Systemax Inc. 10-Q Summary
Registrant and period: Systemax Inc. (the filing supplied for Global Industrial Co); quarterly period ended September 30, 2012. The fiscal third quarter actually ended September 29 and covered 13 weeks. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $846.3 million | $900.2 million | $2,609.4 million | $2,702.2 million |
| Gross profit / margin | $119.0 million / 14.1% | $131.3 million / 14.6% | $367.7 million / 14.1% | $390.7 million / 14.5% |
| Operating income (loss), continuing operations | $(1.9) million | $19.3 million | $6.9 million | $59.8 million |
| Income from continuing operations | $13.9 million | $10.8 million | $19.0 million | $40.0 million |
| Net income | $13.9 million | $10.6 million | $18.8 million | $39.8 million |
| Diluted EPS | $0.38 | $0.29 | $0.51 | $1.07 net income per share |
Q3 selling, general and administrative expenses were $118.9 million, versus $111.6 million a year earlier; special charges were $2.0 million. Nine-month SG&A was $354.7 million, versus $337.0 million, and special charges were $6.1 million, compared with a $6.1 million net special gain in 2011. The filing’s key-indicator presentation includes special charges in its SG&A measure.
Cash flow and liquidity: For the first nine months, cash from operating activities was $46.7 million, versus $45.7 million; continuing-operations operating cash flow was $47.2 million, versus $45.8 million. Investing activities used $11.3 million, including $11.4 million of capital expenditures; financing activities used $1.2 million. Cash increased $36.2 million to $133.5 million. Working capital was $368.3 million, up $13.6 million from year-end 2011. Inventory fell $61.0 million to $311.2 million.
Debt and credit: Current and long-term debt totaled approximately $8.8 million at September 30, 2012; the Jefferson, Georgia bond financing had $6.3 million outstanding. The $125 million secured U.S. revolving facility (expandable to $200 million subject to conditions) had no advances, $113.6 million of availability and $6.0 million of letters of credit. The company reported covenant compliance. It said cash and credit availability should meet requirements for at least the next 12 months.
Material changes and business drivers
- Consolidated sales declined 6.0% in Q3 and 3.4% for the nine months. Technology Products sales fell 9.6% in Q3 and 6.5% year to date; Industrial Products sales rose 26.9% and 28.3%, respectively.
- Business-to-business sales grew 3.8% in Q3 and 6.0% year to date, while consumer-channel sales fell 18.6% and 14.7%. Management attributed consumer weakness to soft demand for PCs and consumer electronics and increased competition; business growth reflected Industrial Products assortment, sales staffing and website expansion.
- Technology Products reported a Q3 operating loss of $3.9 million, versus $13.6 million operating income in 2011. Industrial Products operating income declined to $7.6 million from $10.4 million. Management cited price competition, reduced vendor co-op funding, product/channel mix, lower freight margins, drop shipping and costs to ramp a new distribution center.
- Gross margin contracted 0.5 percentage points in Q3 and 0.4 points year to date. SG&A as a percentage of sales rose to 14.3% from 12.5% in Q3 and to 13.8% from 12.2% year to date.
Outlook, unusual items and risks
- Q3 and nine-month income taxes included a $15.1 million reversal of valuation allowances on French subsidiary deferred tax assets, following demonstrated and projected profitability. Management said this boosted diluted EPS by $0.41; reported tax rates are therefore not representative. No formal sales or earnings guidance is provided.
- After quarter-end, the board approved consolidating U.S. consumer operations under TigerDirect. The company expects approximately $34 million of non-cash, pre-tax impairment charges for CompUSA and Circuit City intangible assets in Q4 2012.
- The company plans to exit Ohio PC manufacturing, expecting $6–$8 million of pre-tax charges in Q4 2012 and 2013, and estimates annual pre-tax profitability benefit of $1–$2 million from strengthening vendor relationships.
- A planned Eastern European shared-services center and related European cost initiatives are expected to generate $14–$16 million of pre-tax costs across Q4 2012 and 2013, mostly cash, and $9–$11 million in annual pre-tax cost reductions after implementation. Management cautioned that scope, timing and costs may change.
- A new 500,000-square-foot New Jersey distribution and call center is leased through August 2032; disclosed lease payments include $33.8 million after 2016. The company anticipates seasonal strength in Q4 but cautions that competitive conditions make past performance an uncertain guide.
- Risks include intense technology price competition, weaker consumer spending, foreign currency movements, working-capital needs and litigation, including patent claims and tax-related matters. Management does not currently expect pending matters to materially harm results or financial condition, but outcomes are unpredictable. The filing also cites a $2.6 million favorable resolution of contingent liabilities and $1.7 million of patent settlements during the nine months.
Investor verification priorities
- Separate recurring operating performance from the $15.1 million tax valuation-allowance reversal and compare adjusted profitability with reported results.
- Track consumer-channel and Technology Products sales, gross margins, and whether Industrial Products growth translates into improved operating margins.
- Monitor cash conversion, inventory and working-capital movements, capital spending, and revolving-credit availability.
- Verify the timing and realized cash/non-cash amounts of the announced impairment, manufacturing exit and European restructuring costs, alongside promised annual savings.
- Assess the long-term lease commitment, litigation and patent exposure, and sensitivity to competition, consumer demand and foreign exchange.