Systemax Inc. Form 10-Q Summary
Reporting period: Second quarter and six months ended June 30, 2014; the actual fiscal second quarter ended June 28. Systemax is a direct marketer of technology and industrial products. The filing is by Systemax Inc.; Global Industrial is a brand associated with its Industrial Products business.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $831.1 million | $805.7 million | $1,704.5 million | $1,686.3 million |
| Gross profit / margin | $123.3 million / 14.8% | $116.3 million / 14.4% | $251.2 million / 14.7% | $237.9 million / 14.1% |
| Operating income (loss) | $(5.4) million | $(6.8) million | $(6.7) million | $(15.5) million |
| Net income (loss) | $(6.2) million | $(6.1) million | $(9.2) million | $(12.4) million |
| Diluted loss per share | $(0.17) | $(0.16) | $(0.25) | $(0.34) |
Q2 sales increased 3.2%; first-half sales increased 1.1%. Gross margin improved in both periods, which management attributed mainly to a larger contribution from Industrial Products and moderate improvement in technology margins. Special charges were $6.0 million in Q2 and $8.4 million for the first half, versus $3.9 million and $10.7 million, respectively, in 2013. SG&A excluding special charges was $128.7 million in Q2 and $257.9 million for the first half.
Segment trends: Q2 Technology Products sales were $687.6 million, up 0.3%; first-half sales were $1,430.4 million, down 2.0%. Industrial Products sales were $142.1 million in Q2, up 19.8%, and $271.2 million for the first half, up 21.0%. Q2 operating income was $12.4 million for Industrial Products, while Technology Products recorded a $13.2 million operating loss. The Industrial Products margin was 8.7% in Q2; Technology Products margin was (1.9%).
Cash flow, balance sheet and debt
For the first half, operating cash flow was a use of $19.2 million, compared with a use of $0.5 million in 2013. Investing activities used $9.6 million, including $6.4 million net cash for the SCC acquisition; financing activities used $1.0 million. Cash declined $28.1 million from year-end to $153.3 million.
At June 30, cash was $153.3 million, current assets were $853.3 million, current liabilities were $514.5 million, and working capital was $338.8 million. Total debt on the balance sheet was $4.1 million ($2.3 million current and $1.8 million long term); a separate note reports approximately $3.2 million outstanding under the equipment bond financing. The $125 million revolving facility had no borrowings, $115.0 million availability, and $5.5 million of outstanding letters of credit; the company reported covenant compliance. The filing states cash and available credit were adequate for expected needs for at least 12 months.
Material developments, outlook and risks
- On June 12, Systemax acquired Dutch B2B IT supplier SCC Services B.V. for approximately $7.3 million in cash. SCC was included in the Technology Products segment from the acquisition date.
- North American technology consumer sales remained weak: down 13.5% in Q2 and 18.0% for the first half. Management cited sales and price erosion in PCs and televisions, changing consumer preferences, online competition, and the closure of retail stores in 2013. B2B sales and Industrial Products sales grew.
- European restructuring and the Budapest shared services center drove special charges and increased expenses. Management expected another $5–6 million of charges and $13–14 million of future cash outlays to complete implementation, including costs already accrued. Once fully implemented, the center was expected to lower annual pretax costs by $9–11 million.
- Management anticipated approximately $10 million of capital expenditures for the remainder of 2014. It cited seasonality, intense technology price competition, working-capital needs, foreign-exchange movements, and execution of European restructuring and systems transitions as factors affecting results and liquidity.
- Legal matters include routine claims and investigations, a Pennsylvania sales-tax dispute involving certain e-commerce sales, and a multistate unclaimed-property audit. The company said it did not expect currently known matters to have a material adverse effect, but outcomes are uncertain.
Most important facts for investors to verify
- Whether the expected shared-services savings are achieved and whether remaining restructuring charges and cash costs stay within management’s estimates.
- Whether Industrial Products growth can offset continued weakness in North American technology consumer sales, and whether segment profitability improves.
- Whether operating cash flow recovers from first-half working-capital use, particularly given rising receivables and accounts-receivable days outstanding.
- Integration costs and performance of SCC, and the availability and terms of the revolving credit facility as it approaches its October 2015 expiration.
- Progress and potential financial effects of the sales-tax, unclaimed-property, and other legal matters.