GLOBAL INDUSTRIAL Co: Form 10-Q for the period ended Jun 30, 2024

Forward-Looking Statements and Risk Factors.

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, including the effects of rising inflation and the volatility of inflation metrics; 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/or due to supply chain disruptions arising from pandemics, war, geopolitical conflicts and plans for new products or services; iv) plans for acquisition or sale of businesses, including expansion or restructuring plans; 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 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, consumer prices and inflation, interest rates, borrowing ability and economic conditions in the manufacturing and/or distribution industries generally, as well as government spending levels will continue to impact our business;
• global, political, economic and market conditions, including the impact of natural disasters, military actions, wars, international shipping disruptions, cyber-attacks, terrorism and global pandemics or other health crises;
• delays in the timely availability of products from our suppliers has in the past and could in the future delay receipt of needed product, resulting in delayed or 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 as well as from other countries, have been, and in the future could continue to be adversely affected by allocation restrictions of difficult to source products by our vendors;
• 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 if we are not able to mitigate these measures;
• 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;
• increases in freight and shipping costs, including fuel costs, could affect our margins to the extent the increases cannot be passed along to customers, as has occurred in the past;
• extreme weather conditions have delayed or disrupted global product supply chains and have affected our ability to timely receive and ship products, which have and could adversely impact sales;
• other critical factors affecting the shipping and distribution of products imported to the United States by us or our domestic vendors, such as a global shortage in availability of shipping containers, shipping port congestion, and pandemic related labor shortages, have in the past and could in the future adversely affect the timely availability of products, resulting in delayed or lost sales, as well as adversely affecting our margins;
• our reliance on common carrier delivery services for shipping 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; and this aspect of competition is aggravated by the current tight labor market in the U.S. for such jobs;
• our ability to realize the expected benefits from acquisitions, including the recent Indoff acquisition, 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;
• the maintenance, repair and operation ("MRO") and industrial equipment industry are consolidating as customers are increasingly aware of the total costs of fulfillment and 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 new lower cost business models are able to operate with lower prices;
• 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;
• our ability to remediate material weaknesses in our internal controls over financial reporting and the identification of additional material weaknesses in the future or other failure to maintain an effective system of internal controls;
• 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, could impact both our and our customers’ ability to fund purchases and conduct operations in the ordinary course;
• quarantines, factory slowdowns or shutdowns, border closings and travel restrictions resulting from pandemics have in the past and could in the future adversely affect the timely availability of products, resulting in delayed or lost sales;
• pending or threatened litigation and investigations, and other government actions, such as anti-dumping, unclaimed property, or trade and customs actions by U.S. or foreign governmental authorities, have occurred in the past and although had no material impact to our business, there can be no assurance that such events would not have such impact on our business and results of operation.

Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Statements in this report, particularly in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Condensed Consolidated Financial Statements, as well as information under the heading “Risk Factors” in our Annual Report on Form 10-K for fiscal year 2023, describe certain factors, among others, that could contribute to or cause such differences.

Overview

Global Industrial Company, through its subsidiaries, is a value-added distributor of hundreds of thousands of industrial and MRO products 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 maintenance, repair and operations (“MRO”) products, including its own Global Industrial Exclusive BrandsTM, which are marketed in North America. These industrial and MRO products are manufactured by other companies. Some products are manufactured for us and sold as a white label product, and some are manufactured to our own design and marketed as private brand products under the trademarks: GlobalTM, GlobalIndustrial.comTM, NexelTM, ParamountTM , InterionTM and AbsocoldTM

On May 19, 2023 the Company acquired 100% of the outstanding equity interests of Indoff LLC ("Indoff"), a business-to-business direct marketer of material handling products, commercial interiors and business products with operations in North America, for approximately $72.6 million in cash, $5.2 million of which was placed into an escrow account for two years to secure the sellers’ indemnification obligations under the purchase agreement. In accordance with the terms of the escrow agreement the escrow amount was reduced to $2.5 million on the one year anniversary of the closing date. The Indoff accounts are included in the accompanying condensed consolidated financial statements from the date of acquisition. See Note 2, Acquisition, of Notes to the Condensed Consolidated Financial Statements regarding the acquisition.

See Note 4, Revenue, of Notes to the Condensed Consolidated Financial Statements for additional financial information about our business' geographic operations.

Operating Conditions

The North American industrial products market is highly fragmented and we compete against companies operating through 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.

The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements, the factors that we believe may affect our future results and financial condition as well as information about how certain accounting policies and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the condensed consolidated financial statements included herein and in conjunction with the audited financial statements as of December 31, 2023 and the other information provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Business Outlook

The Company's net sales increased in the second quarter by 6.8% to $347.8 million, including organic revenue growth of 1.8%, as well as due to the impact of the Indoff acquisition in May 2023. Performance reflects a competitive pricing environment and a continuation of the recent trend of a cautious demand environment within our core small and medium business customer base. Our managed sales organization was our leading channel and we are seeing strong growth in our enterprise business as it benefits from new account generation and healthy retention rates. Order and volume trends were solid and partially offset by continued price headwinds. Gross margin in the second quarter of 2024 was 35.2%, a 50 basis point improvement from the prior year quarter results, primarily due to proactive price management and the contribution mix of private label products. Management of our margin profile remains a key area of focus. Performance will continue to reflect the impact of proactive promotion and freight actions as part of our competitive pricing initiatives. The Company may also experience margin variability in future periods due to the current economic environment, inflationary pressures primarily related to the increasing cost of ocean freight, and historical seasonality. Selling, distribution and administrative expenses ("SD&A") primarily reflects the fixed cost nature of the business, including variable compensation expense, and planned marketing investment. We currently expect SD&A expenses to be elevated in 2024 when compared to prior year due to planned investment in key sales and marketing growth initiatives as well as integrating Indoff's operations into our overall internal controls over financial reporting and ongoing information technology ("IT") control remediation. We continue to maintain strong cost controls within discretionary spending, and will continue to evaluate additional steps to optimize our cost structure.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1, Basis of Presentation, of Notes to the Consolidated Financial Statements included in Item 15 of the Company’s 2023 Annual Report on 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, forecasts of future economic conditions and information available from other outside sources, as appropriate. Management has identified revenue recognition, inventory valuation and valuation of intangible assets acquired through a business combination as policies that entail significant judgments or estimates. 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.

There were no material changes in the Company’s significant accounting policies during the second quarter ended June 30, 2024.

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. See Note 1, Basis of Presentation, of Notes to Condensed Consolidated Financial Statements, Recent Accounting Pronouncements.

Highlights from Q2 2024 and Year to Date Q2 2024

The discussion of our results of operations and financial conditions that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the condensed consolidated financial statements included herein.

Second Quarter 2024 Summary:

• Consolidated sales increased 6.8% to $347.8 million compared to $325.8 million last year. Excluding Indoff, acquired on May 19, 2023, sales increased 1.8% in the quarter and 1.7% on an average daily sales basis*.
• Consolidated gross margin increased to 35.2% compared to 34.7% last year. Excluding Indoff, gross margin was 36.8%, a 110 basis point improvement over prior year.
• Consolidated operating income from continuing operations decreased 9.3% to $26.4 million compared to $29.1 million last year. Excluding Indoff, operating income was $24.9 million, a decrease of 11.1%.
• Net income per diluted share from continuing operations decreased 7.1% to $0.52 compared to $0.56 last year.

Year to Date Q2 2024 Financial Summary:

• Consolidated sales increased 11.9% to $671.2 million compared to $599.6 million last year. Excluding Indoff, acquired on May 19, 2023, sales increased 3.0%.
• Consolidated gross margin declined to 34.8% compared to 35.2% last year. Excluding Indoff, gross margin was 36.3%, a 50 basis point improvement over prior year.
• Consolidated operating income from continuing operations decreased 6.6% to $43.8 million compared to $46.9 million last year. Excluding Indoff, operating income was $41.0 million, a decrease of 10.5%.
• Net income per diluted share from continuing operations decreased 5.5% to $0.86 compared to $0.91 last year.

*Average daily sales is calculated based upon the number of selling days in each period, with Canadian sales converted to US dollars using the current year's average exchange rate. There were 64 selling days in the U.S. in the second quarters of 2024 and 2023, respectively, and there were 128 selling days in the U.S. for the six months ended 2024 and 2023, respectively. There were 64 selling days in Canada in the second quarter of 2024 and 63 selling days in the second quarter of 2023. There were 126 selling days in Canada for the six months ended 2024 and 2023, respectively.

Results of Operations

Three and Six Months Ended June 30, 2024 compared to the Three and Six Months Ended June 30, 2023

Key Performance Indicators* (in millions except for percentages and per share amounts):

*excludes discontinued operations

* Global Industrial Company 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 second quarters ended June 29, 2024 and July 1, 2023, respectively.

Management’s discussion and analysis that follows includes current operations.

NET SALES

The Company's net sales increased 6.8% during the quarter ended June 30, 2024 as compared to the same period in 2023, primarily due to the inclusion of Indoff sales. Organic U.S. sales increased 2.1% for the quarter compared to the same period in 2023 and Canada sales, in local currency, decreased 1.1% compared to the same period in 2023. Revenue benefited from volume improvement, while overall growth rates were impacted by modest pricing headwinds. Our managed sales channels led our performance and we continued to see strong growth in our enterprise business as it capitalizes on new account generation and retention rates. The Company's net sales increased 11.9% for the six months ended June 30, 2024 as compared to the same period in 2023, primarily due to the inclusion of Indoff sales. Organic U.S. sales increased 3.2% for the six months ended June 30, 2024 compared to the same period in 2023 and Canada sales, in local currency, increased 0.3% compared to the same period in 2023. Performance for the quarter, as well as, the first six months of June 30, 2024, reflect a continuation of the cautious customer purchasing behavior we have been experiencing for the past several quarters.

There were 64 selling days in the U.S. in the second quarters of 2024 and 2023, respectively, and there were 128 selling days in the U.S. for the six months ended 2024 and 2023, respectively. There were 64 selling days in Canada in the second quarter of 2024 compared to 63 selling days in the second quarter of 2023. There were 126 selling days in Canada for the six months ended 2024 and 2023, respectively.

GROSS MARGIN

Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, vendor volume rebates, freight pricing decisions including the use of free or other promotional freight plans, freight cost inflation including both domestic outbound freight as well as international inbound ocean freight, inventory valuation and obsolescence and other variables, any or all of which may result in fluctuations in gross margin.

Gross margin increased by 50 basis points to 35.2% in the second quarter of 2024 as compared to the same period in 2023. The year over year improvement was primarily the result of proactive price management and a higher mix of private label sales in the quarter. For the six months ended June 30, 2024, gross margin of 34.8% declined 40 basis points as compared to the same period in 2023. Organic gross margin increased 110 basis points and 50 basis points in the second quarter and six months ended June 2024, respectively, as compared to the same period in 2023.

Management of our margin profile remains a key focus for the Company. Performance will continue to reflect the impact of proactive promotion and freight actions as part of our competitive pricing initiatives, as well as, the impact of Indoff's lower gross margin profile on consolidated gross margin. The Company may also experience margin variability in future periods due to the current economic environment, inflationary pressures and historical seasonality.

SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (“SD&A”)

For the three month period ended June 30, 2024, SD&A costs as a percentage of sales increased approximately 190 basis points compared to prior year. SD&A primarily reflects planned investment in key sales and marketing growth initiatives, which generated negative leverage due to the soft customer demand environment, increased audit and remediation costs related to certain IT general controls, partially offset by a benefit of approximately $1.0 million associated with accounting for executive transitions. We expect SD&A levels to moderate from second quarter levels in the second half of the year, but remain elevated when compared to the year ago quarterly periods, as we continue to support our growth strategy. We remain diligent in the control of our general and discretionary cost management. Cost increases include planned net marketing spend of approximately $4.6 million, total compensation and related costs of approximately $2.6 million, of which approximately $1.0 million related to increased variable compensation expense related to performance, increased salary and severance costs of approximately $1.4 million offset by approximately $1.0 million of cost savings from executive transitions. Indoff's total SD&A increased expenses for the quarter were approximately $3.9 million, inclusive of $0.8 million of intangible asset amortization.

For the six month period ended June 30, 2024, SD&A costs as a percentage of sales increased approximately 80 basis points compared to prior year. This increase reflects the impact of the planned investment in key sales and marketing growth initiatives, increased audit and remediation costs related to certain IT general controls of approximately $0.9 million, Indoff's total SD&A increased expenses of approximately $11.5 million including approximately $1.5 million of intangible asset amortization, planned net marketing spend of approximately $7.5 million and total compensation and related costs of approximately $3.1 million. Within the $3.1 million of increased compensation and related costs was approximately $2.4 million of variable compensation related to performance, increased salary expenses of approximately $1.5 million offset by cost savings from the impact of the prior year reduction in force and the benefit associated with accounting for executive transitions.

OPERATING MARGIN

Operating margin for the three and six month periods ended June 30, 2024 declined 130 basis points compared to the same period in 2023 impacted by the gross margin and SD&A items noted above. Excluding Indoff, operating margin declined 120 basis points in the second quarter of 2024 and 110 basis points in the six months ended June 30, 2024 compared to the same period in 2023.

Management currently expects SD&A expenses to be elevated compared to the year ago period as planned investment in key sales and marketing growth initiatives are implemented and increased audit and remediation costs are incurred.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net from continuing operations was $0.1 million and $0.3 million for the three month periods ended June 30, 2024 and 2023, respectively, and for the six months ended June 30, 2024 and 2023, interest and other expense, net from continuing operations was $0.3 million and $0.5 million, respectively. The higher costs in the prior year reflect the outstanding loan balance utilized to partially fund the Indoff acquisition in May 2023.

INCOME TAXES

For the three month period ended June 30, 2024 and 2023, the Company reported income taxes in continuing operations of approximately $6.1 million and $7.3 million, respectively, related to its U.S., Canada and India operations including tax expense for certain U.S. states. For the six month period ended June 30, 2024 and 2023, the Company reported income taxes in continuing operation of $10.2 million and $11.6 million, respectively, related to its U.S., Canada and India operations including tax expense for certain U.S. states. The decrease in the Company's effective tax rate for 2024 was due to a higher tax benefit of approximately $0.5 million related to stock-based compensation.

Financial Condition, Liquidity and Capital Resources

The following tables present selected liquidity data and historical cash flows (in millions):

Selected liquidity data

Historical Cash Flows

Our primary liquidity needs are to support working capital requirements in our business, funding recently declared and any future dividends, funding capital expenditures and inventory purchases, continuing investment in upgrading and expanding our technological capabilities specifically related to additional functionality and enhanced navigation of our new web platform, continuing investment in sales, marketing, merchandising, customer service and upgrading our distribution footprint and funding acquisitions. We rely upon operating cash flow and our credit facility to meet these needs. We currently believe that current cash on hand, cash flow from operations 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 $15.5 million primarily related to increased inventory balances in anticipation of our historically largest sales period for our private brand products, increased accounts receivable and cash and cash equivalent balances offset by increased accounts payable, accrued expenses and other current liabilities and reduced prepaid expenses and other current assets balances. Accounts receivable days outstanding were 36.9 in 2024 compared to 38.5 in 2023, inventory turns were 5.5 in 2024 compared to 4.3 in 2023 and accounts payable days outstanding were 48.8 in 2024 compared to 52.8 in 2023. 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 $25.0 million compared to $65.5 million provided in 2023, attributable to changes in our working capital accounts which used $14.5 million in cash in 2024 compared to $25.4 million provided in 2023, primarily the result of the changes in inventory, accounts receivable, accounts payable, accrued expenses, other current liabilities and other liabilities balances. Cash generated from net income adjusted by other non-cash items, provided $39.5 million in 2024 compared to $40.1 million provided by these items in 2023 primarily due to increased amortization of intangible assets offset by the current quarter's stock-based compensation expense adjustment related to executive transition generated in the six months ended June 30, 2024 compared to 2023. Net cash provided by operating activities from discontinued operations was $0.2 million for the six months ended June 30, 2024 and $0.2 million was used in the six months ended June 30, 2023.

Investing Activities

Net cash used in investing activities totaled $2.2 million for warehouse machinery and equipment for distribution facilities, leasehold improvements, and computer equipment upgrades. Net cash used in investing activities in 2023 totaled $73.7 million, $72.6 million was used for the purchase of Indoff, offset by $0.3 million of cash acquired, with the balance of $1.4 million used for warehouse machinery and equipment for our U.S warehouses and new Canadian distribution center, and leasehold improvements, computer equipment upgrades and molds.

Financing Activities

Net cash used in financing activities totaled $18.5 million in 2024 primarily related to the regular quarterly dividends of $0.25 per common share which totaled approximately $19.2 million. Proceeds from stock option exercises totaled $1.4 million, offset by payments for payroll taxes through shares withheld, which totaled $1.5 million and proceeds from the issuance of common stock from the employee stock purchase plan totaled $0.8 million. Net cash used in financing activities in 2023 totaled $24.9 million primarily related to proceeds from short-term borrowings of approximately $50.6 million, the majority of which was utilized to fund the Indoff acquisition, offset by the regular quarterly dividends of $0.20 per common share which totaled approximately $15.3 million. and repayments of short-term debt of approximately $10.9 million. Proceeds from the issuance of common stock from our employee stock purchase plan totaled $0.7 million and proceeds from the issuance of common stock from stock option exercises totaled $0.3 million, offset by payments for payroll taxes through shares withheld which totaled $0.5 million.

The Company maintains a $125.0 million secured revolving credit facility with one financial institution, which has a five year term, maturing on October 19, 2026 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 65% 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 Secured Overnight Financing Rate (“SOFR”), 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 June 30, 2024, eligible collateral under the credit agreement was $125.0 million, total availability was $122.2 million, total outstanding letters of credit was $1.6 million, and total excess availability was $120.6 million. The Company was in compliance with all of the covenants of the credit agreement as of June 30, 2024.

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 where the need to adjust prices to gain or hold market share is prevalent.

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 no outstanding debt.

The expenses and capital expenditures described above will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources, cash flow from operations and borrowing under our current credit facility. In 2024 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 stock, debt or a combination of consideration which could have an adverse effect on our earnings. We believe that our cash balances and future cash flows from operations and 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 maintain our cash and cash equivalents in money market funds or their equivalents that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees. As of June 30, 2024, 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 June 30, 2024 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 over $155 million of liquidity (cash and undrawn line of credit) in the U.S. as of June 30, 2024.

Material Cash Requirements

We are obligated under non-cancelable operating and finance leases for the rental of our facilities and certain of our equipment which expires at various dates through 2032. As of June 30, 2024 we were obligated for approximately $107.6 million under these non-cancelable leases. In 2024 we anticipate remaining cash expenditures of approximately $9.4 million for these operating leases. We have sublease agreements for unused space, as well as excess space in facilities we are currently occupying in the United States and Canada. In the event the sub lessee is unable to fulfill its obligations, we would be responsible for remaining rents due under the leases.

Our purchase and other obligations consist primarily of purchase commitments for certain employment, consulting and service agreements. In addition to the previously mentioned commitments, at June 30, 2024, we had $1.6 million of standby letters of credit outstanding.

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 condensed consolidated financial statements.

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.

The translation of the financial statements of our operations 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. 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 June 30, 2024 we had no outstanding option or 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 June 30, 2024, we had no outstanding debt 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.

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 June 30, 2024. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of such date due to material weaknesses identified in the design and operation of certain key Information Technology General Controls (ITGCs) as fully described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

However, giving full consideration to the material weaknesses, the control deficiencies did not result in any identified misstatements, and the Company's management believes the consolidated financial statements included in this Quarterly Report on Form 10-Q and in its 2023 Annual Report on Form 10-K present fairly, in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in this report.

Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management's evaluation of disclosure controls and procedures, management had previously excluded an assessment of such internal controls of Indoff LLC ("Indoff") from its evaluation of the effectiveness of the Company's disclosure controls and procedures. The Company acquired all outstanding stock of Indoff on May 19, 2023. Indoff represented approximately 7% and 12% of the Company's consolidated total assets and net sales at June 30, 2024, respectively.

During the second quarter of 2024, the Company completed its assessment of the internal controls over financial reporting of the Indoff LLC business. As anticipated, given the private company nature of the acquired business, management has concluded that the design and operation of Indoff’s internal controls were also ineffective, resulting in a material weakness.

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.

Remediation of the Material Weaknesses in Internal Control Over Financial Reporting

The Company is in the process of implementing changes associated with the design, implementation, and monitoring of ITGCs in the areas of IT operations, user access, and change management for IT applications supporting all of the Company’s financial statement preparation and reporting processes (including those of Indoff LLC) to ensure that internal controls are designed and operating effectively. Our remediation plans include:

• Engaging an expert accounting advisory firm to evaluate the design of our controls as well as to assist with the documentation, remediation, and testing of the ITGCs over financial reporting based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Treadway Commission.
• Training of relevant personnel on the design and operation of our ITGCs over financial reporting.
• Implementation of controls that increase the frequency of periodic re-evaluation of user access privileges, including administrative access.
• Adoption of the principles of limited access rights and access for all system users as well as the rationalization of access privileges for all system users and critical transactions, based on job responsibilities considering segregation of duties.

During 2024, we have engaged an expert accounting advisory firm and are actively in the process of implementing necessary changes to strengthen our control environment. We have also selected and are in the process of implementing software to assist us with user and logical access and streamlining of the overall ITGC compliance program. These actions are subject to ongoing senior management review, as well as oversight by the audit committee of our Board of Directors. Additional or modified measures may also be required to remediate the material weaknesses. We believe that these actions, collectively, will remediate the material weaknesses identified. However, we will not be able to conclude that we have completely remediated the material weaknesses until the applicable controls are fully implemented and operated for a sufficient period of time and management has concluded, through formal testing, that the remediated controls are operating effectively. We will continue to monitor the design and effectiveness of these and other processes, procedures, and controls and will make any further changes management deems appropriate.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the quarterly period ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, except that, as reported above, on May 19, 2023, the Company acquired all outstanding equity interests of Indoff LLC. In the second quarter, the Company completed its assessment of Indoff’s internal control environment, and have identified similar findings to those previously disclosed in the Global Industrial business with respect to the ineffective design or operation of ITGCs, as well as automated and IT dependent manual business controls that rely upon information from the IT systems. As a result, the Company is currently integrating Indoff LLC’s operations into its overall system of internal control over financial reporting and, will make appropriate changes as it integrates Indoff LLC into the Company's overall internal control over financial reporting process.

For information regarding Risk Factors related to the economy, our industries, our Company and our business, see Item 1A. "Risk Factors" of the Company's 2023 Annual Report on Form 10-K.

There were no material changes to the Company’s risk factors during the quarter ended June 30, 2024.