus an applicable margin.
The applicable margin varies based on borrowing base availability. As of December 31, 2019, eligible collateral under the credit agreement was $75.0 million,
total availability was $72.5 million, total outstanding letters of credit were $1.3 million, excess availability was $71.2 million and there were no outstanding
borrowings. The Company was in compliance with all of the covenants of the credit agreement in place as of December 31, 2019.
Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, distribution and administrative costs, 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 business segments where
the need to adjust prices to gain or hold market share is prevalent.
28
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 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 2020 we anticipate capital expenditures in the range of $3.0 to $5.0 million, though at this time we are not contractually
committed to incur these expenditures.
In the past 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 business spending could adversely impact our cash resources and force us to either forego future acquisition
opportunities or to pay the purchase price using debt, which could have an adverse effect on our earnings. 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.
We maintain our cash and cash equivalents in money market funds or their equivalent that have maturities of less than three months and in non-interest bearing
accounts that partially offset banking fees. As of December 31, 2019, 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, 2019 cash balances held in foreign subsidiaries totaled
approximately $4.4 million. These balances are held in local country banks and are held primarily to support local working capital needs. The Company had in
excess of $164 million of liquidity (cash and an undrawn line of credit) in the U.S. as of December 31, 2019, 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.
Following is a summary of our contractual obligations for future principal payments on our debt, payments on our non-cancelable operating leases and minimum
payments on our other purchase obligations as of December 31, 2019 (in millions):
Contractual Obligations:
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
Capital lease obligations
$
0.1 $
0.1 $
— $
— $
—
Operating lease liabilities
89.8
13.8
30.8
24.8
Purchase & other obligations
26.7
4.4
11.2
11.1
20.4
—
Total contractual obligations
$
116.6 $
18.3 $
42.0 $
35.9 $
20.4
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 $1.3 million of standby letters of credit outstanding as of December 2019.
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, 2019, the Company had no material uncertain tax positions.
29
Discontinued Operations
The sale of the France based IT business met the “strategic shift with major impact” criteria as defined under Accounting Standards Update ("ASU") 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires disclosures of both discontinued operations and
certain other disposals that do not meet the definition of a discontinued operation. Under ASU 2014-08 in order for a disposal to qualify for discontinued
operations presentation in the financial statements, the disposal must be a "strategic shift" with a major impact for the reporting entity. If an entity meets this
threshold, and other requirements, only the components that were in operation at the time of disposal are presented as discontinued operations. Therefore, the
current year and all prior year results of the France based IT business are included in discontinued operations in the accompanying consolidated financial
statements. For the year ended December 31, 2018 and 2017, net sales of the France business included in discontinued operations totaled $352.0 million and
$473.6 million, respectively, and net gain from the sale of the France business and eight months of operating activity, totaled $175.8 million in 2018, and net
income of $10.6 million was included in discontinued operations in 2017, respectively. For a discussion of the accounting for the sale of the France based IT
business, see Note 1 and Note 5 to the consolidated financial statements included in Item 15 of this Form 10-K.
As disclosed in our Form 8-K dated March 31, 2017, on March 24, 2017, certain wholly owned subsidiaries of the Company executed a definitive securities
purchase agreement (the “Purchase Agreement”) with certain special purpose companies formed by Hilco Capital Limited (“Hilco” and together with its
management team partners, “Purchaser”). Pursuant to the Purchase Agreement, Purchaser acquired all of the Company’s interests in Systemax Europe SARL,
which includes its subsidiaries, Systemax Business Services K.F.T., Misco UK Limited, Systemax Italy S.R.L., Misco Iberia Computer Supplies S.L., Misco AB,
Global Directmail B.V. and Misco Solutions B.V. (collectively, the “SARL Businesses”). The SARL Businesses were reported within the Company's European
Technology Products Group ("ETG") segment. The sale of the SARL business met the “strategic shift with major impact” criteria as described above. Net sales of
the SARL Businesses included in discontinued operations totaled $117.0 million for 2017. Net income included in discontinued operations totaled $0.2 million in
2018, and net loss of $28.2 million in 2017. For a discussion of the accounting for the sale of the SARL Businesses, see Note 1 and Note 5 to the consolidated
financial statements included in Item 15 of this Form 10-K.
Also included in Discontinued Operations is the Company’s former North American Technologies Group, which was sold in December 2015 and has been winding
down operations since then. The sale of the NATG business in December 2015 had a major impact on the Company and therefore met the strategic shift criteria as
defined under ASU 2014-08. The NATG components in operation at the time of the sale were the B2B and Ecommerce businesses and three remaining retail
stores. Accordingly, these components and the results of operations have been adjusted in the accompanying financial statements to reflect their presentation in
discontinued operations. The wind-down was substantially completed in the second quarter of 2016 and the Company continues with settling accounts payable,
marketing remaining leased facilities, as well as, settling remaining lease obligations and other contingencies. These wind-down activities continued in 2019 and
will continue in 2020. For the years ended December 31, 2019, 2018 and 2017, net loss from the discontinued NATG business totaled $1.5 million, $0.8 million
and $7.5 million, respectively. For a discussion of the accounting and wind-down of the NATG business, see Note 1 and Note 2 to the consolidated financial
statements included in Item 15 of this Form 10-K.
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.
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.
30
Leases
On January 1, 2019, the Company adopted ASU 2016-02, "Leases" (Topic 842). This ASU requires all companies to record their operating and finance leases that
meet certain criteria under the standard as Right of Use ("ROU") assets with the corresponding lease obligations recorded as short term and long term liabilities.
The Company adopted this standard utilizing the modified retrospective transition method that allows for a cumulative-effect adjustment in the period of adoption
of the new leasing standard without restating prior periods. There was no cumulative-effect adjustment made to opening retained earnings upon adoption of this
ASU. Additionally, the Company elected to adopt the available package of practical expedients under the transition guidance.
The Company has operating and finance leases for office and warehouse facilities, headquarters and call centers and certain computer, communications equipment
and machinery and equipment which provide the right to use the underlying assets in exchange for agreed upon lease payments, determined by the payment
schedule contained in each lease. The Company determines if an arrangement is an operating or finance lease at the inception of the lease. The Company has
elected not to apply recognition requirements to leases with terms of one year or less. All other leases are recorded on the balance sheet, with ROU assets
representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.
The Company’s lease portfolio consists primarily of operating leases which expire at various dates through 2032.
The ROU assets and corresponding lease liabilities are recorded based upon the net present value of the remaining lease payments, discounted using interest rates
determined by utilizing such factors as the Company's current credit facility terms, the length of the remaining term of the lease, the Company's expected debt
credit rating and comparable company term loan yields. Adoption of the new standard resulted in the Company recording ROU assets and lease liabilities of
approximately $54 million and $64 million, respectively, at January 1, 2019. Certain leases may include options to extend the lease, however the Company is not
including any impact of such options in the valuation of its ROU assets or liabilities as they are not currently probable of being extended. The Company’s lease
agreements do not contain residual value guarantees or restrictive covenants. The Company has sublease agreements for certain unused facilities. For the year
ended December 31, 2019, the Company recorded $1.9 million of sublease income in continuing and discontinued operations.
Revenue Recognition
The Company recognizes revenue from contracts with its customers utilizing the following steps:
•
•
•
•
•
Identifying the contract with the customer
Identifying the performance obligations under the contract
Determine the transaction price
Allocate transaction price to performance obligations, if necessary
Recognizing revenue as performance obligations are satisfied
The Company's invoice, and the terms and conditions of sale contained therein, constitutes the evidence of an arrangement and is a contract with the customer. The
performance obligations are generally delivery of the products listed on the invoice and the transaction price for each product is listed. Allocation of transaction
price is generally not needed. Performance obligations are satisfied, and revenue is recognized upon the shipment of goods from one of the Company’s distribution
centers or drop shippers for most contracts or in certain cases revenue will be recognized upon delivery and acceptance by the customer. Customer acceptance
occurs when the customer accepts the shipment. The Company's standard terms, provided on its invoices as well as on its websites, are included in communications
with the customer and have standard payment terms of 30 days. Certain customers may have extended payment terms that have been pre-approved by the
Company's credit department, but generally none extend longer than 120 days.
Provisions for sales returns and allowances are estimated based on historical data and are recorded concurrently with the recognition of revenue. These provisions
are reviewed and adjusted periodically by the Company. Revenue is presented net of sales taxes collected from customers and remitted to government authorities.
Revenue is reduced for any early payment discounts or volume incentive rebates offered to customers.
The Company’s revenue is shown as “Net sales” in the accompanying Consolidated Statements of Operations and is measured as the determined transaction price,
net of any variable consideration consisting primarily of rights to return product. The Company has elected to treat shipping and handling revenues as activities to
fulfill its performance obligation. Billings for freight and shipping and handling are recorded in net sales and costs of freight and shipping and handling are
recorded in cost of sales in the accompanying Consolidated Statements of Operations.
31
The Company will record a contract liability in cases where customers pay in advance of the Company satisfying its performance obligation. The Company did not
have any material unsatisfied performance obligations or liabilities as of December 31, 2019.
The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates is sales returns liability quarterly based
upon its historical returns rates as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately
$1.9 million and $1.8 million at December 31, 2019 and 2018, respectively, and was recorded as a refund liability in Accrued expenses and other current liabilities
in the accompanying Consolidated Balance Sheets.
Allowance for Doubtful Accounts Receivable
We record an allowance for doubtful accounts to reflect our estimate of the collectability of our trade accounts receivable. Our allowance for doubtful accounts
policy contains assumptions and judgments made by management related to collectability of aged accounts receivable and chargebacks from credit card sales. We
evaluate the collectability 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 specific customers 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.
Our estimates for the years ended December 31, 2019, 2018 and 2017 have not been materially different than our actual experience. While bad debt allowances
have been within expectations, there can be no assurance that we will continue to experience the same allowance rate we have in the past particularly if business or
economic conditions change or actual results deviate from historical trends.
Inventory Valuation
We value our inventories at the lower of cost or net realizable value; cost being determined on the first-in, first-out method. 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 customer demand.
Our inventory reserve estimates for the years ended December 31, 2019, 2018 and 2017 have not been materially different than our actual experience. However, if
in the future our estimates are materially different than our actual experience we could have a material loss adjustment.
Goodwill and Intangible Assets
Our business acquisition activity results in the recording of goodwill and intangible assets as part of the purchase price allocation process. 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 Company operates in one reporting unit and in the fourth quarter of each year performs a quantitative assessment of its goodwill by comparing the Company's
fair market value, or market capitalization, to the carrying value of the Company, including goodwill, to determine if impairment exists.
On January 1, 2019 the Company reclassified approximately $0.3 million of the opening balance of definite-lived intangible assets to operating lease right-of-use
assets as part of its adoption of ASU 2016-02.
In the fourth quarter of 2018, the Company determined that it would no longer be using the trademark or domain name of C&H Distributors and wrote off the
unamortized balance of that definite lived intangible asset of approximately $1.9 million.
We have approximately, in aggregate, $7.2 million in goodwill and intangible assets at December 31, 2019. 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
32
are impaired will change materially in the future. However, there can be no assurances that we will not incur impairment charges that are material in the future.
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 a 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 four 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 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.
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 several 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 our net deferred tax assets is significantly 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 four years and we do not anticipate making any
material changes to this policy in the near 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.
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial
Statements included in Part II, Item 8, Financial Statements and Supplemental Data, of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates (principally Canadian
Dollars) as measured against the U.S. Dollar and each other.
33
The translation of the financial statements of our operations located outside of the United States is impacted by movements in foreign currency exchange rates.
Changes in currency exchange rates as measured against the U.S. dollar may positively or negatively affect income statement, balance sheet and cash flows as
expressed in U.S. dollars. Sales would have fluctuated by approximately $4.7 million and pretax income would have fluctuated by approximately $0.2 million if
average foreign exchange rates changed by 10% in 2019. We have limited involvement with derivative financial instruments and do not use them for trading
purposes. We may enter into foreign currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but as of
December 31, 2019 we had no outstanding forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable rate debt consists of short-term borrowings under
our credit facilities. As of December 31, 2019, there were no outstanding balances under our variable rate credit facility. A hypothetical change in average interest
rates of one percentage point is not expected to have a material effect on our financial position, results of operations or cash flows over the next fiscal year.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial Statements filed with this report; see Item 15 of Part
IV.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer,
the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31,
2019. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and
procedures are effective.
Inherent Limitations of Internal Controls over Financial Reporting
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over
financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in
accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or
detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that
those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer and Chief
34
Financial Officer, the Company evaluated the effectiveness of the design and operation of its internal control over financial reporting based on the framework
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2019.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2019, a copy of which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ending December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, its internal control over financial reporting.
35
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Systemax Inc.
Opinion on Internal Control over Financial Reporting
We have audited Systemax Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Systemax
Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2019 consolidated
financial statements of the Company and our report dated March 12, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
New York, New York
March 12, 2020
36
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 of Part III is hereby incorporated by reference to the Company’s Proxy Statement for the 2020 Annual Meeting of
Stockholders (the “Proxy Statement”).
Item 11. Executive Compensation.
The information required by Item 11 of Part III is hereby incorporated by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by item 12 of Part III is hereby incorporated by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Part III is hereby incorporated by reference to the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 of Part III is hereby incorporated by reference to the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) 1.
Consolidated Financial Statements of Systemax Inc.
Reference
Reports of Ernst & Young LLP Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
2
Financial Statement Schedule:
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
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.
41
42
43
44
45
47
49
68
37
Item 15. Exhibits and Financial Statement Schedules.
3 Exhibits.
Exhibit
No.
3.1
3.2
3.3
3.4
4.1
10.1
10.2
10.3
10.4*
10.5*
10.6*
10.7
10.8*
10.9
10.10
10.11
10.12*
10.13*
10.14*
10.15*
10.16*
Description
Certificate of Incorporation of the Company (incorporated by reference to the Company's registration statement on Form S-1)
(Registration No. 33-92052).
Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to the Company’s report on Form 8-
K dated May 18, 1999).
Amended and Restated By-laws of the Company (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).
Amendment to the Bylaws of the Company (incorporated by reference to the Company’s report on Form 8-K dated March 3, 2008).
Stockholders Agreement (incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarterly period ended
September 30, 1995).
Lease Agreement, dated December 8, 2005, between Hamilton Business Center, LLC (landlord) and Global Equipment Company Inc.
(tenant) (Buford, GA facility) (the “Buford Lease”) (incorporated by reference to the Company’s annual report on Form 10-K for the year
ended December 31, 2005).
First Amendment, to the Buford Lease, dated June 12, 2006, between Global Equipment Company Inc. (tenant) and Hamilton Business
Center, LLC (landlord) (Buford, GA facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended
December 31, 2005).
Lease Agreement, dated February 27, 2012, between PR I Washington Township NJ, LLC (landlord) and Global Equipment Company
Inc. (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).
Form of 2010 Long Term Incentive Plan (incorporated by reference to the Company’s Definitive Proxy Statement filed April 29, 2010).
Employment Agreement, dated April 12, 2012, between the Company and Eric Lerner (incorporated by reference to the Company’s
quarterly report on Form 10-Q for the quarterly period ended March 31, 2012).
Amendment No. 1, dated March 10, 2020 and effective as of January 1, 2020, to the Employment Agreement, between the Company and
Eric Lerner (filed herewith).
Lease Agreement, dated December 10, 2014, between Prologis, L.P. (landlord) and Global Industrial Distribution Inc. (tenant) (Las
Vegas, NV facility) (incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2014).
Amendment to the Term of the 2010 Long Term Incentive Plan (incorporated by reference to the Company’s Supplemental Proxy
Material filed May 18, 2015).
Third Amended and Restated Credit Agreement dated as of October 28, 2016, by and among Systemax Inc. and certain affiliates thereof
and JPMorgan Chase Bank, N.A., as Administrative Agent, 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 3, 2016).
Third Amended and Restated Pledge and Security Agreement dated as of October 28, 2016, by and among Systemax Inc. and certain
affiliates thereof and JPMorgan Chase Bank, N.A., in its capacity as administrative agent for the lenders party to the Third Amended and
Restated Credit Agreement (incorporated by reference to the Company’s report on Form 8-K dated November 3, 2016).
Amended and Restated Lease dated December 14, 2016, by and between Global Equipment Company Inc. (tenant) and Addwin Realty
Associates, LLC (landlord) (Port Washington, NY facility) (incorporated by reference to the Company’s report on Form 8-K dated
December 16, 2016).
Employment Agreement, dated October 5, 2018, between the Company and Barry Litwin (incorporated by reference to the Company’s
annual report on Form 10-K for the year ended December 31, 2018).
Amendment No. 1, dated January 7, 2020, to the Employment Agreement, between the Company and Barry Litwin (filed herewith).
Systemax Inc. Employee Stock Purchase Plan (incorporated by reference to the Company’s Definitive Proxy Statement filed November 2,
2018).
Separation Agreement and Release dated October 5, 2018 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, 2018).
Consulting Agreement, dated January 7, 2019 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, 2018).
38
Lease Agreement, dated April 18, 2019, by and between Global Industrial Distribution Inc. (tenant) and HLIT II CTC 3, L.P. (landlord)
(DeSoto, TX facility) (exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K) (incorporated by reference to the
Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2019).
Corporate Ethics Policy for Officers, Directors and Employees (revised as of January 2019) (incorporated by reference to the Company’s
annual report on Form 10-K for the year ended December 31, 2018).
Subsidiaries of the Registrant (filed herewith).
Consent of Independent Registered Public Accounting Firm (filed herewith).
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
10.17
14
21
23
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*Exhibit is a management contract or compensatory plan or arrangement
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SYSTEMAX INC.
By: /s/ BARRY LITWIN
Barry Litwin
Chief Executive Officer
Date: March 12, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature
Title
Date
/s/ RICHARD LEEDS
Executive Chairman and Director
March 12, 2020
/s/ BRUCE LEEDS
Richard Leeds
Bruce Leeds
/s/ ROBERT LEEDS
Robert Leeds
/s/ BARRY LITWIN
Barry Litwin
Vice Chairman and Director
March 12, 2020
Vice Chairman and Director
March 12, 2020
Chief Executive Officer
and Director
(Principal Executive Officer)
March 12, 2020
/s/ THOMAS CLARK
Vice President and Chief Financial Officer
March 12, 2020
Thomas Clark
(Principal Financial Officer)
/s/ THOMAS AXMACHER
Thomas Axmacher
/s/ ROBERT ROSENTHAL
Robert Rosenthal
/s/ CHAD LINDBLOOM
Chad Lindbloom
/s/ LAWRENCE REINHOLD
Lawrence Reinhold
/s/ PAUL PEARLMAN
Paul Pearlman
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
40
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Systemax Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Systemax Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated
statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2019,
and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 12, 2020 expressed an unqualified opinion thereon.
Adoption of a New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases, which generally requires all leases be
recognized in the statement of financial position, in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2005.
New York, New York
March 12, 2020
41
SYSTEMAX INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except for share data)
ASSETS:
Current assets:
Cash
Accounts receivable, net of allowances of $6.8 and $6.6
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Operating lease right-of-use assets
Deferred income taxes
Goodwill and intangibles
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
Dividend payable
Accrued expenses and other current liabilities
Operating lease liabilities
Total current liabilities
Deferred income tax liability
Other liabilities
Operating lease liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $.01 per share, authorized 25 million shares; issued none
Common stock, par value $.01 per share, authorized 150 million shares; issued 38,906,221 and 38,861,992 shares;
outstanding 37,678,539 and 37,335,467 shares
Additional paid-in capital
Treasury stock at cost —1,227,682 and 1,526,525 shares
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
December 31,
2019
2018
$
97.2 $
88.2
112.5
6.4
304.3
17.8
59.3
7.3
7.2
1.0
295.4
84.1
107.3
10.6
497.4
14.9
0.0
8.9
7.7
1.1
$
$
396.9 $
530.0
115.9 $
0.0
34.0
9.9
159.8
0.1
2.8
58.7
221.4
0.4
189.7
(20.4)
2.8
3.0
175.5
101.1
243.5
35.0
0.0
379.6
0.1
12.6
0.0
392.3
0.4
187.0
(25.1)
(27.6)
3.0
137.7
Total liabilities and shareholders’ equity
$
396.9 $
530.0
See notes to consolidated financial statements.
42
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Net sales
Cost of sales
Gross profit
Selling, distribution and administrative expenses
Special (gains) charges, net
Operating income from continuing operations
Foreign currency exchange loss
Interest and other (income) expense, net
Income from continuing operations before income taxes
Provision (benefit) for income taxes
Net income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Net income per common share from continuing operations:
Basic
Diluted
Net (loss) income per common share from discontinued operations:
Basic
Diluted
Net income per common share:
Basic
Diluted
Weighted average common and common equivalent shares:
Basic
Diluted
Dividends declared
See notes to consolidated financial statements.
43
$
$
$
$
$
$
$
$
Year Ended December 31,
2019
2018
2017
946.9
621.2
325.7
260.4
(0.8)
66.1
0.0
0.0
66.1
16.1
50.0
(1.5)
48.5 $
1.33 $
1.32 $
(0.04) $
(0.04) $
1.29 $
1.28 $
896.9 $
589.2
307.7
245.2
0.8
61.7
0.4
(1.6)
62.9
13.4
49.5
175.2
224.7 $
1.34 $
1.31 $
4.69 $
4.62 $
6.03 $
5.93 $
37.5
37.7
37.2
37.9
0.48
7.94
791.8
518.6
273.2
227.2
0.3
45.7
0.0
0.2
45.5
(20.0)
65.5
(25.1)
40.4
1.77
1.74
(0.68)
(0.67)
1.09
1.07
37.0
37.6
1.85
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Net income
Other comprehensive income (loss):
Foreign currency translation
Total comprehensive income
See notes to consolidated financial statements.
44
Year Ended December 31,
2019
2018
2017
48.5 $
224.7 $
0.0
48.5 $
(3.0)
221.7 $
40.4
8.2
48.6
$
$
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations
Adjustments to reconcile income from continuing operations to net cash provided by (used in)
operating activities:
Depreciation and amortization
Other non-cash (benefit) and asset impairment charges
Provision (benefit) for deferred income taxes
Provision for returns and doubtful accounts
Compensation expense related to equity compensation plans
Loss on dispositions and abandonment
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Income taxes payable (receivable)
Accounts payable
Accrued expenses, other current liabilities and other liabilities
Net cash provided by operating activities from continuing operations
Net cash (used in) provided by operating activities from discontinued operations
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Net cash used in investing activities from continuing operations
Net cash provided by (used in) investing activities from discontinued operations
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations
Dividends paid
Proceeds from issuance of common stock
Payment of payroll taxes on stock-based compensation through shares withheld
Proceeds from the issuance of common stock from employee stock purchase plans
Repurchase of treasury shares
Year Ended December 31,
2019
2018
2017
$
50.0 $
49.5 $
65.5
4.1
(0.8)
1.4
1.0
5.4
0.1
(5.6)
(5.0)
(0.4)
3.7
14.6
1.8
70.3
(1.9)
68.4
(6.9)
0.0
(6.9)
0.0
(6.9)
0.0
(261.6)
2.1
(0.9)
0.8
0.0
4.5
1.9
8.4
0.7
0.9
0.0
(11.9)
(19.4)
(2.4)
(5.4)
(6.6)
(10.4)
9.8
(32.1)
(22.3)
(4.5)
0.0
(4.5)
249.6
245.1
(0.1)
(109.3)
5.4
(1.9)
0.0
(9.1)
4.6
0.0
(21.9)
1.0
1.6
0.0
(6.7)
(5.0)
0.9
0.0
4.7
(0.6)
44.1
1.5
45.6
(2.5)
0.1
(2.4)
(0.4)
(2.8)
(0.1)
(13.0)
2.4
(0.8)
0.0
0.0
(11.5)
Net cash used in financing activities from continuing operations
(259.6)
(115.0)
EFFECTS OF EXCHANGE RATES ON CASH
(0.1)
3.1
3.5
NET (DECREASE) INCREASE IN CASH
CASH – BEGINNING OF YEAR
CASH – END OF YEAR
Supplemental disclosures:
(198.2)
295.4
110.9
184.5
34.8
149.7
$
97.2 $
295.4 $
184.5
45
Interest paid
Income taxes paid
Supplemental disclosures of non-cash operating and investing activities:
Acquisitions of equipment through capital leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
See notes to consolidated financial statements.
46
$
$
$
$
0.3 $
11.3 $
0.2 $
36.6 $
0.0 $
0.0 $
16.5 $
0.0 $
0.4
5.8
0.3
0.0
SYSTEMAX INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except share data in thousands)
Common Stock
Number
of Shares
Outstanding
Amount
Additional
Paid-in
Capital
Treasury
Stock,
At Cost
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Equity
Balances, December 31, 2016
36,924
$
0.4 $
185.5 $
(23.9) $
73.1 $
(20.7)
$
214.4
Stock-based compensation
expense
Issuance of restricted stock
Stock withheld for employee
taxes
Cancellation of restricted shares
Proceeds from issuance of
common stock
Dividends
Discontinued European entities
cumulative translation adjustment
Change in cumulative translation
adjustment
Net income
68
(48)
(8)
158
1.6
(0.8)
(0.3)
0.0
0.8
(0.5)
(0.1)
0.5
1.9
(68.7)
40.4
Balances, December 31, 2017
37,094
$
0.4 $
186.5 $
(21.8) $
44.8 $
Stock-based compensation
expense
Issuance of restricted stock
Stock withheld for employee
taxes
Proceeds from issuance of
common stock
Dividends
Repurchase of treasury shares
Discontinued France operations
entities cumulative translation
adjustment
Change in cumulative translation
adjustment
Net income
117
(62)
419
(233)
2.8
(1.7)
1.7
0.0
(1.9)
(0.6)
6.0
(297.1)
(9.1)
224.7
Balances, December 31, 2018
37,335
$
0.4 $
187.0 $
(25.1) $
(27.6) $
3.0
$
Stock-based compensation
expense
Issuance of restricted stock
Stock withheld for employee
taxes
Proceeds from issuance of
common stock
Dividends
Issuance of shares under
employee stock purchase plan
109
(39)
230
44
5.4
(1.8)
1.8
(0.9)
(1.7)
3.8
(18.1)
0.8
47
1.6
0.0
(0.8)
(0.1)
2.4
(68.7)
14.4
14.4
8.2
1.9
4.1
(3.0)
8.2
40.4
211.8
2.8
0.0
(1.9)
5.4
(297.1)
(9.1)
4.1
(3.0)
224.7
137.7
5.4
0.0
(0.9)
2.1
(18.1)
0.8
Change in cumulative translation
adjustment
Net income
48.5
0.0
0.0
48.5
Balances, December 31, 2019
37,679 $
0.4 $
189.7 $
(20.4) $
2.8 $
3.0 $
175.5
See notes to consolidated financial statements.
48
SYSTEMAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Systemax Inc., through its operating subsidiaries, is primarily a direct marketer of brand name and private label industrial and business equipment and supplies
in North America going to market through a system of branded e-commerce websites and relationship marketers. As previously disclosed, in August 2018 the
Company sold its France-based IT business. With the completion of the sale, Systemax operates and is internally managed in one reportable business segment.
The Company sells a wide array of industrial and general business hard goods and supplies and to a lesser extent products that would fall into the generally
recognizable category of maintenance, repair and operations ("MRO"), markets the Company has served since 1949.
As previously disclosed, in 2018 the Company sold its France-based IT value added reseller business and recorded a pre-tax book gain of approximately $178.9
million. Also, as previously disclosed in 2017 the Company sold Systemax Europe SARL and its subsidiaries (the "SARL Businesses") and recorded a pre-tax
book loss on the sale of $23.7 million. The France business and SARL Businesses were reported within the Company's former European Technology Products
Group ("ETG") segment.
The sale of the France business and SARL Businesses met the “strategic shift with major impact” criteria as defined under Accounting Standards Update
("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires disclosures of both discontinued
operations and certain other disposals that do not meet the definition of a discontinued operation. Under ASU 2014-08, in order for a disposal to qualify for
discontinued operations presentation in the financial statements, the disposal must be a “strategic shift” with a major impact for the reporting entity. If the entity
meets this threshold, and other requirements, only the components that were in operation at the time of disposal are presented as discontinued operations.
Therefore, the prior year results of the France business and SARL Businesses are included in discontinued operations in the accompanying consolidated financial
statements.
Net sales of the France business, included within discontinued operations, totaled $352.0 million and $473.6 million in 2018 and 2017, respectively. Net gain
from the sale of the France business and eight months of operating activity, included within discontinued operations, totaled $175.8 million in 2018, and net
income from the France business, included in discontinued operations, was $10.6 million in 2017.
Net sales of the SARL Businesses, included within discontinued operations, totaled $117.0 million in 2017 and net income included in discontinued operations
totaled $0.2 million in 2018, and net loss of $28.2 million in 2017.
Also included in discontinued operations is the Company's former North American Technology Products Group ("NATG"), which was sold in December 2015
and has been winding down its operations since then. The sale of the NATG business had a major impact on the Company and therefore certain components met
the strategic shift criteria as defined under ASU 2014-08. Accordingly, these components and any related results of operations are reflected in discontinued
operations. For the years ended December 31, 2019, 2018 and 2017, net loss from the discontinued NATG business totaled $1.5 million, $0.8 million and $7.5
million, respectively.
During 2018 the Company's recorded a net gain of $3.1 million related to the settlement of previously disclosed state audits offset by an impairment charge
resulting from the decision to impair the trade and domain names of C&H Distributors, which was recorded within selling, distribution and administrative
expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Systemax Inc. and its wholly-owned subsidiaries
(collectively, the “Company” or “Systemax”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications — Certain prior year amounts were reclassified to conform to current year presentation.
Fiscal Year — The Company’s fiscal year ends at midnight on the Saturday closest to December 31. For clarity of presentation herein, all fiscal years are
referred to as if they ended on December 31. The fiscal year is divided into four fiscal quarters that each end at midnight on a Saturday. For clarity of
presentation herein, all fiscal quarters are referred to as if they ended on the traditional calendar month. The full year of 2019, 2018 and 2017 included 52
weeks.
49
Use of Estimates in Financial Statements — The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical
experience, current business factors, and various other assumptions that the Company believes are necessary to consider to form a basis for making judgments
about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities. The
Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Company’s business environment,
therefore, actual results could differ from these estimates.
Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported
results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and
assumptions by management affect the allowance for doubtful accounts, product returns liabilities, inventory reserves, allowances for cooperative advertising,
the carrying value of long‑lived assets (including goodwill and intangible assets), the provision for income taxes and related deferred tax accounts, certain
accrued liabilities, revenue recognition, contingencies, sublease income, litigation and related legal accruals and the value attributed to employee stock options
and other stock‑based awards.
Foreign Currency Translation — The Company has operations in foreign countries. The functional currency of each foreign country is the local currency. The
financial statements of the Company’s foreign entities are translated into U.S. dollars, the reporting currency, using year-end exchange rates for assets and
liabilities, year to date average exchange rates for the statement of operations items and historical rates for equity accounts. Translation gains or losses are
recorded as a separate component of shareholders’ equity.
Cash — The Company considers amounts held in money market accounts and other short-term investments, including overnight bank deposits, with an original
maturity date of three months or less to be cash. Cash overdrafts are classified in accounts payable.
Inventories — Inventories consist primarily of finished goods and are stated at the lower of cost or net realizable value. Cost is determined by using the first-in,
first-out method.
Leases — On January 1, 2019, the Company adopted ASU 2016-02, " Leases" (Topic 842). This ASU requires all companies to record their operating and
finance leases that meet certain criteria under the standard as Right of Use ("ROU") assets with the corresponding lease obligations recorded as short term and
long term liabilities. The Company adopted this standard utilizing the modified retrospective transition method that allows for a cumulative-effect adjustment in
the period of adoption of the new leasing standard without restating prior periods. There was no cumulative-effect adjustment made to opening retained earnings
upon adoption of this ASU. Additionally, the Company elected to adopt the available package of practical expedients under the transition guidance.
The Company has operating and finance leases for office and warehouse facilities, headquarters and call centers and certain computer, communications
equipment and machinery and equipment which provide the right to use the underlying assets in exchange for agreed upon lease payments, determined by the
payment schedule contained in each lease. The Company determines if an arrangement is an operating or finance lease at the inception of the lease. The
Company has elected not to apply recognition requirements to leases with terms of one year or less. All other leases are recorded on the balance sheet, with ROU
assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the
lease. The Company’s lease portfolio consists primarily of operating leases which expire at various dates through 2032. See Note 3 to the consolidated financial
statements.
Property, Plant and Equipment — Property, plant and equipment is stated at cost. Furniture, fixtures and equipment are depreciated using the straight-line or
accelerated method over their estimated useful lives ranging from three to fifteen years. Leasehold improvements are amortized over the shorter of the useful
lives or the term of the respective leases. In 2019 the Company reclassified approximately $4.2 million of its warehouse racking equipment, which had
previously been reported under leasehold improvements, to other equipment.
Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statement of operations in the period
realized.
Internal-Use Software — Internal‑use software is included in fixed assets and is amortized on a straight‑line basis over 3 years. The Company capitalizes costs
incurred during the application development stage. Costs related to minor upgrades, minor enhancements and maintenance activities are expensed as incurred.
50
Evaluation of Long-lived Assets — Long-lived assets are assets used in the Company’s operations and include definite-lived intangible assets, leasehold
improvements, warehouse and similar property used to generate sales and cash flows. Long-lived assets are tested for impairment utilizing a recoverability test.
The recoverability test compares the carrying value of an asset group to the undiscounted cash flows directly attributable to the asset group over the life of the
primary asset. If the undiscounted cash flows of an asset group is less than the carrying value of the asset group, the fair value of the asset group is then
measured. If the fair value is also determined to be less than the carrying value of the asset group, the asset group is impaired.
Business Combinations — The Company accounts for its business combinations using the acquisition method of accounting. The cost of an acquisition is
measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed by the Company to the sellers and equity
instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are
measured separately at their fair values as of the acquisition date. The excess of (i) the total costs of acquisition over (ii) the fair value of the identifiable net
assets of the acquiree is recorded as goodwill.
Goodwill and Intangible Assets — Goodwill represents the excess of the cost of acquired assets over the fair value of assets acquired. The Company operates in
one reporting unit and in the fourth quarter of each year performs a quantitative assessment of its goodwill by comparing the Company's fair market value, or
market capitalization, to the carrying value of the Company, including goodwill, to determine if impairment exists. Any excess of the carrying amount over fair
value would be charged to impairment expense.
On January 1, 2019 the Company reclassified approximately $0.3 million of the opening balance of definite-lived intangible assets to operating lease right-of-use
assets.
In the fourth quarter of 2018, the Company determined that it would no longer be using the trademark or domain name of C&H Distributors and wrote off the
unamortized balance of that definite lived intangible asset of approximately $1.9 million, which was recorded within selling, distribution and administrative
expenses.
Income Taxes — The Company accounts for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the
future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax
basis and tax credit carry forwards and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are
expected to be in effect when the differences are expected to reverse.
The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when
necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
In accordance with the guidance for accounting for uncertainty in income taxes the Company recognizes the tax benefits from an uncertain tax position only if it
is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax
benefit of an uncertain tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount that is greater than 50% likely to
be realized upon settlement with the tax authority. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in
excess of accruals, our effective tax rate in a given financial statement period could be affected.
Revenue Recognition and Accounts Receivable — In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from
Contracts with Customers, which amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The new
standard was required to be adopted using either a full-retrospective or a modified-retrospective approach. The Company adopted the new standard using the
modified-retrospective approach on January 1, 2018. There was no material impact to total revenues in our consolidated statements of operations, accounting
policies, business processes or internal controls as a result of this adoption. See Note 4 to the consolidated financial statements.
Shipping and Handling Costs — The Company recognizes shipping and handling costs in cost of sales.
Advertising Costs — Expenditures for internet, television, local radio and newspaper advertising are expensed in the period the advertising takes place. Catalog
preparation, printing and postage expenditures are amortized over the period of catalog distribution during which the benefits are expected, generally one to four
months.
Net advertising expenses were $69.8 million, $70.4 million and $67.0 million during 2019, 2018 and 2017, respectively, and are included in the accompanying
consolidated statements of operations within continuing and discontinued operations. Of the
51
previously mentioned amounts, the Company's discontinued operations net advertising expenses totaled $0 million, $1.1 million and $2.5 million during 2019,
2018 and 2017, respectively.
The Company utilizes advertising programs to drive traffic to its websites, support vendors, including catalogs, internet and magazine advertising, and receives
payments and credits from vendors, including consideration pursuant to volume incentive programs and cooperative marketing programs. The Company
accounts for consideration from vendors as a reduction of cost of sales unless certain conditions are met showing that the funds are used for specific,
incremental, identifiable costs, in which case the consideration is accounted for as a reduction in the related expense category, such as advertising expense. The
amount of vendor consideration recorded as a reduction of selling, distribution and administrative expenses totaled $2.2 million, $3.3 million and $5.8 million
during 2019, 2018 and 2017, respectively. Of the previously mentioned amounts, the Company's discontinued operations amount of vendor consideration was
$0.0 million, $2.0 million and $4.7 million during 2019, 2018 and 2017, respectively.
Stock Based Compensation — In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies
the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions.
This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted after
adoption of ASU 2014-09. The Company adopted this standard beginning January 1, 2019 and its adoption did not materially impact the Company's
consolidated financial position or results of operations.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting, which clarified when
changes to the terms or conditions of a share-based payment award must be accounted for as modifications. In the first quarter of 2019, the Company repriced
approximately 0.6 million of outstanding stock options and recorded approximately $0.6 million of related compensation expense. For the year ended December
31, 2019, total related compensation expense was $0.7 million. Due to the sale of the France business in August 2018, the Company accelerated the vesting of
certain stock options and recorded additional compensation expense of approximately $0.3 million, which was recorded within discontinued operations.
The fair value of employee share options is recognized in expense over the vesting period of the options, using the graded attribution method. The fair value of
employee share options is determined on the date of grant using the Black-Scholes option pricing model. The Company has calculated its dividend yield by
dividing the annualized regular quarterly dividend by the current stock price at grant date. The Company has used historical volatility in its estimate of expected
volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The risk-free interest rate is
based on the U.S. Treasury yield curve. Stock-based compensation expense includes an estimate for forfeitures and is recognized over the expected term of the
award.
The fair value of the restricted stock and performance restricted stock is the closing stock price on the NYSE of the Company's common stock on the date of
grant or the closing stock price of the Company's common stock on the last business day prior to the grant date. Upon delivery, a portion of the RSU award may
be withheld to satisfy the minimum statutory withholding taxes. The remaining RSU's/PRSU's will be settled in shares of the Company's common stock after the
vesting period and on the prescribed delivery date. These RSUs/PRSU's have none of the rights as other shares of common stock, other than rights to cash
dividends, until common stock is distributed.
Net Income (Loss) Per Common Share — Net income per common share - basic is calculated based upon the weighted average number of common shares
outstanding during the respective periods presented using the two-class method of computing earnings per share. The two-class method was used as the
Company has outstanding restricted stock with rights to dividend participation for unvested shares. Net income per common share - diluted was calculated based
upon the weighted average number of common shares outstanding and included the equivalent shares for dilutive options outstanding during the respective
periods, including unvested options. The dilutive effect of outstanding options and restricted stock issued by the Company is reflected in net income per share -
diluted using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price of common
stock during the period exceeds the exercise price of the options.
The undistributed and distributed net income from continuing operations available to common shareholders-basic was $49.7 million, $49.8 million and $65.5
million for the years ended December 31, 2019, 2018 and 2017, respectively. The undistributed and distributed net income from continuing operations available
to common shareholders-diluted was $49.7 million, $49.5 million and $65.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The
undistributed and distributed net (loss) income from discontinued operations available to common shareholders-basic was $(1.5) million, $174.4 million and
$(25.1) million for the years ended December 31, 2019, 2018 and 2017, respectively. The undistributed and distributed net (loss) income from discontinued
operations available to common shareholders-diluted was $(1.5) million, $175.2 million and $(25.1)
52
million for the years ended December 31, 2019, 2018 and 2017, respectively. The weighted average number of stock options outstanding included in the
computation of diluted earnings per share was 0.2 million and the weighted average number of restricted stock awards included in the computation of diluted
earnings per share was 0.0 million for the year ended December 31, 2019. The weighted average number of stock options outstanding included in the
computation of diluted earnings per share was 0.5 million and the weighted average number of restricted stock awards included in the computation of diluted
earnings per share was 0.2 million for the year ended December 31, 2018. The weighted average number of stock options outstanding included in the
computation of diluted earnings per share was 0.4 million and the weighted average number of restricted stock awards included in the computation of diluted
earnings per share was 0.2 million for the year ended December 31, 2017. The weighted average number of stock options and/or restricted stock awards
outstanding excluded from the computation of diluted income per share was 0.4 million shares, de minimis shares, and 0.04 million shares for the years ended
December 31, 2019, 2018 and 2017, respectively, due to their antidilutive effect.
Employee Benefit Plans — The Company’s U.S. subsidiaries participate in a defined contribution 401(k) plan covering substantially all U.S. employees.
Employees may invest 1% or more of their eligible compensation, limited to maximum amounts as determined by the Internal Revenue Service. The Company
provides a matching contribution to the plan, determined as a percentage of the employees’ contributions. Aggregate expense to the Company for contributions
to the plan was approximately $1.1 million, $1.2 million and $0.7 million in 2019, 2018 and 2017, respectively.
Fair Value Measurements — Financial instruments consist primarily of investments in cash, trade accounts receivable, debt and accounts payable. The
Company estimates the fair value of financial instruments based on interest rates available to the Company. At December 31, 2019 and 2018, the carrying
amounts of cash, accounts receivable and accounts payable are considered to be representative of their respective fair values due to their short-term nature. Cash
is classified as Level 1 within the fair value hierarchy. The Company’s debt is considered to be representative of its fair value because of its variable interest
rate. The weighted average interest rate on short-term borrowings was 6.2% in 2019, 5.7% in 2018 and 4.7% in 2017.
The fair value of goodwill, non-amortizing intangibles and long-lived assets is measured in connection with the Company’s annual impairment testing as
discussed above.
Significant Concentrations — Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts
receivable. The Company’s excess cash balances are invested with money center banks. Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and their geographic dispersion comprising the Company’s customer base. The Company also performs on-going
credit evaluations and maintains allowances for potential losses as warranted.
The Company purchases substantially all of its products and components directly from both large and small manufacturers as well as large wholesale
distributors. No supplier accounted for 10% or more of our product purchases for continuing operations in 2019, 2018 and 2017. Most private label products are
manufactured by third parties to our specifications.
Recent 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 Company’s current operations.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU clarifies and simplifies
accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles and the methodology for calculating income tax rates in an
interim period, among other updates. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020,
with early adoption permitted. The Company will adopt this ASU effective January 1, 2021. The Company is evaluating the effect of the adoption of this
pronouncement.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements, which eliminates, adds or modifies certain disclosure requirements for fair value
measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but
will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU is
effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with early adoption permitted to adopt either the
53
entire standard or only the provisions that eliminate or modify the requirements. The Company does not expect the adoption of this standard to have a material
impact on the Company's financial position or results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement
that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to
defer and recognize as an asset. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year, with
early adoption permitted, including adoption in any interim period. The Company does not expect the adoption of this standard to have a material impact on the
Company's financial position or results of operations.
In March 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment which eliminates the second step
from the goodwill impairment test. An entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot
exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019, with early adoption permitted. The Company early adopted this standard on January 1, 2019. There was no material impact on the
Company's financial position or results of operations upon adoption of this standard.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses:
Measurement of Credit Losses on Financial Instruments as modified by subsequently issued ASU's 2018-19, 2019-04, 2019-05 and 2019-11. This ASU requires
estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical
experience, current conditions and reasonable and supportable forecasts. This ASU is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019, with early adoption permitted. The Company will adopt this ASU effective January 1, 2020. The Company's trade accounts
receivables are subject to this standard. The Company has completed its evaluation of the impact of adopting this standard and has concluded that it will not have
a material impact on the Company's financial position or results of operations.
3. LEASES
The Company has operating and finance leases for office and warehouse facilities, headquarters, call centers, machinery and certain computer and
communications equipment which provide the right to use the underlying assets in exchange for agreed upon lease payments, determined by the payment
schedule contained in each lease. The Company’s lease portfolio consists primarily of operating leases which expire at various dates through 2032.
In the second quarter of 2019, the Company entered into a lease agreement for a portion of a distribution facility located in Texas for approximately 490,000
square feet and a lease term of 125 months. The total lease obligation is approximately $19.8 million. The Company is separately charged for real estate taxes,
insurance and common area maintenance. The Company recorded an ROU asset and related lease liability of approximately $14.7 million during the second
quarter of 2019.
In the third quarter and fourth quarters of 2019, the Company renewed, extended or expanded four of its leased facilities for an additional obligation of $2.0
million and recorded ROU assets and related lease liabilities of approximately $1.8 million. Also, in the third quarter of 2019, the Company's former German
branch recorded approximately $0.8 million of gain related to a buyout of its outstanding lease obligation.
The Company's operating lease costs, included in continuing operations, was $12.0 million, $11.4 million and $11.2 million, for the years ended December 31,
2019, 2018 and 2017, respectively.
The following tables summarizes the Company's ROU weighted average remaining lease term and discount rate for continuing and discontinued operations as
of December 31, 2019.
54
Year Ended December 31,
2019
Weighted Average Remaining Lease Term
Operating leases
Weighted Average Discount Rate
Operating leases
Maturities of lease liabilities were as follows (in millions):
Year Ending December 31
Operating Leases
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: interest
Total present value of lease liabilities
$
$
8.4 years
5.7%
13.8
10.9
10.0
9.9
9.7
35.5
89.8
(21.2)
68.6
The Company currently leases its headquarters office facility from an entity owned by the Company’s principal shareholders. Total expense recorded was $1.0
million in 2019 and 2018 and $0.9 million in 2017, to related parties.
The ROU assets and corresponding lease liabilities are recorded based upon the net present value of the remaining lease payments, discounted using interest
rates determined by utilizing such factors as the Company's current credit facility terms, the length of the remaining term of the lease, the Company's expected
debt credit rating and comparable company term loan yields. Adoption of the new standard resulted in the Company recording ROU assets and lease liabilities
of approximately $54 million and $64 million, respectively, at January 1, 2019. Certain leases may include options to extend the lease, however the Company
is not including any impact of such options in the valuation of its ROU assets or liabilities as they are not currently considered probable of being extended.
The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. The Company has sublease agreements for certain unused
facilities. For the year ended December 31, 2019, the Company recorded $1.9 million of sublease income in continuing and discontinued operations. Future
rent streams related to sublease agreements of $1.7 million to be collected in less than one year and $1.9 million to be collected between one and three years.
4. REVENUE
The Company’s revenue generated by its operating subsidiaries is comprised of sales of a wide array of industrial and general business hard goods and supplies
and to a lesser extent products that would fall into the generally recognizable category of MRO products. The Company also has revenues from related activities,
such as freight and, to a lesser extent, services.
The Company recognizes revenue from contracts with its customers utilizing the following steps:
•
•
•
•
•
Identifying the contract with the customer
Identifying the performance obligations under the contract
Determine the transaction price
Allocate transaction price to performance obligations, if necessary
Recognizing revenue as performance obligations are satisfied
55
The Company's invoice, and the terms and conditions of sale contained therein, constitutes the evidence of an arrangement and is the contract with the customer.
The performance obligations are generally delivery of the products listed on the invoice and the transaction price for each product is listed. Allocation of
transaction price is generally not needed. Performance obligations are satisfied, and revenue is recognized upon the shipment of goods from one of the
Company’s distribution centers or drop shippers for most contracts or in certain cases revenue will be recognized upon delivery and acceptance by the customer.
Customer acceptance occurs when the customer accepts the shipment. The Company's standard terms, provided on its invoices as well as on its websites, are
included in communications with the customer and have standard payment terms of 30 days. Certain customers may have extended payment terms that have
been pre-approved by the Company's credit department, but generally none extend longer than 120 days.
Provisions for sales returns and allowances are estimated based on historical data and are recorded concurrently with the recognition of revenue. These
provisions are reviewed and adjusted periodically by the Company. Revenue is presented net of sales taxes collected from customers and remitted to government
authorities. Revenue is reduced for any early payment discounts or volume incentive rebates offered to customers.
The Company’s revenue is shown as “Net sales” in the accompanying Consolidated Statements of Operations and is measured as the determined transaction
price, net of any variable consideration consisting primarily of rights to return product. The Company has elected to treat shipping and handling revenues as
activities to fulfill its performance obligation. Billings for freight and shipping and handling are recorded in net sales and costs of freight and shipping and
handling are recorded in cost of sales in the accompanying Consolidated Statements of Operations.
The Company will record a contract liability in cases where customers pay in advance of the Company satisfying its performance obligation. The Company did
not have any material unsatisfied performance obligations or liabilities as of December 31, 2019.
The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates its sales returns liability quarterly based
upon its historical return rates as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately
$1.9 million and $1.8 million at December 31, 2019 and 2018, respectively, and was recorded as a refund liability in Accrued expenses and other current
liabilities in the accompanying Consolidated Balance Sheets.
Disaggregation of Revenues
The Company serves customers in diverse geographies, which are subject to different economic and industry factors. The Company's presentation of revenue by
geography most reasonably depicts how the nature, amount, timing and uncertainty of Company revenue and cash flows are affected by economic and industry
factors. The following table presents the Company's revenue, from continuing operations, by geography for the year ended December 31, 2019, 2018 and 2017
(in millions):
Net sales:
United States
Canada
Consolidated
Year Ended December 31,
2019
2018
2017
$
$
901.3 $
45.6
946.9 $
854.6 $
42.3
896.9 $
759.4
32.4
791.8
5. DISPOSITIONS AND SPECIAL GAINS AND CHARGES
The Company's discontinued operations include the results of the France business sold in August 2018, the SARL Businesses sold in March 2017 and the NATG
business sold in December 2015 (see Note 1).
56
On August 31, 2018, the Company closed on the sale of its France-based IT value added reseller business. The Company recorded a pre-tax book gain on the
sale of the France business, of approximately $178.9 million for the year ended December 31, 2018.
The Company incurred special charges within discontinued operations of $0.0 million, $0.6 million and $30.6 million for the years ended 2019, 2018 and 2017,
respectively.
For the year ended December 31, 2018, the Company recorded special charges of approximately $0.6 million in discontinued operations. The Company recorded
lease reserve adjustments related to its previously exited leased facilities for the discontinued NATG business of approximately $1.7 million and additional legal
and professional fees of $0.1 million for ongoing restitution proceedings. Offsetting these expenses were approximately $1.0 million in restitution receipts and
$0.2 million in vendor settlement receipts from the discontinued NATG business.
For the year ended December 31, 2017, the Company recorded special charges of $30.6 million in discontinued operations. A pre-tax book loss on the sale of the
SARL Businesses of approximately $23.7 million was recorded and approximately $6.9 million of additional charges were recorded from the discontinued
NATG business, of which $6.2 million primarily related to updating our future lease cash flows and $0.7 million related to ongoing restitution proceedings.
The Company has completed the wind-down activities related to the sale of the France business, but may incur additional charges related to statutory tax and
other indemnities given at closing. The Company has substantially completed the wind-down activities related to the NATG business, although certain NATG
activities related to sublet facilities, settling accounts payable and other contingent liabilities continue. The Company expects that additional NATG wind-down
costs incurred during 2020 or later may aggregate up to $1.0 million, which will be presented in discontinued operations.
Below is a summary of the impact on net sales, net income (loss) and net income (loss) per share from discontinued operations for the years ended December 31,
2019, 2018 and 2017.
Results of discontinued operations are as follows:
Net sales
Cost of sales
Gross profit
Selling, distribution and administrative expenses
Pre-tax book gain on sale of France business
Special charges, net
Operating (loss) income from discontinued operations
Foreign currency exchange (income) loss
Interest and other expense (income), net
Income (loss) of discontinued operations before income taxes
(Benefit) provision for income tax
Net income (loss) from discontinued operations
Net income (loss) per share - basic
Net income (loss) per share - diluted
Year Ended December 31,
2019
2018
2017
0.0 $
0.0
352.0 $
295.8
0.0
2.1
0.0
0.0
(2.1)
0.0
0.0
(2.1)
(0.6)
56.2
36.5
(178.9)
0.6
198.0
(0.2)
0.0
198.2
23.0
(1.5) $
(0.04) $
(0.04) $
175.2 $
4.69 $
4.62 $
590.6
498.3
92.3
74.7
0.0
30.6
(13.0)
0.8
0.3
(14.1)
11.0
(25.1)
(0.68)
(0.67)
$
$
$
$
In the third quarter of 2019, within continuing operations, the Company's former German branch recorded special gains of approximately $0.8 million related to
a buyout for its outstanding lease obligation.
The Company recorded special charges of $0.8 million in 2018 and 0.3 million in 2017, within continuing operations, related to updating lease reserves
adjustments related to its outstanding NATG business lease obligations.
57
The following table details liabilities related to the exit costs of the sold businesses that remain for 2019 (in millions):
Balance January 1, 2019
Charged to expense
Paid or otherwise settled
Balance December 31, 2019
$
$
Accrued exit costs
2.8
0.7
(0.7)
2.8
On January 1, 2019, the Company reclassified approximately $4.3 million of the opening balance of the exit cost liability related to lease obligations to operating
lease right-of-use assets.
The following table details liabilities related to the exit costs of the sold businesses for 2018 (in millions):
Balance, January 1, 2018
Charged to expense
Paid or otherwise settled
Balance, December 31, 2018
$
$
Accrued exit costs
20.2
2.5
(15.6)
7.1
6. GOODWILL AND INTANGIBLES
Goodwill and indefinite-lived intangible assets:
The following table provides information related to the carrying value of goodwill (in millions):
Balance, December 31
December 31,
2019
2018
$
5.5 $
5.5
The following table provides information related to the carrying value of indefinite lived intangibles as of December 31, 2019 and 2018, respectively (in
millions):
Balance, December 31
Definite-lived intangible assets:
December 31,
2019
2018
$
0.7 $
0.7
On January 1, 2019 the Company reclassified approximately $0.3 million of the opening balance of definite-lived intangible assets to operating lease right-of-use
assets.
58
The following table summarizes information related to definite-lived intangible assets as of December 31, 2019 (in millions):
Client lists
Domain name
Total
December 31, 2019
Amortization
Period (Years)
5-10 yrs
5 yrs
Gross
Carrying
Amount
$
$
2.0 $
3.4
5.4 $
Accumulated
Amortization
Net Book
Value
Weighted avg
useful life
1.0 $
3.4
4.4 $
1.0
0.0
1.0
5.1
0.0
5.1
The following table summarizes information related to definite-lived intangible assets as of December 31, 2018 (in millions):
December 31, 2018
Client lists
Leases
Domain name
Total
Amortization
Period (Years)
5-10 yrs
3-6 yrs
5 yrs
Gross
Carrying
Amount
$
2.0 $
0.8
3.4
Accumulated
Amortization
Net Book
Value
Weighted avg
useful life
0.8 $
0.5
3.4
1.2
0.3
0.0
$
6.2 $
4.7 $
1.5
6.1
1.9
0.0
5.2
The aggregate amortization expense for these intangibles was approximately $0.2 million in 2019. The estimated amortization for future years ending December
31 is as follows (in millions):
2020
2021
2022
2023
2024 and after
Total
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following (in millions):
Land improvements
Furniture and fixtures, office, computer and other equipment and software
Leasehold improvements
Less accumulated depreciation and amortization
Property, plant and equipment, net
59
$
$
$
December 31,
2019
2018
$
$
0.8 $
44.3
13.1
58.2
40.4
17.8 $
0.2
0.2
0.2
0.2
0.2
1.0
0.8
42.8
11.7
55.3
40.4
14.9
Depreciation charged to continuing operations for property, plant and equipment including capital leases in 2019, 2018, and 2017 was $3.9 million, $3.5 million
and $3.6 million, respectively. ETG and NATG discontinued operations total depreciation expense was $0 million, $0.3 million and $0.7 million, for 2019, 2018
and 2017, respectively.
8. CREDIT FACILITIES
The Company maintains a $75 million secured revolving credit facility with one financial institution, which has a five-year term, maturing on October 28, 2021
and provides for borrowings in the United States. 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 the inventory advance rate computed as the lesser of 60% or 85% of the net orderly liquidation value (“NOLV”). Borrowings are
secured by substantially all of the borrower’s assets, as defined, including all accounts, accounts receivable, inventory and certain other assets, subject to limited
exceptions, including the exclusion of certain foreign assets from the collateral. The interest rate under the amended and restated facility is computed at
applicable market rates based on the London interbank offered rate (“LIBOR”), the Federal Reserve Bank of New York (“NYFRB”) or the Prime Rate, plus an
applicable margin. The applicable margin varies based on borrowing base availability. As of December 31, 2019, eligible collateral under the credit agreement
was $75.0 million, total availability was $72.5 million, total outstanding letters of credit were $1.3 million, total excess availability was $71.2 million and there
were no outstanding borrowings. The Company was in compliance with all of the covenants of the credit agreement in place as of December 31, 2019.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in millions):
Payroll and employee benefits
Advertising
Sales and VAT tax payable
Freight
Reorganization costs
Product returns liability
Other
10. SHAREHOLDERS’ EQUITY
Stock-Based Compensation Plans
December 31,
2019
2018
$
11.3 $
12.0
4.9
2.6
6.8
0.4
1.9
6.1
5.5
2.8
4.9
2.0
1.8
6.0
$
34.0 $
35.0
The Company currently has one equity compensation plan which reserves shares of common stock for issuance to key employees, directors, consultants and
advisors to the Company. The following is a description of this plan:
The 2010 Long-term Stock Incentive Plan (“2010 Plan”) - This plan was adopted in April 2010 and allows the Company to issue incentive stock options, non-
qualified stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards and other stock based awards authorized by the
Compensation Committee of the Board of Directors. Options and awards issued under this plan expire ten years after the options and awards are granted. The
maximum number of shares granted per type of award to any individual may not exceed 1,500,000 in any calendar year. Restricted stock grants and common
stock awards reduce stock options otherwise available for future grant. Awards for a maximum of 7,500,000 shares may be granted under this plan. A total of
764,784 options and 172,595 restricted stock units were outstanding under this plan as of December 31, 2019.
60
Shares issued under our share-based compensation plans are usually issued from shares of our common stock held in the treasury.
Compensation cost related to non-qualified stock options recognized in continuing operations (selling, distribution and administrative expenses) for 2019, 2018
and 2017 was $3.3 million, $0.3 million, and $1.1 million respectively. In the first quarter of 2019, the Company repriced approximately 0.6 million shares of
outstanding stock options and recorded approximately $0.6 million of related compensation expense and for the year ended December 31, 2019, the Company
recorded $0.7 million of related compensation expense. France discontinued operations compensation cost related to non-qualified stock options was $0.4
million in 2018, primarily related to the acceleration of stock options due to the sale of the France business of approximately $0.3 million and de minimis
compensation cost in 2017. The related future income tax benefits recognized for 2019, 2018 and 2017 were $0.7 million, $0.1 million and $0.2 million,
respectively.
Stock Options
The following table presents the weighted-average assumptions used to estimate the fair value of options granted in 2019, 2018 and 2017:
Expected annual dividend yield
Risk-free interest rate
Expected volatility
Expected life in years
The following table summarizes information concerning outstanding and exercisable options:
2019
2018
2017
1.9%
2.65%
50.4%
5.0
1.4%
2.94%
48.0%
5.2
2.4%
2.26%
48.9%
4.0
2019
Weighted
Avg. Exercise
Price
Shares
Weighted Average
2018
Weighted
Avg. Exercise
Price
Shares
Shares
2017
Weighted
Avg. Exercise
Price
596,148 $
1,038,536 $
(224,750) $
(645,150) $
764,784 $
11.64
15.76
8.92
12.50
17.31
1,001,300 $
17,550 $
(400,203) $
(22,499) $
596,148 $
11.58
31.66
12.18
15.24
11.64
1,410,250 $
10,000 $
(138,450) $
(280,500) $
1,001,300 $
12.57
24.36
13.49
16.04
11.58
Outstanding at beginning of year
Granted
Exercised
Canceled or expired
Outstanding at end of year
Options exercisable at year end
227,598
341,515
588,802
Weighted average fair value per option
granted during the year
$
9.16
$
12.87
$
10.69
The total intrinsic value of options exercised was $3.4 million in 2019 and $9.5 million in 2018 and $1.3 million in 2017.
61
The following table summarizes information about options vested and exercisable or non-vested that are expected to vest (non-vested outstanding less expected
forfeitures) at December 31, 2019:
Range of Exercise Prices
5.00
10.01
15.01
20.01
5.00
to
to
to
to
to
$
$
$
$
$
10.00
15.00
20.00
25.00
25.00
$
$
$
$
$
Options outstanding
and
Exercisable
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value (in
millions)
232,000 $
10,000 $
92,285 $
430,499 $
764,784 $
6.23
10.39
16.93
23.52
17.31
6.28 $
0.51
3.05
9.07
7.39 $
4.5
0.1
0.8
0.8
6.2
The aggregate intrinsic value in the tables above represents the total pretax intrinsic value (the difference between the closing stock price on the last day of
trading in 2019 and the exercise price) that would have been received by the option holders had all options been exercised on December 31, 2019. This value
will change based on the fair market value of the Company’s common stock.
The following table reflects the activity for all unvested stock options during 2019:
Unvested at January 1, 2019
Granted
Vested
Forfeited
Unvested at December 31, 2019
Weighted
Average Grant-
Date Fair Value
Shares
254,633 $
1,038,536 $
(452,348) $
(303,635) $
537,186 $
4.73
9.16
8.80
5.62
9.38
At December 31, 2019, there was approximately $2.5 million of unrecognized compensation costs related to unvested stock options, which is expected to be
recognized over a weighted average period of 3.7 years. The total fair value of stock options vested during 2019, 2018 and 2017 was $4.0 million, $1.2 million
and $0.9 million, respectively.
Restricted Stock and Restricted Stock Units
The following table reflects the activity for restricted stock awards, excluding the restricted stock issued to Directors (in millions, except shares data):
62
Year Granted
Shares
Granted
Outstanding at
December 31,
2019
Rights to Cash
Dividend
Other
Participation
Rights
Performance
Award
Compensation Expense
Year Ended December 31,
2019
2018
2017
2010
2011
2012
2016
2017
2017
2018
2019
2019
175,000
100,000
50,000
100,000
53,288
49,600
5,117
30,251
149,412
—
—
15,000
—
—
—
—
30,251
114,513
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
None
None
None
None
None
None
None
None
None
No $
0.0 $
0.1 $
No
No
No
No
Yes
No
No
Yes
0.0
0 (1)
0 (1)
0.0
0.0
0.0
0.3
1.3
0.2
0 (1)
0.1
0 (1)
1.5 (2)
0 (1)
0.0
0.0
Total $
1.6 $
1.9 $
0.1
0.1
0.1
0.2
0.1
0 (1)
0.0
0.0
0.0
0.6
1
2
less than $0.1 million of expense recorded
As a result of the sale of the France business in August 2018 and terms of the performance award, compensation expense of $1.5 million and less
than $0.1 million was recorded in discontinued operations for the year ended 2018 and 2017, respectively.
Share-based compensation expense for restricted stock issued to Directors was $0.2 million in 2019, $0.1 million in 2018 and $0.1 million benefit in 2017 due to
the resignation of two Directors during the year.
At December 31, 2019, there was approximately $2.5 million of unrecognized compensation cost related to the unvested RSU's, which is expected to be
recognized over a weighted average period of 3.05 years.
In 2018, due to the sale of the France business, $1.5 million of compensation expense related to the performance RSU's above were reported in discontinued
operations and less than $0.1 million was recorded during 2017.
Compensation expense related to RSU and performance RSU's reported within continuing operations was approximately $1.8 million, $0.5 million and $0.5
million for the years ended December 31, 2019, 218 and 2017, respectively. Share-based compensation expense related to restricted stock units and performance
RSU's is recognized within selling, distribution and administrative expenses.
The following table reflects the activity for all unvested restricted stock during 2019:
Unvested at January 1, 2019
Granted
Vested
Forfeited
Unvested at December 31, 2019
63
Weighted
Average
Grant-
Date Fair
Value
14.31
23.39
14.39
26.45
23.14
Shares
132.484
188.717
(133.725)
(14.881)
172.595
Employee Stock Purchase Plan
The 2018 Employee Stock Purchase Plan - This plan was approved by the Company's stockholders in December 2018 and a reserve of 500,000 shares of
common stock has been established under this plan. The Company adopted this plan, the terms of which allow for eligible employees (as defined in the 2018
Employee Stock Purchase Plan) to participate in the purchase, during each six month purchase period, up to a maximum of 10,000 shares of the Company's
common stock at a purchase price equal to 85% of the closing price at either the start date or the end date of the stock purchase period, whichever is lower.
Compensation expense related to this plan of approximately $0.3 million and $0.1 million, respectively, is recognized in selling, distribution and administrative
expenses during 2019 and 2018. As of December 31, 2019, approximately 455,771 shares remain reserved for issuance under this plan. Employees purchased
approximately 44,229 shares of common stock during fiscal year 2019 at an average per share price of $17.61.
Stock Repurchase
In 2018, the Company's Board of Director's approved a share repurchase program with a repurchase authorization of up to two million shares of the Company's
common stock. Under the share repurchase program, the Company is authorized to purchase shares from time to time through open market purchases, tender
offerings or negotiated purchases, subject to market conditions and other factors. In 2018, the Company repurchased 232,550 common shares for approximately
$9.1 million. Details of the purchase was as follows:
Fiscal Month/Year
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs
July 2018
232,550
38.96
232,550
1,767,450
11. INCOME TAX
The following table summarizes our U.S. and foreign components of income (loss) from continuing operations before income taxes (in millions):
United States
Foreign
Total
Year Ended December 31,
2019
2018
2017
$
$
65.8 $
0.3
66.1 $
62.8 $
0.1
62.9 $
45.6
(0.1)
45.5
The following table summarizes the (benefit) provision for income taxes from continuing operations (in millions):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
TOTAL
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
12.5 $
2.1
0.1
14.7 $
1.1 $
0.3
0.0
1.4 $
16.1 $
2.6 $
2.4
0.0
5.0 $
7.7 $
0.6
0.1
8.4 $
13.4 $
0.7
1.1
0.1
1.9
(18.3)
(3.6)
0.0
(21.9)
(20.0)
Tax expense from discontinued operations was $(0.6) million, $23.0 million and $11.0 million for the years ended December 31, 2019, 2018 and 2017,
respectively. Income taxes are accrued and paid by each foreign entity in accordance with applicable local regulations.
A reconciliation of the difference between the income tax expense and the computed income tax expense based on the Federal statutory corporate rate is as
follows (in millions):
Year Ended December 31,
Income tax at Federal statutory rate
$
13.9
21.0 % $
13.2
21.0 % $
15.9
35.0 %
2019
2018
2017
State and local income taxes, net of federal tax
benefit
Impact of state rate changes
Changes in valuation allowances
Reversal of valuation allowances
2017 TCJA, net deferred tax remeasurement and
repatriation tax impacts
Stock based compensation
Non-deductible items
Other items, net
Income tax
2.4
0.1
0.0
(0.3)
0.0
(0.5)
0.8
(0.3)
16.1
$
3.7 %
0.1 %
— %
(0.4)%
— %
(0.8)%
1.2 %
(0.4)%
24.4 % $
2.6
(0.1)
0.0
(0.2)
0.0
(1.5)
0.1
(0.7)
13.4
4.1 %
(0.2)%
— %
(0.3)%
— %
(2.4)%
0.2 %
(1.1)%
5.0
0.3
(21.7)
(29.4)
10.4
0.0
0.1
(0.6)
21.3 % $
(20.0)
11.0 %
0.7 %
(47.7)%
(64.6)%
22.9 %
— %
0.2 %
(1.5)%
(44.0)%
The deferred tax assets and liabilities are comprised of the following (in millions):
64
Assets:
Accrued expenses and other liabilities
Inventory
Operating lease obligations
Intangible & other
Net operating loss and credit carryforwards
Valuation allowances
Total deferred tax assets
Liabilities:
Operating lease right-of-use assets
Other
Total deferred tax liabilities
December 31,
2019
2018
$
$
$
$
1.3 $
1.3
16.5
1.3
17.7
(16.8)
21.3 $
14.0 $
0.1
14.1 $
3.5
1.3
0.0
3.1
19.3
(18.3)
8.9
0.0
0.1
0.1
During 2019 the Company utilized approximately $2.8 million in state NOLs to offset state pretax income. As of December 31, 2019, the Company has foreign
NOLs of $9.0 million which expire through 2032 and foreign tax credit carryforwards of $1.7 million expiring in years through 2027. The Company has
recorded valuation allowances of approximately $16.8 million, including valuations against state net operating loss carryforwards of $5.8 million, foreign NOLs
of $9.0 million, $0.3 million against the deductibility of state and foreign temporary tax differences and $1.7 million against foreign tax carryforwards. Valuation
allowances have been recorded against these assets as the Company believes it is more likely than not that these NOLs, temporary differences and foreign tax
credits will not be utilized in the near future.
The Company has not provided for federal income taxes applicable to the undistributed earnings of its foreign subsidiary in India and Canada of approximately
$0.2 million as of December 31, 2019, since these earnings are considered permanently reinvested in the subsidiaries. The Company's permanent reinvestment
assertion has not changed following the enactment of the TCJA. If the Company ceases to be permanently reinvested in its foreign subsidiaries, the Company
may be subject to foreign withholding and other taxes on undistributed earnings and may need to record a deferred tax liability for any outside basis difference in
its investments in its foreign subsidiaries.
The Company recorded a tax benefit in discontinued operations of approximately $0.6 million primarily from the Company's former NATG operations. Under
the TCJA each U.S. shareholder of a controlled foreign corporation ("CFC") must include in its gross taxable income in any tax year the aggregate net GILTI, or
net income, of its CFCs. In 2019 the Company has included in taxable income the net income of its subsidiaries in the Netherlands, India, and Canada. The
Company has elected to treat GILTI expense as a period cost when incurred.
The Company is routinely audited by federal, state and foreign tax authorities with respect to its income taxes. The Company regularly reviews and evaluates the
likelihood of audit assessments. The Company’s federal income tax returns have been audited through 2013. The Company has not signed any consent to extend
the statute of limitations for any subsequent years. The Company’s significant state tax returns have been audited through 2009. The Company considers its
significant tax jurisdictions in foreign locations to be Canada and India. The Company remains subject to examination in France for years after 2013 and in
Canada for years after 2013.
As of December 31, 2019, the Company had no uncertain tax positions. Interest and penalties, if any, are recorded in income tax expense. There were no accrued
interest or penalty charges related to unrecognized tax benefits recorded in income tax expense in 2019, 2018 or 2017.
65
12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company and its subsidiaries are from time to time involved in various lawsuits, claims, investigations and proceedings which may include commercial,
employment, tax, customs and trade, customer, vendor, personal injury, creditors rights and health and safety law matters, which are handled and defended in the
ordinary course of business. In addition, the Company is from time to time subjected to various assertions, claims, proceedings and requests for damages and/or
indemnification concerning sales channel practices and intellectual property matters, including patent infringement suits involving technologies that are
incorporated in a broad spectrum of products the Company sells or that are incorporated in the Company’s e-commerce sales channels, as well as
trademark/copyright infringement claims. The Company is also audited by (or has initiated voluntary disclosure agreements with) various U.S. Federal and state
authorities, as well as Canadian authorities, concerning potential income tax, sales tax and/or "unclaimed property" liabilities. These matters are in various stages
of investigation, negotiation and/or litigation. The Company's NATG subsidiaries are being audited by an entity representing 28 states seeking recovery of
“unclaimed property” and has received separate demands from 20 states requesting payments of their claimed amounts. The Company is complying with the
unclaimed property audit, is providing requested information and is corresponding with the states regarding possible further discussions. The Company intends
to vigorously defend these matters and believes it has strong defenses. In September 2017 the Company and certain subsidiaries comprising its former NATG
"Tiger" consumer electronics business were sued in United States District Court, Northern District of California by a software publisher alleging that the NATG
subsidiaries violated certain contractual sales channel restrictions resulting in claims of breach of contract and trademark/copyright infringement. This matter
was settled in 2019 without material impact to the Company.
Although the Company does not expect, based on currently available information, that the outcome in any of these matters, individually or collectively, will have
a material adverse effect on its financial position or results of operations, the ultimate outcome is inherently unpredictable. Therefore, judgments could be
rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company regularly
assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in
situations where it assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for its various lawsuits,
claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the
loss can be reasonably estimated. At December 31, 2019 the Company has established accruals for certain of its various lawsuits, claims, investigations and
proceedings based upon estimates of the most likely outcome in a range of loss or the minimum amounts in a range of loss if no amount within a range is a more
likely estimate. The Company does not believe that at December 31, 2019 any reasonably possible losses in excess of the amounts accrued would be material to
the financial statements.
66
13. SUBSEQUENT EVENT
In February 2020, the Company's Board of Directors declared a special dividend of $1.00 per share to common stock shareholders of record at the close of business
on March 9, 2020, payable of March 16, 2020. Estimated dividends to be paid total $38.0 million.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data, excluding discontinued operations, is as follows (in millions, except for per share amounts):
2019
Net sales
Gross profit
Net income from continuing operations
Net income per common share from continuing operations:
Basic
Diluted
2018
Net sales
Gross profit
Net income from continuing operations
Net income per common share from continuing operations:
Basic
Diluted
First Quarter
Second Quarter Third Quarter Fourth Quarter
232.2 $
80.3 $
10.0 $
0.27 $
0.26 $
212.2 $
72.5 $
8.7 $
0.23 $
0.23 $
248.6 $
86.0 $
14.9 $
0.40 $
0.39 $
231.2 $
80.0 $
13.4 $
0.36 $
0.35 $
243.9 $
84.4 $
13.7 $
0.36 $
0.36 $
235.8 $
82.2 $
15.1 $
0.41 $
0.40 $
222.2
75.0
11.4
0.30
0.30
217.7
73.0
12.3
0.33
0.33
$
$
$
$
$
$
$
$
$
$
67
SYSTEMAX INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December:
(in millions)
Description
Allowance for doubtful accounts
2019
2018
2017
Allowance for sales returns(4)
2019
2018
2017
Allowance for inventory returns(5)
2019
2018
2017
Allowance for deferred tax assets
2019
2018
2017
$
$
$
$
$
$
$
$
$
$
$
$
Balance at
Beginning of
Period
Charged to
Expenses
Write-offs
Other
Balance at
End of
Period
1.0
1.1
9.1
$
$
$
0.0
0.0
1.4
$
$
$
1.0 $
0.7 $
1.0 $
0.0 $
0.0 $
1.4 $
0.0
0.0
(0.6)
$
$
$
0.0 $
0.0 $
(0.5) $
(0.8) $
(0.8) $
(9.0) $
0.0
0.0
0.0
$
$
$
1.2 (1)
1.0 (1)
1.1 (1)(2)
0.0 $
0.0 $
0.0 $
0.0 $
0.0 $
0.0 $
0.0
$
0.0
$
(1.4) (3) $
0.0
$
$
0.0
0.6 (3) $
0.0
0.0
1.4
0.0
0.0
(0.5)
16.8
18.3
18.3
18.3
18.3
69.0
$
$
$
(0.3) $
(0.3) $
(28.6) $
0.0 $
0.0 $
(2.9) $
(1.2)
0.3
(19.2)
$
$
$
1 Excludes approximately $5.6 million of reserves related to notes receivable and tax refund receivables originated in 2016.
2 Excludes approximately $0.4 million of reserves related to non-trade receivables.
3 Amounts represent gross revenue and cost reversals to the estimated sales returns and allowances accounts.
4 Amounts in 2019 and 2018 are reported within accrued expenses and other current liabilities, as Product Returns Liability (see Note 4 and 9).
5 Amounts in 2019 and 2018 are reported within prepaid expenses and other current assets.
68
Stock Performance Graph
Financial Summary
(In millions except Diluted Net Income Per Share)
2015
2016 2017 2018
2019
Net sales from continuing operations
$ 860.9
$ 753.1 $ 791.8 $ 896.9 $ 946.9
Operating income (loss) from continuing operations $ (20.0)
$ 8.0 $ 45.7 $ 61.7 $ 66.1
Net income from continuing operations
$ (32.8)
$ 3.9 $ 65.5 $ 49.5 $ 50.0
Diluted net income (loss) per share
$ (0.88)
$ 0.10 $ 1.74 $ 1.31 $ 1.32
Forward-Looking Statements: Certain statements in this Annual Report constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include known and unknown risks, uncertainties and other factors as set forth within the Form 10K forming a
part of this document.
ANNUAL MEETING OF STOCKHOLDERS:
The 2020 Annual Meeting will be held on:
Monday, June 1, 2020 at 12:00 p.m. Eastern Time
online at:
www.virtualshareholdermeeting.com/SYX2020
STOCK EXCHANGE:
The Company’s shares are traded on the
New York Stock Exchange under the symbol SYX.
INDEPENDENT AUDITORS:
ERNST & YOUNG LLP
New York, NY
DIRECTORS
Richard Leeds
Executive Chairman
Bruce Leeds
Vice Chairman
Robert Leeds
Vice Chairman
Barry Litwin
Chief Executive Officer
Robert D. Rosenthal
Independent Director
Chad M. Lindbloom
Independent Director
Paul S. Pearlman
Independent Director
Lawrence Reinhold
Director
EXECUTIVE OFFICERS
Richard Leeds
Executive Chairman
Bruce Leeds
Vice Chairman
Robert Leeds
Vice Chairman
Barry Litwin
Chief Executive Officer
Thomas Clark
Senior Vice President & Chief Financial Officer
Robert Dooley
President, Industrial Products Group
Ritesh Chaturbedi
Senior Vice President & Chief Operations Officer
Donna Fielding
Senior Vice President &
Chief Human Resources Officer
Eric Lerner
Senior Vice President & General Counsel
Manoj Shetty
Senior Vice President & Chief Information Officer
Klaus Werner
Senior Vice President and Chief Marketing Officer
Thomas Axmacher
Vice President & Controller
Headquarters
11 Harbor Park Drive, Port Washington, NY 11050
2019 ANNUAL REPORT