Business context and reporting period
Systemax Inc. (the registrant identified in the filing; operating through its Global Industrial-branded business) filed this Form 10-K for the fiscal year ended December 31, 2019. It primarily markets industrial and business equipment and supplies in North America through e-commerce and relationship sales. The company reported one operating segment following the 2018 sale of its France-based IT business. Fiscal 2019 comprised 52 weeks.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales, continuing operations | $946.9 million | $896.9 million |
| Gross profit / gross margin | $325.7 million / 34.4% | $307.7 million / 34.3% |
| Operating income / margin | $66.1 million / 7.0% | $61.7 million / 6.9% |
| Net income, continuing operations | $50.0 million | $49.5 million |
| Diluted EPS, continuing operations | $1.32 | $1.31 |
| Cash from continuing operating activities | $70.3 million | $9.8 million |
| Cash and working capital at year-end | $97.2 million / $144.5 million | $295.4 million / $117.8 million |
Total net income was $48.5 million in 2019, compared with $224.7 million in 2018; the prior-year figure included a large gain on the France business sale. Continuing-operations results are more informative for comparison. The effective tax rate was 24.4%, versus 21.3% in 2018.
There were no borrowings on the $75 million secured revolving credit facility at year-end. Availability was $71.2 million after letters of credit, and the company reported compliance with covenants. Operating lease liabilities were $68.6 million in total, including $9.9 million current. The filing states that cash, operating cash flow and available credit should cover requirements for at least 12 months.
Capital expenditures were $6.9 million. Financing cash use was $259.6 million, principally reflecting payment of a $243.5 million special dividend declared in 2018 and $18.1 million of regular dividends. The board subsequently declared a $1.00-per-share special dividend and raised the regular quarterly dividend to $0.14, payable in March 2020.
Material changes versus the prior comparable period
- Sales grew 5.6%; constant-currency average daily sales grew 5.7%. U.S. sales increased 5.5%, while Canada sales increased 7.8% (10.5% constant currency).
- Operating income rose 7.1%, and gross margin increased 0.1 percentage point. The reported operating margin rose 0.1 point to 7.0%; management cited fixed-cost leverage, spending discipline and a gain tied to a former German branch lease obligation.
- Fourth-quarter sales growth slowed to 2.1%. Management cited a challenging trade environment and mild U.S. winter weather affecting heating-product sales.
- Operating cash flow increased to $70.3 million from $9.8 million, aided by working-capital movements, particularly accounts payable. Receivables days increased to 35.9 from 34.0, while inventory turns declined to 5.9 from 6.3.
- Cash fell by $198.2 million, mainly due to the large special-dividend payment. The 2018 cash balance had been bolstered by proceeds from the France business sale.
- Fiscal 2019 included $0.8 million of special gains related to a former German branch lease obligation. Stock-based compensation increased, including $0.7 million associated with repriced options. The new Texas distribution center incurred $3.9 million of operating expense in 2019.
Outlook, commentary, risks and unusual items
- Management forecast 2020 capital expenditures of $3 million to $5 million and stated that the company had adequate liquidity for expected needs. No revenue or earnings guidance was provided.
- The 490,000-square-foot De Soto, Texas distribution center began operations in August 2019 and was not yet at full capacity; expenses relative to volume may remain elevated as utilization builds.
- Management described 2019 demand as solid but the market as soft, with cautious customers and mixed category performance. Tariffs had raised procurement costs; management said it was using pricing, supplier negotiations and alternative sourcing to mitigate them, while warning that outcomes were uncertain.
- The filing identified the emerging coronavirus outbreak as a risk to Asian sourcing, supplier deliveries, employee availability and economic activity. Some vendors had reported constrained supply and deferred deliveries; the company said it had not experienced related lost sales as of the filing.
- Other significant risks include freight and commodity-cost increases, competitive pricing and product-mix pressure, labor-market tightness, dependence on third-party suppliers and carriers, distribution capacity, cybersecurity and IT disruption, inventory obsolescence, sales-tax exposure, and litigation or unclaimed-property claims.
- The company expected up to $1.0 million of additional NATG wind-down costs in 2020 or later, recorded in discontinued operations. It also noted possible additional France-sale tax or indemnity charges. Management did not expect reasonably possible litigation losses above accrued amounts to be material, but outcomes remain uncertain.
- Adoption of lease accounting in 2019 brought operating lease assets and liabilities onto the balance sheet; at adoption the company recorded approximately $54 million of right-of-use assets and $64 million of lease liabilities. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the distinction between the Systemax legal registrant and the Global Industrial operating brand, and review any subsequent corporate-name or reporting changes.
- Assess whether sales growth and margins can hold amid slower fourth-quarter growth, tariffs, freight costs, competitive pricing and product-mix shifts.
- Monitor utilization and operating costs at the Texas distribution center, alongside inventory turns and working-capital requirements.
- Review cash use, dividend sustainability and credit-facility availability, including covenant restrictions and the impact of lease commitments.
- Track supplier disruption and alternative-sourcing developments related to the coronavirus and trade actions, as well as remaining NATG, tax, customs and unclaimed-property contingencies.
- Separate recurring continuing-operations performance from discontinued-operation gains, wind-down costs and other special items when evaluating earnings trends.