Business context and reporting period
Systemax Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2017; the filing identifies the registrant as Systemax Inc. The company operates Industrial Products Group (IPG), selling MRO products primarily in North America, and Europe Technology Products Group (ETG), whose continuing business is in France. The filing’s IPG discussion includes the Global Industrial brand. Unless noted, amounts are in millions of dollars.
In March 2017, the company sold most of its European technology businesses (the SARL Businesses) for nominal proceeds, retaining its French business. These sold operations are reported as discontinued operations. Prior-period comparisons are affected by this and other divestitures, including the 2016 sale of Misco Germany.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Continuing net sales | $319.3 | $290.2 | $934.8 | $874.7 |
| Gross profit / margin | $89.6 / 28.1% | $75.7 / 26.1% | $262.9 / 28.1% | $229.6 / 26.2% |
| Operating income / margin | $18.0 / 5.6% | $3.1 / 1.1% | $52.1 / 5.6% | $11.6 / 1.3% |
| Continuing net income | $14.1 | $1.6 | $43.7 | $5.4 |
| Discontinued-operations loss | $(2.8) | $(7.4) | $(37.1) | $(35.9) |
| Consolidated net income (loss) | $11.3 | $(5.8) | $6.6 | $(30.5) |
| Diluted continuing EPS | $0.37 | $0.04 | $1.17 | $0.15 |
- Sales increased 10.0% in Q3 and 6.9% year to date. Management cited growth in IPG and France; constant-currency average daily sales rose 8.2% and 8.1%, respectively.
- IPG Q3 sales grew 9.1% and operating income rose to $19.8 from $8.3; ETG Q3 sales grew 12.8% and operating income was $5.3 versus $0.1. IPG benefited from stronger product and freight margins, pricing and expense leverage; ETG benefited from growth and the absence of Germany’s prior-year losses.
- Q3 gross margin improved 2.0 percentage points. Management also reclassified distribution-center, purchasing and product-development costs from cost of sales to SG&A for all periods presented; this was a presentation change, not a restatement.
- For the nine months, cash from continuing operating activities was $42.7, compared with cash used of $30.9 in 2016. Total operating cash flow, including discontinued operations, was $33.4 versus cash used of $58.1. Capital spending was $1.6; dividends paid were $9.2.
- At September 30, cash was $176.0; working capital was $226.6. Current assets were $468.5 and current liabilities $241.9. Cash increased $26.3 from year-end 2016.
- No revolver borrowings were outstanding under the $75.0 million facility; reported excess availability was $71.0, and the company was in covenant compliance. Foreign-subsidiary cash of $33.1 was not readily available to the U.S. parent on a tax-efficient basis. The filing reports no material debt balance beyond capital lease obligations.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance was provided. Management expected cash, operating cash flow and credit availability to cover requirements for at least the next 12 months; planned remaining-2017 capital expenditures were approximately $1.0–$2.0.
- The company expected additional discontinued-operation charges of $1.0–$1.5 related to the SARL sale and $1.0–$2.0 related to NATG. Further costs could arise from disputed SARL statutory tax indemnities and NATG lease settlements or subletting.
- The sold businesses’ $2.2 note receivable was in default and disputed with the purchaser at quarter-end. It was described as secured by a Misco UK guaranty and UK real-estate collateral. Misco UK entered administration in October 2017; management did not anticipate a material adverse effect on Systemax.
- Former NATG facilities carried approximately $57.0 of lease obligations, against a $17.2 reserve, net of current and projected sublease income. Management warned that estimates may need revision if subletting assumptions do not hold. Total non-cancelable operating leases, net of subleases, were $133.2.
- Other risks include intense price competition, inventory and working-capital exposure, foreign-exchange movements, technology and cybersecurity disruptions, and potential tax, sales-channel and intellectual-property claims. A software publisher’s September 2017 suit against former NATG entities was at an early stage; potential damages could not be estimated.
- The company recorded a $24.4 loss on the SARL sale during the first nine months, including $14.4 of cumulative translation adjustment write-offs and $8.2 of net-asset write-offs. The filing states that approximately $1.3 of these charges required cash.
Important facts for investors to verify
- Confirm collection prospects and collateral enforceability for the defaulted $2.2 SARL purchaser note, considering Misco UK’s administration.
- Track the remaining SARL and NATG exit charges, disputed tax indemnities and the adequacy of the $17.2 NATG lease reserve against sublease outcomes.
- Assess whether recent sales and margin gains persist, particularly in IPG and the retained French ETG business, and account for divestitures when comparing periods.
- Review the $133.2 operating-lease commitments, dividend capacity, and the accessibility of foreign-held cash.
- Monitor the software-publisher lawsuit and other legal, tax and unclaimed-property matters; the filing says outcomes are uncertain.