Systemax Inc. Form 10-K Summary
Entity and period: The filing is for Systemax Inc. (NYSE: SYX), for the fiscal year ended December 31, 2017—not a standalone quarterly filing. The company’s Industrial Products Group includes the Global Industrial business. The filing also reports unaudited fourth-quarter results.
Business context
Continuing operations comprised North American industrial and MRO products (IPG) and France technology products (ETG). In March 2017, Systemax sold most of its European technology businesses to Hilco; France operations were retained. The divested businesses and the previously sold North American Technology Products Group (NATG) are presented as discontinued operations.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Continuing-operations net sales | $1,265.4 million | $1,170.3 million |
| Gross profit / margin | $351.4 million / 27.8% | $307.9 million / 26.3% |
| Operating income / margin | $71.3 million / 5.6% | $27.7 million / 2.4% |
| Continuing-operations net income | $76.1 million | $16.9 million |
| Net income (loss), including discontinued operations | $40.4 million | $(32.6) million |
| Diluted EPS from continuing operations | $2.02 | $0.45 |
| Operating cash flow, continuing operations | $57.9 million | $(23.6) million |
- FY 2017 revenue grew 8.1%. IPG sales rose 10.6% to $791.8 million and operating income increased to $69.6 million from $34.3 million. ETG sales rose 5.0% to $473.6 million and operating income increased to $24.5 million from $14.5 million.
- Management attributed IPG improvement to sales growth, better product and freight margins, pricing, lower marketing expense, and cost efficiencies. ETG benefited from revenue growth and the absence of Germany operating losses.
- Discontinued operations recorded a $35.7 million net loss in 2017, including a $23.7 million charge related to the SARL business sale. Discontinued-operations sales were $117.0 million, versus $521.6 million in 2016.
- Fourth-quarter 2017 continuing-operations sales were $330.6 million, gross profit was $88.5 million, net income was $32.4 million, and diluted EPS was $0.85. Comparable fourth-quarter 2016 figures were $295.6 million, $78.3 million, $11.5 million, and $0.31, respectively.
Liquidity, debt, and capital allocation
- Year-end cash was $184.5 million, up from $149.7 million. Working capital was $178.3 million, down from $186.2 million; total assets were $551.4 million and shareholders’ equity was $211.8 million.
- Operating cash flow from continuing operations was $57.9 million; total operating cash flow, including discontinued operations, was $45.6 million. Capital spending was $2.8 million across continuing and discontinued operations.
- No borrowings were outstanding under the $75 million revolving credit facility; reported excess availability was $70.2 million. The company was covenant-compliant. Capital lease obligations were $0.2 million.
- Declared dividends were $1.85 per share for 2017, including a $1.50 special dividend payable in January 2018. The balance sheet included $55.7 million of dividend payable at year-end.
- Net operating lease commitments, after subleases, totaled $120.3 million. Management estimated 2018 capital expenditures of up to $8 million and said available cash, operating cash flow, and credit availability should cover requirements for at least 12 months.
Outlook, unusual items, and risks
- Management did not provide specific revenue or earnings guidance. It expected $1 million to $5 million of additional NATG wind-down costs in 2018 or later and less than $1 million of further SARL-sale charges; disputed statutory tax indemnities could add SARL-related charges.
- U.S. and French tax-law changes led to deferred-tax remeasurement expense of approximately $10.8 million; the company also recorded a provisional $5.2 million repatriation-tax amount. These items were among factors affecting taxes, alongside valuation-allowance reversals and tax-loss utilization.
- Key risks include intense price competition and margin pressure, reliance on major suppliers (two represented 16% and 12% of continuing-operations purchases), foreign exchange exposure, inventory obsolescence, technology and cybersecurity disruptions, and sales-tax and other legal claims.
- The company disclosed a software publisher lawsuit involving former NATG businesses; potential damages could not be estimated. It also faced an audit concerning unclaimed property on behalf of 21 states. Management did not expect currently known matters to have a material adverse effect, but outcomes remain uncertain.
- Currency sensitivity was material: management estimated that a 10% change in average foreign exchange rates would have changed sales by approximately $49.6 million and pretax results by approximately $2.6 million in 2017.
Most important facts for investors to verify
- Whether sustained IPG growth and margin gains continue, and how much of 2017’s improvement came from nonrecurring or timing-related factors.
- The cash and earnings effects of NATG wind-down obligations, SARL-sale indemnities, and the retained $2.2 million note receivable, which was reported paid in January 2018.
- Whether tax-law estimates, including the provisional repatriation tax and deferred-tax asset realizability, require later adjustments.
- Potential exposure from sales-tax, unclaimed-property, intellectual-property, and other litigation matters.
- The scale and cash consequences of long-term leases, dividends, supplier concentration, and foreign-exchange movements.