Business context and reporting period
Systemax Inc. (the registrant; its Industrial Products business includes Global-branded products) filed this Form 10-Q for the quarter ended September 30, 2014. The actual fiscal third quarter ended September 27 and comprised 13 weeks; the nine-month period comprised 39 weeks. The company sells Technology Products and Industrial Products through business-to-business and consumer channels.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $825.4 million | $791.8 million | $2,529.9 million | $2,478.1 million |
| Gross margin | 14.2% | 14.8% | 14.6% | 14.3% |
| Operating income (loss) | ($2.7) million | ($3.8) million | ($9.4) million | ($19.3) million |
| Net income (loss) | ($2.8) million | ($11.6) million | ($12.0) million | ($24.0) million |
| Diluted loss per share | ($0.08) | ($0.31) | ($0.32) | ($0.65) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | ($37.5) million | $36.0 million |
Q3 sales grew 4.2%; the nine-month increase was 2.1%. Industrial Products sales rose 13.5% in Q3 and 18.3% year to date, while Technology Products sales rose 2.4% in Q3 but declined 0.6% year to date. Q3 business-to-business sales increased 9.2%, while North American Technology consumer sales fell 8.6%. For nine months, consumer sales declined 15.3%.
Q3 gross margin contracted 0.6 percentage points, principally due to lower selling margins in Europe, particularly the UK and Germany. The nine-month margin improved 0.3 points, reflecting a larger Industrial Products contribution to gross profit. Consolidated operating loss narrowed; the reported operating margin was negative 0.3% in Q3 versus negative 0.5% a year earlier, and negative 0.4% year to date versus negative 0.8%.
At September 30, cash was $133.6 million, down from $181.4 million at year-end 2013; working capital was $328.6 million, down from $345.8 million. Operating cash use of $37.5 million reflected $43.6 million of cash consumed by working-capital changes. Investing cash use was $10.8 million, including $6.4 million for the SCC acquisition; financing cash use was $1.6 million. Receivables days outstanding increased to 37.3 from 31.0, which management attributed partly to slower EU/UK collections during the shared-services transition.
Reported current and long-term debt totaled approximately $3.5 million. The company had no borrowings under its $125 million revolving facility, reported $114.5 million of availability and $7.4 million of outstanding letters of credit, and was covenant-compliant. The facility expires in October 2015. The company reported more than $248 million of U.S. liquidity, including cash and undrawn credit; $51.5 million of cash was held in foreign subsidiaries and was not readily available to the U.S. parent on a tax-efficient basis.
Material changes and notable items
- Technology Products’ Q3 operating loss was $9.7 million; Industrial Products generated $10.6 million of operating income. For the first nine months, those segments recorded operating losses of $29.5 million and income of $32.7 million, respectively.
- Special charges were $1.7 million in Q3 and $10.1 million for nine months, versus $5.8 million and $16.5 million in the comparable 2013 periods. Charges primarily related to European restructuring and shared-services implementation. A favorable $2.3 million resolution of a North American Technology contractual dispute also reduced expenses in Q3.
- On June 12, 2014, Systemax acquired Netherlands-based SCC Services B.V. for approximately $7.3 million cash. SCC’s results are included in Technology Products from the acquisition date.
- Foreign-currency exchange losses were $3.5 million in Q3 and $4.9 million year to date, compared with gains in the prior-year periods. The Q3 tax benefit was $3.6 million; some losses in jurisdictions with full valuation allowances produced no recognized tax benefit.
Outlook, risks and contingencies
Management expects to incur a further $7–8 million of restructuring charges and spend an additional $12–13 million, including amounts accrued at quarter-end, to restructure smaller European operations and complete the shared-services center. Once fully implemented, the center is expected to reduce annual pre-tax costs by $9–11 million. Management anticipated approximately $3 million of capital expenditures for the remainder of 2014 and said operating cash flow and available credit should fund needs for at least the next 12 months.
Management expects pressure on North American Technology consumer sales from competition, product-price erosion, changing device preferences and migration to online sellers to continue. It also cited transition delays and challenges at the Hungary shared-services center and in replacing sales, procurement and other information systems functions. Other risks include collection delays, working-capital needs, foreign-exchange movements, and potential restructuring execution costs. The company is involved in ordinary-course litigation and investigations, including state sales-tax claims and a multi-state unclaimed-property audit; it said excess reasonably possible losses beyond recorded accruals were not expected to be material, while acknowledging outcomes are uncertain.
Most important facts for investors to verify
- Whether European shared-services and systems transitions meet the plan and deliver the projected $9–11 million annual pre-tax savings, and whether the remaining charges and cash costs stay within estimates.
- Whether receivables collection improves after the increase in days outstanding, given the significant operating cash outflow and lower cash balance.
- Whether Industrial Products growth and margins can offset ongoing North American Technology consumer weakness and European margin pressure.
- The revolving facility’s October 2015 expiry, borrowing-base availability and covenant compliance as liquidity needs evolve.
- Progress and final purchase-accounting impacts from SCC, and outcomes of sales-tax, unclaimed-property and other legal matters.