Global Industrial Co. (Systemax Inc.) Q2 2017 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; the company’s actual fiscal second quarter ended July 1, 2017. The filing registrant is Systemax Inc.; GlobalIndustrial.com is among its brands.
Business context and results
Continuing operations comprise the North American Industrial Products Group (IPG), France-focused Europe Technology Products Group (ETG), and Corporate and Other. In March 2017, the company sold its European SARL businesses; their results and sale loss are reported as discontinued operations. The company retained its French technology business.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Continuing-operations sales | $313.0 million | $297.7 million | $615.5 million | $584.5 million |
| Gross profit / margin | $91.5 million / 29.2% | $78.0 million / 26.2% | $173.3 million / 28.2% | $153.9 million / 26.3% |
| Operating income / margin | $21.7 million / 6.9% | $5.4 million / 1.8% | $34.1 million / 5.5% | $8.5 million / 1.5% |
| Continuing-operations net income | $19.3 million | $2.3 million | $29.6 million | $3.8 million |
| Total net income (loss), including discontinued operations | $13.8 million | $(7.4) million | $(4.7) million | $(24.7) million |
Q2 continuing-operations diluted EPS was $0.52, versus $0.06; six-month diluted EPS was $0.79, versus $0.10. The reported continuing-operations effective tax rates were 11.5% for Q2 and 14.0% year to date. Continuing-operations sales rose 5.1% in Q2 and 5.3% year to date. Management’s supplemental non-GAAP comparison, which removes specified divested businesses and other adjustments, showed sales growth of 9.6% and 10.7%, respectively; these figures are not GAAP results.
Segments and changes versus prior period
- IPG: Q2 and year-to-date sales rose 11.5%; operating income increased to $22.9 million from $8.6 million in Q2 and to $35.4 million from $16.5 million year to date. Management cited product mix, pricing, freight performance, sales growth, and expense leverage.
- ETG: Reported Q2 sales declined 4.1% and year-to-date sales declined 3.3%, primarily because Germany was sold in 2016. France sales increased 6.4% in Q2 and 9.2% year to date. ETG operating income increased to $5.7 million from $2.9 million in Q2 and to $11.5 million from $6.6 million year to date.
- Gross margin and expense comparisons reflect a presentation change: certain distribution-center, purchasing, and product-development costs were moved from cost of sales to selling, distribution and administrative expense in both periods. Management said this was a reclassification, not a restatement.
Cash, debt, and liquidity
- At June 30, cash was $159.8 million, accounts receivable $161.8 million, inventory $122.6 million, and working capital $216.6 million. Cash increased $10.1 million from year-end 2016; total assets were $485.0 million.
- Six-month operating cash flow was $15.7 million overall: $22.4 million from continuing operations, offset by $6.7 million used by discontinued operations. Investing activities used $1.8 million; financing activities used $5.4 million, including $5.5 million of dividends paid.
- The $75 million secured revolving credit facility had no borrowings outstanding. Excess availability was $70.2 million after $3.0 million in letters of credit; the company reported covenant compliance. Total debt is not a material source of financing in the period.
- Cash dividends declared and paid were $0.10 per share in Q2 and $0.15 per share for the first six months. Management said cash and available credit were expected to meet requirements for at least the next 12 months.
Outlook, unusual items, and risks
- No specific revenue or earnings guidance was provided. Management estimated $1 million to $5 million of capital expenditures for the remainder of 2017, not contractually committed.
- The SARL sale generated a $23.3 million loss in Q1; total sale-related costs recorded for the first six months were $24.2 million, including $14.4 million of cumulative translation adjustments and $8.2 million of net-asset write-offs. The company expects another $1 million to $2 million of SARL-related charges. Vendor guarantees of about $0.6 million remain subject to a notice period; the purchaser indemnifies the company and pledged collateral.
- Former North American Technology Group (NATG) facilities carry approximately $61.0 million of gross lease obligations and a $19.4 million reserve at June 30. The company recorded about $3.4 million of additional lease reserves in Q2 and expects another $1 million to $2 million of NATG-related charges; future reserve changes may result if sublease assumptions are not realized.
- Other disclosed risks include intense price competition, inventory and working-capital demands, foreign exchange exposure, technology and e-commerce disruptions, and legal, tax, intellectual-property, and unclaimed-property matters. Management said it did not expect reasonably possible losses beyond recorded accruals to be material, but outcomes remain uncertain.
Important facts for investors to verify
- Reconcile GAAP continuing-operations growth with the company’s supplemental non-GAAP comparisons and assess which divestitures and adjustments each excludes.
- Track cash conversion, receivables days (46.8 versus 41.1 a year earlier), inventory turns (7.7 versus 11.3), and the working-capital requirements of growth.
- Monitor the NATG lease reserve against the $61.0 million gross obligation, sublease progress, and potential further cash charges.
- Review final SARL sale-related costs, vendor guarantees, tax indemnities, and the value and recoverability of retained consideration, including the 5% residual equity interest and note receivable.
- Assess dividend sustainability, credit-facility availability and covenants, and the effects of the cost-classification change when comparing margins.