Business context and reporting period
This is Systemax Inc.’s unaudited Form 10-Q for the quarter presented as ended March 31, 2015; the actual fiscal quarter ended March 28 and comprised 13 weeks. The filing describes three segments: Industrial Products, EMEA Technology Products, and North America Technology Products (NATG). Note: the filing registrant is Systemax Inc., not Global Industrial Co.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $785.8 million | $873.4 million |
| Gross profit / margin | $107.8 million / 13.7% | $127.9 million / 14.6% |
| Operating income (loss) | $(19.5) million | $(1.3) million |
| Net income (loss) | $(28.6) million | $(3.0) million |
| Diluted loss per share | $(0.77) | $(0.08) |
| Operating cash flow | $(5.7) million | $(19.9) million |
Sales declined 10.0% year over year. Gross margin fell 0.9 percentage points; operating margin was (2.5)% versus (0.1)%. The filing attributes the sharper loss to weaker segment performance, reduced gross margin, special charges, and a $7.2 million foreign-currency exchange loss versus $0.5 million in the prior-year quarter.
Cash was $132.9 million at March 31, down $32.1 million from year-end. Working capital was $267.7 million, down $44.4 million. Total assets were $820.1 million and shareholders’ equity was $326.4 million. Balance-sheet current and long-term debt totaled $3.1 million; a related financing note reports approximately $1.7 million outstanding. The $125 million revolving facility had no advances, $98.3 million availability, and $6.1 million in letters of credit; the company reported covenant compliance. Cash from operations was negative, and investing cash outflow of $28.7 million included $24.9 million for the P.E.G. acquisition.
Material changes versus the prior comparable period
- Industrial sales increased 23.1% to $158.9 million, including $16.5 million from P.E.G.; excluding P.E.G. and on a constant-currency basis, Industrial sales rose 10.8%. Segment operating income was $9.7 million, flat year over year.
- EMEA sales declined 15.6% to $272.6 million; its operating result shifted from $1.6 million income to a $4.8 million loss. Management cited currency effects and weak UK performance, partly offset by France.
- NATG sales declined 16.0% to $352.8 million; its operating loss widened to $19.7 million from $8.2 million. Management cited challenging market conditions, retail-exit disruption, and $3.9 million of inventory reserves related to liquidation pricing.
- On a constant-currency basis and excluding P.E.G. and Misco Solutions, consolidated sales declined 9.2%.
- Operating cash use improved from $19.9 million to $5.7 million, mainly because working-capital changes provided cash rather than using it.
Outlook, management commentary, risks and unusual items
- NATG is exiting substantially all retail stores, closing a distribution center, reducing workforce, and shifting emphasis to B2B operations and online consumer sales. Management expected liquidation and workforce reductions to finish by the end of Q2 2015.
- Management estimated total one-time retail-exit charges of $50–$55 million, including about $39 million of lease-exit costs and $4 million of severance, substantially all requiring cash. Lease-exit payments were expected to continue through 2017. Management forecast annual pretax profitability improvement of $18–$22 million; these are forward-looking estimates, not guaranteed results.
- Q1 special charges were $5.3 million, including NATG retail-exit and related costs, Fiorentino-related professional costs, EMEA impairment, and P.E.G. integration severance. P.E.G. was acquired January 30 for approximately $25.9 million cash; purchase-price allocation remained preliminary.
- Management said cash, operating cash flow, and credit availability should cover requirements for at least 12 months. Planned 2015 capital expenditures were approximately $15.2 million and were not contractually committed. Approximately $61 million of cash was held in foreign subsidiaries and was not readily available to the U.S. parent on a tax-efficient basis; the company reported more than $230 million of U.S. liquidity, including cash and undrawn credit.
- The revolving facility was due to expire October 26, 2015; management expected to renew or extend it by then. A prolonged decline in consumer or B2B spending could pressure liquidity and constrain acquisitions.
- The company is cooperating with a U.S. Attorney’s Office investigation concerning allegations arising from the Fiorentino matter, including possible executive conflicts and internal-controls/books-and-records issues. The company said it could not predict the investigation’s outcome or potential impact. It also cannot predict the outcome of restitution claims. Other litigation, tax, and unclaimed-property matters are described; the company did not expect reasonably possible losses beyond accruals to be material.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Systemax Inc.; the request metadata names Global Industrial Co.
- Track execution and cash costs of the NATG retail exit, especially the $50–$55 million estimate and expected $18–$22 million annual pretax benefit.
- Assess whether NATG and EMEA sales and operating performance stabilize, and whether Industrial growth and P.E.G. integration can offset declines.
- Monitor cash use, working capital and receivables collections, foreign cash accessibility, and renewal of the revolving credit facility before its October 2015 expiry.
- Follow developments in the U.S. Attorney’s Office investigation, restitution proceedings, and other legal or regulatory matters.