SYSTEMAX: Discussion and analysis by management of the financial situation and operating results. (form 10-K)
Systemax Inc., through its subsidiaries, is primarily a direct marketer of brand name and private label industrial and business equipment and supplies in North Americagoing to market through a system of branded e-commerce websites and relationship marketers. As the coronavirus has become widespread in the United States, it has lead to health screenings, domestic quarantines, government mandated business, school and government agency shutdowns and lower domestic economic activity and productivity. The resultant lower demand for certain of our core products and other product lines was mitigated by stronger sales of pandemic and safety related supplies. 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 operational ("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™. Discontinued Operations
The discontinued operations of the Company include the results of the
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 21 --------------------------------------------------------------------------------
availability by maintaining relationships with major distributors and manufacturers, using a combination of inventory and drop shipping.
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. 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. The Company has elected to omit discussion of the earliest year presented,
December 31, 2018, 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, 2019, filed on March 12, 2020.
As we look to 2021, the Company is focused on the continued execution of our customer centric strategy, building on our financial performance and expanding our higher margin private label line of Global products by adding additional products and product categories. The strategy guides our actions across the business and specifically in our customer end-to-end purchase, service and delivery experience. In the year ahead, we will be making further investments in: automation and technology in our customer service stack; our e-commerce shopping experience to provide a seamless shopping journey filled with educational content and solutions offerings; our distribution centers to increase timeliness, quality and accuracy in customer order fulfillment, while driving labor productivity and sales force productivity and automation, which will continue to allow our managed sales force to proactively provide our customers the solutions they need in order to operate their businesses. These actions will enhance our end-to-end customer experience, drive the further evolution of our e-commerce platform and strengthen our competitive position. Accordingly, we expect our capital expenditures in 2021 to be in the range of
$5.0to $7.0 million. 22
-------------------------------------------------------------------------------- Highlights from 2020 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 8.7% to
$1.0 billioncompared to $946.9 millionin the prior year. •On a Non-GAAP*, average daily sales, constant currency basis, sales increased 7.0% compared to prior year. •Consolidated operating income increased 27.2% to $84.1 millioncompared to $66.1 millionlast year. •Net income per diluted share from continuing operations increased 27.3% to $1.68compared to $1.32in the prior year.
* Average daily non-GAAP sales, in constant currency, are calculated based on the number of sales days in each period, with Canadian sales converted to US dollars using the average exchange rate for the previous year.
23 -------------------------------------------------------------------------------- Results of Operations
Key performance indicators (in millions):
Years Ended December 31 Change 2020 2019 2020 vs. 2019 Results of continuing operations: Consolidated net sales
$ 1,029.0 $ 946.98.7 % Consolidated gross profit $ 356.9 $ 325.79.6 % Consolidated gross margin 34.7 % 34.4 % 0.3 % Consolidated SD&A costs $ 272.8 $ 260.44.8 % Consolidated SD&A costs as % of sales 26.5 % 27.5 % (1.0) % Consolidated operating income $ 84.1 $ 66.127.2 % Consolidated operating margin from continuing operations: 8.2 % 7.0 % 1.2 % Effective income tax rate 23.7 % 24.4 % (0.7) % Net income from continuing operations $ 64.1 $ 50.028.2 % Net margin from continuing operations 6.2 % 5.3 % 0.9 %
Net earnings (loss) from discontinued operations, net of tax $ 1.3
$ (1.5)186.7 % 24
SYSTEMAX INC.Consolidated Summary Results(1) - Unaudited
(In millions) Year Ended December 31, Change GAAP: 2020 2019 2020 vs. 2019 Net sales
$1,029.0 $946.98.7 % Average daily sales* $4.0 $3.77.0 % Operating income $84.1 $66.127.2 % Operating margin % 8.2% 7.0% 1.2 % Non-GAAP: Average daily sales, constant currency** $4.0 $3.77.0 %
* Average daily sales are calculated based on the number of sales days in each
period, converted to US Dollars using the current year's
average exchange rate. The
were 257 selling days in 2020 and 253 selling days in 2019.
** Non-GAAP, average daily sales, at constant currency are calculated based on the
number of selling days in each period, with Canadian sales
converted to US dollars
using the prior year's average exchange rate.
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.. The year ended 2020 included 53 weeks and 2019 included 52 weeks. 25
The following management discussion and analysis will include ongoing and discontinued operations.
The Company's net sales increased 8.7% to over
$1.0 billioncompared to $946.9 millionas the Company's performance continued to benefit from investments in our private label offerings, significant growth in pandemic related supplies and equipment and a return to growth from our core product offerings in the second half of the year despite the challenging macro environment. Net sales from our Canadabusiness grew 33.6%, 34.8% on a constant currency basis, compared to prior year. U.S.revenue increased 7.4% compared to prior year. On a constant currency basis, average daily sales increased 7.0% compared to prior year. There were 257 selling days in 2020 compared to 253 selling days in 2019. The Company expects that there will be challenging impacts in early in 2021 associated with disruptions in the supply chain, including container shortages, high levels of port congestion, and disruption to the domestic less-than-truckload ("LTL") carrier network due to severe winter storms across much of the U.S.
Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, vendor volume rebates, 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. The Company expects to see continued margin variability due to the current economic environment, freight pricing fluctuations, changes in mix as a result of our customer's strong demand of personal protective equipment ("PPE") and other related products, significant price fluctuations of PPE based upon market availability and historical seasonality. Gross margin was 34.7% compared to 34.4% in the prior year primarily driven by improvements in price rationalization, as well as a product mix shift to in stock and private label products and the higher margins these sourcing channels provide as compared to nationally branded products fulfilled through a drop ship model. The Company did experience a number of margin pressures during the fourth quarter related to freight promotions, increased parcel shipping costs associated with an extended peak season and ocean freight costs. We expect these costs to continue into the first quarter of 2021, and will also incur, what we believe to be temporary additional freight costs as we transition to a new third party logistics partner in an effort to further improve service levels and our customers' experience.
SALES, DISTRIBUTION AND ADMINISTRATION COSTS (“SD&A”), EXCLUDING EARNINGS AND SPECIAL COSTS
Selling, distribution and administration costs total
SD&A costs as a percentage of sales improved in 2020 compared to 2019 by 100 basis points. This improved SD&A leverage reflects our continued optimization in marketing spend, as well as fixed cost leverage as sales volume grew. Significant cost savings were generated from lower net advertising spend of approximately
$7.7 millionand lower net catalog and trade shows costs of approximately $1.8 million. Offsetting these decreased costs was increased salary and related costs of approximately $13.9 million, of which $7.0 millionrelated to variable bonus and commission expense, which is directly attributable to the Company's financial performance in the current year. Additional increased costs related to consulting expenses of approximately $3.2 millionprimarily related to our customer centric strategy initiatives, increased facility costs of approximately $2.2 million, and additional credit card fees of approximately $1.5 million.
CONTINUING OPERATIONS GAINS AND SPECIAL EXPENSES
The Company did not incur any special charges in connection with continuing operations in 2020. During the third quarter of 2019 and for the year ended
DISCONTINUED ACTIVITIES SPECIAL GAINS AND EXPENSES
The discontinued operations of the Company include the results of the
Total special gains included in discontinued operations totaled
$1.4 millionand $0.0 millionfor the years ended December 31, 2020and 2019, respectively. The Company's NATG discontinued operations recorded approximately $1.9 millionin restitution 26 --------------------------------------------------------------------------------
revenue offset by
The Company’s operating margin increase of 120 basis points in 2020 compared to 2019 is due to the improvement in gross margin resulting from the reorientation of the product line towards in-stock and branded products. of distributor, the effectiveness of our marketing efforts, a better leverage effect within our structure of increased sales volume, as well as the benefit of the force reduction action implemented in
The consolidated operating margin was impacted by exceptional gains of
INTEREST AND OTHER (INCOME) EXPENSES, NET
Interest and other (income) charges, net of continuing operations were
The Company recorded net tax expense in continuing operations for 2020 of
$19.9 million, or 23.7%, and a net tax expense in discontinued operations of $0.5 million. Tax expense from continuing operations was primarily the result of pretax income in the U.S.and Indiaoperations, including tax expense for certain U.S.states. The tax rate was benefited by pre-tax income in Canadaof approximately $3.2 millionas the Company has full valuation allowances against the deferred tax assets, including net operating losses, of its Canadian subsidiary and taxable income is fully offset by these net operating losses. Tax expense from continuing operations was also benefited by approximately $0.6 millionof stock option exercises and dividend equivalent payments. Non-deductible expenses, including executive compensation, was approximately $0.7 million. Tax expense in discontinued operations is attributed to pretax income recorded in the discontinued NATG business. 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 millionof stock option exercises and approximately $0.2 millionfrom 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.
Financial situation, liquidity and capital resources
Selected liquidity data (in millions):
December 31, 2020 2019 $ Change Cash and cash equivalents
$ 22.4 $ 97.2 $ (74.8)Accounts receivable, net $ 102.3 $ 88.2 $ 14.1Inventories $ 132.3 $ 112.5 $ 19.8Prepaid expenses and other current assets $ 6.8 $ 6.4 $ 0.4Accounts payable $ 125.4 $ 115.9
Accrued expenses and other current liabilities
$ 50.7 $ 34.0 $ 16.7Operating lease liabilities $ 10.39.9 $ 0.4Working capital $ 77.4 $ 144.5 $ (67.1)27
Historical Cash Flows Year Ended
December 31, 20202019
Net cash flow from operating activities of continuing operations $
Net cash provided by (used in) operating activities of discontinued operations
$ (1.9)Net cash used in investing activities from continuing operations $
Net cash flow used in financing activities from continuing operations $
Effects of exchange rates on cash $ 0.1
$ (0.1)Net decrease in cash and cash equivalents $
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 specifically related to our e-commerce shopping experience, and sales force productivity and automation, continuing investment in upgrading and expanding our distribution footprint, and funding acquisitions. We rely principally upon operating cash flows to meet these needs. We currently believe that current cash on hand and cash flow from operations 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 decreased
$67.1 millionprimarily related to the $2.00per share special dividend declared, totaling $75.5 million, of which $75.1 millionwas paid in December 2020, increased accounts payable balances and accrued expenses and other current liabilities balances offset by increased accounts receivable and inventory balances. Our inventory balance increase is primarily associated with strategic investment in personal protective equipment items in response to continuing demand for Covid-19 related safety products, as well as increased stocking levels of certain core products which turned slower in 2020 given lower demand due to business and government shutdowns, but has shown continued recovery in the last quarter of 2020. Accounts receivable days outstanding were 37.4 in 2020 compared to 35.9 in 2019. Inventory turns were 5.3 in 2020 compared to 5.9 in 2019 and accounts payable days outstanding were 68.3 in 2020 compared to 68.7 in 2019. We expect that future accounts receivable, inventory and accounts payable balances will fluctuate with net sales and the product mix of our net sales.
Net cash provided by operating activities from continuing operations was
$67.3 millionattributable to cash generated from net income adjusted by other non-cash items which provided $73.6 millionin 2020 compared to $61.2 millionprovided by these items in 2019. This increase is primarily related to the higher net income from continuing operations in 2020 compared to 2019. Partially offsetting this increase are the changes in our working capital accounts, which used $6.3 millionin cash compared to $9.1 millionprovided in 2019, primarily the result of changes in the inventory, accounts receivable, accounts payable and accrued expenses and other current liabilities and non-current liabilities balances in 2020. Net cash provided by operating activities from discontinued operations was $0.9 millionin 2020 and net cash used in discontinued operations in 2019 was $1.9 million. Investing Activities Net cash used in investing activities from continuing operations totaled $2.7 millionand $6.9 millionfor 2020 and 2019, respectively. In 2020, investing activities primarily related to leasehold improvements, warehouse machinery and equipment, molds and computer equipment. In 2019, investing activities were primarily related to the new Texasdistribution center other warehouse projects including wire decking, in-rack sprinkler systems, video security systems and warehouse lighting. Net cash used in investing activities from discontinued operations was zero for 2020 and 2019.
Net cash used in financing activities was
$138.8 millionand $259.6 millionin 2020 and 2019, respectively. In 2020, net cash used in financing activities primarily related to the special dividend of $2.00per share declared in December 2020, the $1.00per share special dividend declared in February 2020and the regular quarterly dividends of $0.14per share, which totaled approximately $134.3 million. Also, during 2020, the Company purchased treasury shares totaling approximately $7.2 million. 28 -------------------------------------------------------------------------------- Proceeds from the issuance of common stock from stock option exercises, net of payments for payroll taxes through shares withheld, totaled $1.9 millionand proceeds from the issuance of common stock from our employee stock purchase plan totaled $0.8 million. In 2019, cash used in financing activities was primarily related to the payment of the special dividend declared in December 2018of $243.5 millionand 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 millionand proceeds from the issuance of common stock from our employee stock purchase plan totaled $0.8 million. The Company maintains a $75.0 millionsecured revolving credit facility with one financial institution which has a five-year term, maturing on October 28, 2021and provides for borrowings in the United States. The Company expects to renew this facility before its expiration in 2021. 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 Londoninterbank 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, 2020, eligible collateral under the credit agreement was $75.0 million, total availability and excess availability was $72.6 millionand there were no outstanding borrowings. The Company has restricted cash collateralizing letters of credit outstanding of $1.6 millionat December 31, 2020recorded within Other assets in the accompanying Consolidated Balance Sheets. The Company was in compliance with all of the covenants of the credit agreement in place as of December 31, 2020. 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. 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 and borrowing under our current credit facility. In 2021 we anticipate capital expenditures in the range of $5.0to $7.0 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 and future cash flows from operations 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, 2020, 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, 2020cash balances held in foreign subsidiaries totaled approximately $3.4 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 $93 millionof liquidity (cash, restricted cash and an undrawn line of credit) in the U.S.as of December 31, 2020. This facility expires in October 2021, however the Company expects to renew this facility before its expiration in 2021.
We are held under non-cancellable operating leases for the rental of most of our facilities and some of our equipment which expire on various dates through 2032. We have sublease agreements for the space unused that we rent in
Below is a summary of our contractual obligations for future principal payments on our non-cancellable operating leases and minimum payments on our other purchase obligations as of
Less than More than Total 1 year 1-3 years 3-5 years 5 years Contractual Obligations:
Operating lease debts
Purchase & other obligations 30.1 6.5 12.2
Total contractual obligations
See note 4 of the notes to the consolidated financial statements for more details on obligations related to operating leases.
Our purchasing and other obligations consist primarily of product purchase commitments, certain employment contracts and service contracts.
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, 2020, the Company had no material uncertain tax positions.
The discontinued operations of the Company include the results of the
Off-balance sheet provisions
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 conventions 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. Certainaccounting 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 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.
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 30 -------------------------------------------------------------------------------- apply recognition requirements to leases with terms of one year or less. All other leases are recorded on the balance sheet, with Operating lease right-of-use ("ROU") assets representing the right to use the underlying asset for the lease term and Operating 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. 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.
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. 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, 2020. 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 returns rates as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately $1.9 millionat December 31, 2020and 2019, respectively, and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets. 31
Provision for credit losses
January 1, 2020the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The Company's trade accounts receivable are subject to this standard. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations. The Company's trade accounts receivable is one portfolio comprised of commercial businesses operating in the U.S.and to a much lesser extent, Canada. The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its receivables, considering customer financial condition, historical loss experience with its customers, current market economic conditions and forecasts of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected. For the balance of its trade receivables, the Company uses a loss rate method to estimate its credit loss reserve. Historical loss experience rates are calculated using receivable write offs over a trailing twelve-month period and comparing that to the average receivable balances over the same period. That rate is applied to the current accounts receivable portfolio, excluding accounts that have been specifically reserved. Any write offs incurred are recorded against the established reserves. The Company grants credit to commercial business customers using an electronic application process that evaluates the customer's detailed credit report, reference responses, availability under credit facilities, existing liens, tenure of management and business history, among other factors. Credit terms are typically net 30 days payment required with larger businesses eligible for up to net 90 day terms, if qualified. Our estimates for the years ended December 31, 2020and 2019 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.
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. The Company estimates the net realizable value of its inventory by considering factors such as inventory levels, historical write-off information, historical and current demand trends, market conditions, estimated direct selling costs and physical condition of the inventory as well as credits that we may obtain for returned merchandise. Our inventory reserve estimates for the years ended
December 31, 2020and 2019 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.
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. We have approximately, in aggregate,
$7.0 millionin goodwill and intangible assets at December 31, 2020. We do not believe it is reasonably likely that the estimates or assumptions used to determine whether any of our remaining goodwill or intangible 32 -------------------------------------------------------------------------------- assets 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 that it is reasonably probable that the estimates and assumptions used to determine the impairment of long-lived assets will vary significantly in the future. However, if our estimates are significantly different from our actual experience, we could have a significant adjustment for gain or loss.
We are subject to the taxation of federal, state and foreign jurisdictions and determining our tax liability 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 positions
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.
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