Business context and reporting period
This Form 10-Q is for Systemax Inc. (the registrant named in the filing) for the quarter ended March 31, 2013; the company’s actual fiscal quarter ended March 30 and comprised 13 weeks. Systemax sold technology products across North America and Europe and industrial products in North America.
Financial performance
| Metric | Q1 2013 | Q1 2012 or comparison |
|---|---|---|
| Net sales | $880.7 million | $913.2 million; down 3.6% |
| Gross profit / margin | $122.6 million / 13.9% | $130.7 million / 14.3% |
| Operating income (loss) | $(8.7) million | $10.8 million |
| Net income (loss) | $(6.3) million; $(0.17) per diluted share | $7.1 million; $0.19 per diluted share |
| Operating cash flow | $(9.8) million | $14.8 million, including $0.2 million from discontinued operations |
| Cash and working capital | $134.7 million cash; $351.6 million working capital at quarter-end | Cash was $150.7 million and working capital $360.8 million at Dec. 31, 2012 |
| Debt | $7.4 million total balance-sheet debt; no revolving-credit borrowings | — |
Technology Products sales fell 5.8% to $773.5 million, while Industrial Products sales rose 16.8% to $105.6 million. Technology Products reported an $11.3 million operating loss versus $8.8 million income a year earlier; Industrial Products operating income increased to $8.5 million from $8.3 million. Business-to-business sales rose 1.6%, while consumer-channel sales declined 10.9%.
Material changes and management commentary
- Management attributed weaker sales chiefly to North American consumer-channel softness and declines in technology accessories, software, consumer electronics and components. Stronger computer sales partly offset these declines.
- Gross margin contracted amid promotional freight campaigns and competitive pricing in North American technology, partly offset by a larger contribution from higher-margin industrial products.
- SG&A increased. Management cited higher advertising and lower vendor cooperative funding, additional staffing and contract labor, and facility costs. The MD&A’s $131.3 million SG&A measure includes special charges; the income statement separately reports $125.2 million of SG&A and $6.1 million of special charges.
- Special charges were $6.1 million, including $4.3 million for a Hungary shared-services-center restructuring and $1.8 million for a former officer’s termination, partially offset by a $0.2 million reserve adjustment. Management anticipated significant further costs for the Hungary restructuring, but minimal additional costs for the officer termination and North American facility/PC-manufacturing exit.
- Operating cash use reflected working-capital changes, including a $40.6 million decrease in accounts payable, accrued expenses and other current liabilities; inventory reductions provided $39.5 million. Cash also fell $2.7 million from exchange-rate effects. Capital expenditures were $3.0 million.
Liquidity, outlook and risks
The $125 million secured revolving facility (expandable to $200 million subject to conditions) expires in October 2015. At March 31, 2013, availability was $104.6 million, letters of credit were $5.5 million and there were no borrowings; the company reported compliance with covenants. The filing reports approximately $5.5 million outstanding under the Jefferson, Georgia bond-financed equipment lease. Management stated that cash and available credit, together with operating cash flow, should meet working-capital and other cash requirements for at least 12 months.
No specific revenue or earnings guidance was provided. Management cited planned investment in the Hungary shared-services center, European operations and warehouse functions, the Industrial Products distribution and call center, and technology and information systems. It warned that intense technology-product price competition, weak consumer or business spending, foreign-exchange movements, seasonality and restructuring costs could affect results and liquidity. Litigation and government inquiries include a Texas sales-tax audit concerning certain e-commerce sales; management said it believed it had strong defenses and did not expect the matters collectively to have a material adverse effect, while acknowledging uncertain outcomes.
Most important facts for investors to verify
- Whether the technology segment’s sales and profitability stabilize, and whether consumer-channel weakness persists.
- The size, timing and benefits of further Hungary restructuring costs and other planned investments.
- Whether operating cash flow improves as working-capital movements normalize.
- Revolving-credit availability, covenant compliance and the terms and balance of the bond-financed lease.
- Developments in the Texas sales-tax audit and other legal, tax and intellectual-property matters.