Systemax Inc. (NYSE: SYX) — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 30, 2020 (actual fiscal quarter ended June 27); six-month period ended June 30. The filing identifies the registrant as Systemax Inc., which operates under the Global Industrial brand. Financial amounts below are in millions of dollars except per-share data.
Business context and results
Systemax is a North American direct marketer of industrial and business equipment and supplies, selling through e-commerce sites and relationship marketers. It reports one operating segment. Continuing operations exclude the former North American Technology Group (NATG), sold in 2015, whose remaining activity is reported as discontinued operations.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $242.1 | $248.6 | $469.4 | $480.8 |
| Gross profit / margin | $84.8 / 35.0% | $86.0 / 34.6% | $161.5 / 34.4% | $166.3 / 34.6% |
| SD&A | $64.7 | $66.0 | $129.9 | $133.1 |
| Operating income / margin | $20.1 / 8.3% | $20.0 / 8.0% | $31.6 / 6.7% | $33.2 / 6.9% |
| Net income from continuing operations | $15.3 | $14.9 | $23.6 | $24.9 |
| Total net income | $16.4 | $14.6 | $24.6 | $24.3 |
| Diluted EPS, continuing operations | $0.40 | $0.39 | $0.62 | $0.66 |
Cash flow, liquidity and capital
- First-half operating cash flow was $14.4, including $13.4 from continuing operations, versus $50.2 and $50.1, respectively, in 2019. Working-capital changes used $14.9 of cash, chiefly reflecting higher receivables and inventory.
- Investing activities used $0.4 in the first half, compared with $2.4 in 2019. Financing activities used $53.0, primarily dividends of $48.6 and share repurchases of $4.8. Cash declined $39.1 to $58.1 from year-end 2019.
- At June 30, cash was $58.1, working capital $120.7 (down from $144.5 at year-end), and current assets and current liabilities were $307.2 and $186.5. No debt was outstanding under the $75.0 revolving facility; excess availability was $71.4, and the company reported covenant compliance. The facility matures October 28, 2021.
- Management said cash, operating cash flow and available credit should meet working-capital and other needs for at least 12 months, including under current conditions. 2020 capital expenditure expectations remained $3.0–$5.0, not contractually committed.
- First-half dividends paid were $48.6, including a $1.00-per-share special dividend declared in February and regular quarterly dividends. Q2 repurchases were 50,201 shares for $0.9; first-half repurchases totaled 283,450 shares for $4.8.
Material changes and management commentary
- Q2 sales fell 2.6%; first-half sales fell 2.4%. Management said sales had declined about 20% through late March and much of April, then grew 4.3% in May and 6.4% in June. It reported that the improving trend continued into July, but cautioned that it might not persist.
- Q2 U.S. sales decreased 4.5%, while Canada sales increased about 35.3% (39.2% on a constant-currency basis). First-half U.S. sales fell 3.6%; Canada sales rose about 20.6% (23.4% constant currency).
- Q2 gross margin improved 40 basis points, mainly from a shift toward in-stock and private-label products. First-half gross margin declined 20 basis points. Management expects continued margin variability from economic conditions, product mix, PPE demand and seasonality.
- Q2 operating income increased 0.5%, despite lower sales, reflecting improved gross margin, digital marketing efficiencies and April cost reductions. First-half operating income declined 4.8%. Q2 SD&A included approximately $0.8 of reduction-in-force expense; lower internet advertising spend helped offset other cost increases.
- COVID-19 affected customer demand, operations and supply chains. PPE demand supported results, while shutdowns and lower demand for core products weighed on sales; inventory increased partly due to PPE investment and higher core-product stocking. Management cited risks from renewed pandemic impacts, delayed reopenings, constrained supply, distribution capacity, freight costs and labor availability.
Unusual items, contingencies and other risks
- Discontinued NATG operations contributed $1.1 of Q2 income and $1.0 for the first half, versus losses of $0.3 and $0.6 in 2019. Q2 included $1.9 of restitution receipts and $0.1 of vendor settlements, offset by $0.4 of professional fees. Management estimated up to $0.5 of additional exit charges after Q2; accrued exit costs were $2.8 at June 30.
- Accounts receivable increased to $110.2 and inventory to $132.4 from $88.2 and $112.5 at year-end. Inventory turns declined to 5.4 from 6.0; receivable days rose to 38.0 from 35.2. The filing reports a $3.9 full reserve against notes receivable written off in Q2.
- The company disclosed ordinary-course litigation and investigations, including unclaimed-property matters involving an entity representing 28 states and separate payment demands from 20 states. It intends to defend the matters and does not expect reasonably possible losses above recorded accruals to be material, but outcomes remain uncertain.
- Other cited risks include competition and pricing, tariffs, foreign exchange, dependence on carriers and suppliers, e-commerce and cybersecurity disruptions, credit availability, and possible adverse effects from legal, tax or trade matters. No borrowings or outstanding currency options or forwards were reported at quarter-end.
Most important facts for investors to verify
- Whether the reported May–July sales recovery continued, and how much growth depended on PPE versus core product demand.
- Whether inventory, receivable days and operating cash conversion normalize after first-half working-capital use.
- Whether margins hold as product mix, freight costs, supply constraints and competitive pricing change.
- Cash needs and capital-allocation choices after the special dividend, including future dividends, repurchases and planned capital expenditure.
- Developments in COVID-related operating risks, unclaimed-property claims and remaining NATG exit costs.