Business context and reporting period
The supplied filing is Systemax Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2015; the company states its actual fiscal third quarter ended September 26 and comprised 13 weeks. Systemax reports three segments: Industrial Products Group (IPG), EMEA Technology Products Group, and North America Technology Products Group (NATG). The filing does not identify the registrant as “GLOBAL INDUSTRIAL Co”; verify the requested company-to-filing match.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $699.3 million | $825.4 million | $2,225.1 million | $2,529.9 million |
| Gross profit / margin | $100.6 million / 14.4% | $117.5 million / 14.2% | $319.9 million / 14.4% | $368.7 million / 14.6% |
| Operating loss | $8.2 million | $2.7 million | $56.2 million | $9.4 million |
| Net loss | $10.3 million | $2.8 million | $67.3 million | $12.0 million |
| Loss per diluted share | $0.28 | $0.08 | $1.81 | $0.32 |
Q3 revenue fell 15.3% year over year; nine-month revenue fell 12.0%. Net losses widened in both periods. Gross margin improved 0.2 percentage points in Q3 but declined 0.2 points year to date. Operating margins were negative 1.2% in Q3 and negative 2.5% year to date.
Segment trends were mixed: Q3 IPG sales rose 26.2% to $180.1 million, including $23.8 million from the P.E.G. acquisition; EMEA sales fell 13.4% to $241.8 million; NATG sales fell 31.3% to $276.1 million. NATG recorded operating losses of $12.9 million for Q3 and $68.2 million year to date, including the impact of the retail exit and related charges.
For the first nine months, operating cash flow was positive $1.9 million, versus a $37.5 million outflow in 2014. Investing cash outflow was $30.4 million, including $24.8 million net for the P.E.G. acquisition; financing cash outflow was $2.3 million. Cash declined $28.9 million to $136.1 million from year-end 2014. Working capital was $249.6 million, down from $312.3 million.
At September 30, total debt was approximately $1.7 million, with no borrowings on the revolving facility. The company reported $102.8 million of revolver availability, $6.1 million of letters of credit, and compliance with its covenants. The current ratio was approximately 1.58. Cash included $48.4 million held in foreign subsidiaries that the company said was not readily available to the U.S. parent on a tax-efficient basis.
Material changes, outlook, risks, and unusual items
- NATG completed its exit from substantially all retail stores and a distribution center in the second quarter, shifting toward B2B and public-sector customers. The company said substantially all restructuring costs had been incurred by September 30, but lease-exit payments were expected to continue through 2017. It said NATG had not reached acceptable performance levels and that it was exploring strategic alternatives.
- NATG special charges were $35.0 million for the first nine months, primarily lease termination costs, workforce reductions, and consulting costs. Total company special charges were $36.4 million for the period, versus $10.1 million in 2014; Q3 charges were $2.6 million. Nine-month net loss also reflected the operating impact of the restructuring and continuing NATG losses.
- IPG acquired P.E.G. on January 30 for approximately $25.9 million in cash, expanding its North American MRO business. P.E.G. contributed $65.5 million of sales from acquisition through September 30. IPG’s organic sales growth excluding P.E.G. was 10.3% year to date on a constant-currency basis.
- Management cited currency headwinds, difficult U.K. market conditions, competitive pricing, lower NATG sales during the transition, and elevated IPG distribution and growth-investment costs. It expected the new IPG warehouse to yield modest longer-term freight and efficiency benefits.
- No formal earnings or revenue guidance was provided. Management said cash flows and credit availability should fund working capital and other cash needs for at least the next 12 months. It anticipated approximately $15.2 million of 2015 capital expenditures, not contractually committed at the time of the filing.
- After quarter-end, Systemax amended and restated its revolving credit facility on October 13, 2015; the new facility matures October 31, 2016. The remaining approximately $0.6 million Georgia bond financing was paid off in November 2015.
- Legal matters include the pending company restitution claims related to former NATG executives and a U.S. Attorney’s Office investigation into possible executive conflicts and internal-control or books-and-records violations. The company said its Audit Committee investigation found no evidence of executive conflicts and no material evidence of control or books-and-records violations, but the government investigation’s outcome remained uncertain. Other litigation, tax, intellectual-property, and unclaimed-property matters were also disclosed.
- Foreign exchange movements affected reported results; the company had no outstanding currency hedges at September 30. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm that this Systemax Inc. filing is the intended filing for GLOBAL INDUSTRIAL Co.
- Track NATG’s post-retail-exit sales, profitability, and any strategic alternatives, as well as lease-related cash payments through 2017.
- Assess whether IPG growth, including P.E.G., can offset declines in EMEA and NATG and support consolidated profitability.
- Review cash generation, working-capital trends, foreign cash availability, and the terms and availability tests of the amended credit facility.
- Monitor the restitution claims and government investigation, along with other disclosed legal and regulatory contingencies.