Systemax Inc. (including Global Industrial) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. The registrant is Systemax Inc.; Global Industrial is part of its Industrial Products business, not the filing’s registrant name.
Business context and financial results
Systemax sells technology products in North America and Europe and industrial products in North America, primarily through direct marketing and e-commerce. Technology Products generated 89% of 2012 sales; Industrial Products generated 11%.
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $3,544.6 million | $3,680.6 million |
| Gross profit / margin | $488.1 million / 13.8% | $530.5 million / 14.4% |
| Operating income (loss), continuing operations | $(39.9) million | $80.8 million |
| Net income (loss) | $(8.3) million | $54.4 million |
| Diluted EPS | $(0.22) | $1.47 |
| Cash from operating activities, continuing operations | $75.4 million | $18.4 million |
| Cash and working capital at year-end | $150.7 million; $360.8 million | $97.3 million; $354.8 million |
| Long-term debt, including current portion | $8.1 million | $9.7 million |
Fourth-quarter 2012 sales were $935.2 million and net loss was $27.0 million. The quarter included substantial impairment and restructuring-related charges.
Material changes versus 2011
- Sales fell 3.7% overall (1.9% at constant currency). Technology Products sales declined 6.5% to $3,137.6 million; Industrial Products sales rose 25.6% to $401.9 million.
- Business-to-business sales increased 5.1% to $2,085.8 million, while consumer-channel sales declined 14.0% to $1,458.8 million, reflecting softness in North American web, television-shopping and retail sales.
- Gross margin contracted 0.6 percentage points. Management cited competitive pricing and promotional freight, particularly in North American technology.
- Operating results swung to a loss, including $46.3 million of net special charges. These included $35.3 million of CompUSA/Circuit City goodwill and intangible impairments, $4.6 million of PC-manufacturing asset write-downs, severance and reorganization costs, and $1.8 million of patent settlements. Recoveries partially offset charges.
- Cash from continuing operations increased, primarily reflecting higher accounts payable and other working-capital movements; accounts receivable days outstanding rose to 29 from 27.
Liquidity, outlook, risks and unusual items
- Liquidity and debt: The company reported $150.7 million of cash, $360.8 million of working capital and $8.1 million of capital-lease debt. Its $125 million secured revolving facility had $104.6 million available and no advances outstanding at year-end; the company reported covenant compliance.
- Cash uses and plans: 2012 investing cash outflow was $12.0 million and financing cash outflow was $11.1 million, including a $9.1 million special dividend. Management anticipated approximately $15.6 million of 2013 capital expenditures and said cash, operating cash flows and credit availability should meet requirements for at least 12 months.
- Operating plans: Systemax planned to open a Budapest shared-services center in 2013, expected to begin operating in the second quarter, and to reorganize European support operations. Management cautioned that transition costs, delays or disruption could prevent expected efficiencies.
- Key risks: Price competition and thin technology margins; declining consumer demand; inventory obsolescence; dependence on suppliers, information systems and e-commerce availability; foreign-exchange exposure; sales-tax and other regulatory claims; and execution of the European restructuring. A 10% exchange-rate change was estimated to affect sales by about $140 million and pretax income by about $4 million.
- Contingencies and governance: The company disclosed a Texas sales-tax audit and other litigation and tax matters, while stating it did not expect a material adverse outcome based on available information. The SEC concluded its investigation into a former executive’s conduct in February 2013 and said it would not recommend action against the company. The Leeds family group controlled more than 70% of voting power.
- Reporting controls: Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- How much of the 2012 operating loss reflects one-time charges, and whether ongoing technology operations can return to profitability.
- Whether Industrial Products’ sales growth can continue while its operating income and margin recover from 2012 levels.
- Whether consumer-channel trends, pricing pressure and gross margin stabilize, and whether working-capital cash generation is sustainable.
- Actual startup, restructuring and capital costs for the Budapest center, alongside the timing and realization of expected savings.
- Developments in the Texas sales-tax audit and other litigation, and any effects on reserves or cash flows.
- Compliance with credit-facility covenants, availability under the borrowing base, and the implications of substantial operating-lease commitments.