Systemax Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The filing is by Systemax Inc.; its continuing businesses were the Industrial Products Group (IPG) and France-based Europe Technology Products Group (ETG).
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $363.1 million | $313.0 million | $718.3 million | $615.5 million |
| Gross profit / margin | $101.1 million / 27.8% | $91.5 million / 29.2% | $197.8 million / 27.5% | $173.3 million / 28.2% |
| Operating income from continuing operations | $25.3 million | $21.7 million | $45.4 million | $34.1 million |
| Net income from continuing operations | $17.8 million | $19.3 million | $32.0 million | $29.6 million |
| Net income (loss), including discontinued operations | $18.2 million | $13.8 million | $32.8 million | $(4.7) million |
| Diluted EPS, continuing operations | $0.47 | $0.52 | $0.84 | $0.79 |
- Q2 sales rose 16.0%; management reported average daily sales growth of 12.6% on a constant-currency basis. Six-month sales rose 16.7%, or 12.2% on that basis.
- Q2 IPG sales increased 14.1% to $231.2 million; ETG sales increased 19.6% to $131.9 million. For six months, IPG sales grew 12.9% and ETG sales 23.5%.
- Q2 continuing-operations operating margin was 7.0%, versus 6.9%; six-month margin was 6.3%, versus 5.5%. The Q2 gross-margin decline reflected IPG product mix and lower freight margins, and ETG customer mix and lower-margin large deals.
- Q2 continuing-operations net income declined despite higher sales and operating income, as the effective tax rate rose to 29.6% from 11.5%. The six-month rates were 29.4% and 14.0%, respectively.
Cash, debt and liquidity
- At June 30, cash was $96.9 million, down from $184.5 million at December 31, 2017. Working capital was $163.2 million, compared with $178.3 million.
- For the six months, operating cash flow was $16.3 million in total, comprising $14.6 million from continuing operations and $1.7 million from discontinued operations. Investing activities used $1.4 million; financing activities used $101.5 million, primarily for dividends. The resulting net decrease in cash was $87.6 million.
- The company had no revolver borrowings under its $75 million secured facility; excess availability was $71.0 million after $2.4 million in letters of credit. It reported covenant compliance and more than $138 million of U.S. liquidity, including cash and undrawn credit availability.
- No material debt balance was reported. The filing says cash flows and credit availability are expected to cover working capital and other cash needs for at least the next 12 months.
Changes, outlook and material items
- The company paid substantial dividends during the period, including a $55.7 million special dividend declared in December 2017 and a $37.2 million dividend declared and funded in June 2018. Total dividends paid were $101.1 million.
- After quarter-end, Systemax signed a definitive agreement to sell its France business, Inmac Wstore, to Bechtle AG. The transaction was subject to customary regulatory approvals and was expected to close later in 2018. Management’s pro forma estimates used an enterprise value of $246 million and equity value of approximately $270 million; it estimated transaction and exit expenses of $6–$7 million, tax expense of $18–$24 million before use of net operating losses, and a pretax book gain of $182–$188 million. These were estimates, not completed-sale results.
- Management anticipated 2018 capital expenditures of up to $8 million. No specific revenue or earnings guidance was provided.
- Legacy NATG facilities carried approximately $46.4 million in lease obligations and a $13.0 million reserve at June 30. Management said further reserve adjustments may be needed if projected sublease income does not materialize; it anticipated another $1–$2 million of NATG sale-related charges, mostly cash costs. A separate Jefferson, Georgia warehouse lease termination agreement was entered into August 1 for approximately $8 million, already fully accrued at quarter-end.
- Other items to monitor include ongoing restitution proceedings involving former NATG executives, unclaimed-property demands and audits, and a software publisher’s claims against former NATG subsidiaries. The company said outcomes were uncertain and that reasonably possible losses beyond accrued amounts were not expected to be material.
Most important facts for investors to verify
- Whether and when the Inmac Wstore sale closed, and the final proceeds, taxes, transaction costs and gain compared with the filing’s estimates.
- Whether growth and margins persisted after the reported period, particularly given lower gross margins and the company’s dependence on competitive pricing.
- Cash generation and liquidity after the large dividend payments, including the impact of working-capital movements.
- Whether NATG lease reserves and other discontinued-operation obligations prove sufficient as facilities are sublet or settled.
- The final tax effects of the 2017 U.S. tax law; the company had not completed its analysis and had recorded provisional amounts.