GLOBAL INDUSTRIAL Co (GIC) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Global Industrial Company, through its subsidiaries, is a value-added industrial distributor of more than 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.

On May 19, 2023 the Company acquired 100% of the outstanding equity interests of 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. This acquisition expands the Company's presence in the MRO market in North America. The Indoff accounts are included in the accompanying consolidated financial statements from the date of acquisition. See Note 4, Acquisition, of Notes to Consolidated Financial Statements for additional financial information regarding the acquisition.

Continuing Operations

The Company sells a wide array of industrial and MRO products, 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: Global™, GlobalIndustrial.com™, Nexel™, Paramount™, Interion™ and Absocold™.

Discontinued Operations

The Company's discontinued operations include the results of the North American Technology Group ("NATG") business sold in December 2015 (see Note 1 and Note 8 to the Consolidated Financial Statements).

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Operating Conditions

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

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, 2021, 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, 2022, filed on February 23, 2023.

Business Outlook

As we enter 2024, we believe we have the right plan in place to build upon the progress of the last year. Initiatives across the business are designed to elevate and highlight Global Industrial’s position as an indispensable business partner, and the value we bring every day to our customers. Investments in key performance areas are designed to strengthen our competitive position, drive operational efficiencies, and help us capture share.

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Highlights from 2023 vs. 2022

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 9.3% to $1.27 billion in U.S. dollars compared to $1.17 billion last year. Excluding Indoff, sales declined 0.7% as compared to the year ago period and 0.3% on an average daily sales basis*.

•Consolidated gross margin declined to 34.2 % compared to 36.1% last year. Excluding Indoff, gross margin was 35.5%.

•Consolidated operating income from continuing operations decreased 8.3% to $96.5 million compared to $105.2 million last year. Excluding Indoff, operating income was $90.8 million, a decrease of 13.7%.

•Net income per diluted share from continuing operations decreased 9.8% to $1.84 compared to $2.04 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 253 selling days in the U.S. in 2023 compared to 254 selling days in 2022 and 250 selling days in Canada in 2023 compared to 251 selling days in 2022.

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Results of Operations(1)

Key Performance Indicators (in millions):

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Management’s discussion and analysis that follows will include current operations and discontinued operations.

NET SALES

The Company's net sales increased 9.3% to $1.27 billion compared to $1.17 billion in 2022, benefiting from the Indoff acquisition on May 19, 2023. Excluding sales contributed by Indoff, full year and average daily sales decreased 0.7% and 0.3%, respectively, compared to prior year reflecting the soft demand environment experienced in the first half of 2023 which improved as we continued through the year. Sales increased 4.1% in the second half of 2023 which benefited by our second consecutive quarter of revenue growth in the fourth quarter, which improved 5.1% over the prior year. The Company's sales reflect a leading performance by our web business, strong customer acquisition, and growth in our public sector sales group partially offset by lower price capture associated with passing through lowering costs of inbound transportation. Our private brand offering continued to represent approximately 50% of total sales, down slightly from prior year associated with improved volume offset by lower price capture. U.S. sales, including Indoff, increased 10.2% compared to the full year of 2022 and Canada sales declined 5.3%, 1.7% in local currency.

There were 253 selling days in the U.S. in 2023 compared to 254 selling days in 2022 and 250 selling days in Canada in 2023 compared to 251 selling days in 2022.

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 was 34.2% compared to 36.1% in the prior year, a 190 basis point reduction, reflecting the inclusion of Indoff's lower gross margin profile. Excluding Indoff, gross margin was 35.5%, a 60 basis points reduction compared to prior year reflecting the impact of planned proactive promotions and freight actions, as well as, the sell through of certain high cost inventory products, specifically within our cooling category. The Company's margin reflects a nearly 40 basis point and 10 basis point benefit in the fourth quarter of 2023 and fiscal year 2023, respectively, from a one-time settlement with a former less-than-truckload ("LTL") freight partner. In 2022 gross margin benefited from strong price realization and lower inventory cost flow through, both of which have now waned 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”)

Selling, distribution and administrative expenses totaled $339.3 million and $316.0 million for the years ended December 31, 2023 and 2022, respectively.

SD&A costs as a percentage of sales improved approximately 50 basis points in 2023 compared to 2022. SD&A primarily reflects the benefit of Indoff's lower cost structure as well as general cost controls within the organic business. Total compensation and related costs savings of approximately $4.6 million were realized, of which approximately $4.8 million related to a reduction in variable incentive and equity compensation expenses related to performance and approximately $3.9 million of decreased spend for temporary help. Offsetting these savings was approximately $1.6 million of increased costs due to various severance arrangements and approximately $2.5 million of other salary and related costs. Other additional costs included increased planned net marketing spend of approximately $7.0 million, approximately $1.0 million of acquisition related expenses and approximately $19.4 million of SD&A expenses related to Indoff, including $1.9 million of intangible asset amortization.

DISCONTINUED OPERATIONS

The Company's discontinued operations include the results of the NATG businesses sold in December 2015 (see Note 1 and Note 8 to the Consolidated Financial Statements).

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During 2023, the Company's discontinued operations net loss was de minimis as sublet income and resolution of certain liabilities offset the operating expenses incurred during the year.

During 2022, the Company recorded net income in its discontinued operations of approximately $0.7 million primarily related to the resolution of certain liabilities.

OPERATING MARGIN

The Company's operating margin declined 140 basis points in 2023 compared to 2022, primarily driven by the gross margin decline offset by savings in SD&A expenses. In 2022, operating margin increased primarily due to the product mix shift to in stock and private brand products and efficiencies in our marketing efforts.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net from continuing operations was $1.1 million for 2023 and 2022. These costs reflect the outstanding loan balance, utilized to partially fund the Indoff acquisition in May 2023, which were repaid in the third quarter of 2023 and to partially fund inflationary inventory costs in 2022. The Company also recorded foreign exchange losses of approximately $0.2 million in 2023 and $0.3 million in 2022.

INCOME TAXES

The Company recorded net tax expense in continuing operations for 2023 of $24.5 million, or 25.7%. Tax expense from continuing operations was primarily the result of pretax income in the U.S. and India operations, including tax expense for certain U.S. states. Non-deductible expenses, including executive compensation, was approximately $2.5 million. The increase in the tax rate in 2023 as compared to 2022 is attributed to higher foreign taxable net income inclusion in the U.S. and additional state tax expense resulting from the acquisition of Indoff.

The Company recorded net tax expense in continuing operations for 2022 of $25.7 million, or 24.8%, and a net tax expense in discontinued operations of $0.2 million. Tax expense from continuing operations was primarily the result of pretax income in the U.S. and India operations, including tax expense for certain U.S. states. Non-deductible expenses, including executive compensation, was approximately $3.0 million. Tax expense in discontinued operations is attributed to pretax income recorded in the discontinued North American Technology Products Group business.

Financial Condition, Liquidity and Capital Resources

Selected liquidity data (in millions):

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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 upgrading our distribution footprint and funding acquisitions. We rely upon operating cash flow and our credit facility to meet those 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 decreased $17.0 million primarily related to lower inventory balances and higher accounts payable, accrued expenses and other current liabilities balances offset by increased accounts receivable and cash balances. Our inventory balance decrease is primarily associated with decreased cost of capitalized freight associated with normalizing costs of inbound ocean freight, as well as a reduction of safety stock levels, made possible by improved supply chain performance. Accounts receivable days outstanding were 37.3 in 2023 compared to 38.3 in 2022. Inventory turns were 5.3 in 2023 compared to 3.8 in 2022 and accounts payable days outstanding were 50.0 in 2023 compared to 56.6 in 2022. 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 $112.0 million attributable to cash generated from net income adjusted by other non-cash items which provided $85.3 million in 2023 compared to $88.0 million provided in 2022. This decrease is primarily the result of lower income in 2023 offset by increased depreciation and amortization expenses. In addition, changes in our working capital accounts provided $26.7 million in 2023 compared to $38.2 million used in 2022, primarily the result of changes in inventory and accounts payable balances. Net cash provided by operating activities from discontinued operations was $0.0 million and $0.4 million in 2023 and 2022, respectively.

Investing Activities

Net cash used in investing activities totaled $76.2 million and $7.1 million for 2023 and 2022 respectively In 2023, $72.6 million was used for the purchase of Indoff, offset by $0.3 million of cash acquired, with the balance of $3.9 million used for warehouse machinery and equipment for our U.S. warehouses and new Canadian distribution center, leasehold improvements, computer equipment upgrades and molds. In 2022, investing activities was used for warehouse machinery and equipment, primarily related to our new Canadian distribution center, leasehold improvements, computer equipment and software.

Financing Activities

Net cash used in financing activities was $29.7 million in 2023 and 2022, respectively. In 2023, net cash used in financing activities primarily related to the regular quarterly dividend of $0.20 per common share which totaled $30.6 million and net repayments of short-term borrowings of $0.6 million. Offsetting these payments, were net proceeds of $0.1 million from the issuance of common stock from stock option exercises, net of payments for payroll taxes through shares withheld and proceeds of $1.4 million from the issuance of common stock from our employee stock purchase plan. In 2022, net cash used in financing activities primarily related to the regular quarterly dividend of $0.18 per common share which totaled approximately $27.6 million and net repayments of short-term borrowings of $3.9 million. Offsetting these payments, were proceeds from the issuance of common stock from stock option exercises, net of payments for payroll taxes through shares withheld, totaled $0.4 million and proceeds from the issuance of common stock from our employee stock purchase plan totaled $1.4 million.

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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 December 31, 2023, eligible collateral under the credit agreement was $105.4 million, total availability was $102.8 million, total outstanding letters of credit was $1.6 million, total excess availability was $101.2 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, 2023.

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 to be in the range of $6.0 to $8.0 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 equivalent that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees. As of December 31, 2023, 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, 2023 cash balances held in foreign subsidiaries totaled approximately $4.2 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 $131 million of liquidity (cash and an undrawn line of credit) in the U.S. as of December 31, 2023.

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 expire at various dates through 2032. As of December 31, 2023 we were obligated for approximately $117.6 million under these non-cancelable operating leases. In 2024 we anticipate cash expenditures of approximately $19.0 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. As of December 31, 2023 we were obligated for approximately $32.3 million under these commitments. In 2024

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we anticipate cash expenditures of approximately $7.8 million related to these commitments. In addition to the previously mentioned commitments, we had $1.6 million of standby letters of credit outstanding as of December 31, 2023.

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, 2023, the Company had no material uncertain tax positions.

Discontinued Operations

The Company's discontinued operations include the former North American Technology Group business sold in December 2015 (see Note 1 and Note 8 to the Consolidated Financial Statements).

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, 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.

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

▪Determining the transaction price

▪Allocating 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 90 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.

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The Company will record a contract liability in cases where customers pay in advance of the Company satisfying its performance obligation. The Company had approximately $3.3 million of contract obligations or liabilities as of December 31, 2023 and $0.0 million as of December 31, 2022. The increase in the contract liability balance is related to the Indoff acquisition.

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 $2.1 million at December 31, 2023 and $2.2 million at December 31, 2022, and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.

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 or average cost 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, market conditions, estimated direct selling costs and physical condition of the inventory.

Our inventory reserve estimates for the years ended December 31, 2023 and 2022 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.

Business Combinations

We follow ASC 805, Business Combinations, for our acquisition accounting. ASC 805 provides a framework for entities to use in evaluating whether an integrated set of assets and activities should be accounted for as an acquisition of a business or a group of assets. If the transaction is an acquisition of a business then the fair value of the transaction is used to establish a new accounting basis of the acquired entity. The acquirer recognizes and measures the assets acquired and liabilities assumed at their full fair values as of the date control is obtained.

On May 19, 2023 the Company acquired 100% of the outstanding equity interests of 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. The transaction was accounted for using the acquisition method of accounting and the fair value of the transaction was used to establish a new accounting basis of Indoff. The Company recognized and measured the assets acquired and liabilities assumed at their full fair values as of the date of the acquisition.

The purchase price of Indoff was allocated between the net tangible assets acquired and the identified intangible assets, customer lists and trademarks, with the residual of the purchase price recorded as goodwill. Estimates were used in determining the fair value of the customer lists and trademarks. The significant assumptions used to estimate the fair value of the acquired intangible assets include projected revenue growth rates, customer retention rates, weighted average cost of capital rate, pretax earnings and resulting discounted cash flows. These assumptions are forward-looking and could be impacted by future business activity and market conditions. If in the future our estimates are determined to be materially different than our actual experience and these differences result in us failing to achieve projected results, we could have a material impairment of our intangible assets and/or goodwill.

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.