GLOBAL INDUSTRIAL Co (Systemax Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019 (the fiscal quarter ended March 30; 13 weeks). The company reported one segment, the Industrial Products Group (IPG), serving North American industrial and MRO markets. The France-based IT business was sold in August 2018 and is presented as discontinued operations.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Continuing-operations net sales | $232.2 million | $212.2 million | +9.4% |
| Gross profit / gross margin | $80.3 million / 34.6% | $72.5 million / 34.2% | Margin +0.4 percentage points |
| SD&A / share of sales | $67.1 million / 28.9% | $61.4 million / 28.9% | Expense +9.3%; ratio unchanged |
| Operating income / margin | $13.2 million / 5.7% | $11.1 million / 5.2% | Income +18.9%; margin +0.5 points |
| Continuing-operations net income | $10.0 million | $8.7 million | +14.9% |
| Total net income | $9.7 million | $14.6 million | Lower, mainly reflecting discontinued operations |
| Diluted EPS from continuing operations | $0.26 | $0.23 | +13.0% per company highlights |
Continuing-operations sales increased 9.6% on a constant-currency average-daily-sales basis. U.S. sales rose 9.3%; Canadian sales rose approximately 11.8% reported and 17.5% on a constant-currency basis. Canada recorded its ninth consecutive quarter of double-digit growth.
- Cash flow: Operating cash flow from continuing operations was $23.8 million, versus $6.6 million in Q1 2018. Capital expenditures were $1.0 million, versus $0.4 million. Cash ended the quarter at $70.0 million, down $225.4 million from year-end.
- Cash distribution: Financing activities used $248.4 million, principally the $243.5 million special dividend declared in December 2018 and paid in January 2019, plus the regular quarterly dividend. Dividends declared in Q1 were $0.12 per share.
- Liquidity and debt: Working capital was $114.6 million, compared with $117.8 million at December 31, 2018. There were no revolver borrowings; the $75 million secured facility had $72.1 million of excess availability after letters of credit. The company reported covenant compliance and more than $137 million of U.S. liquidity, including cash and undrawn credit.
- Balance sheet: Total assets were $358.2 million and shareholders’ equity was $144.0 million at March 31, 2019. Operating lease liabilities totaled $61.9 million, of which $10.6 million was current.
Material changes and unusual items
- Operating performance improved on higher sales, a 0.4-point gross-margin gain, better shipping performance, and operating-cost discipline. SD&A included $0.6 million of executive separation and transition costs; excluding these costs, the company said the SD&A ratio improved 0.3 percentage points.
- Non-GAAP operating income was $14.9 million, up 27.4% from $11.7 million. Adjustments were $1.7 million in Q1 2019, including executive separation and transition costs, stock-based compensation, and intangible amortization.
- Discontinued operations recorded a $0.3 million loss in Q1 2019, versus $5.9 million income in Q1 2018. The prior-year period included $143.0 million of France-business sales and $5.5 million of France-business net income; consequently, total sales and net income comparisons are not like-for-like.
- The company adopted lease accounting standard Topic 842 on January 1, 2019, recording approximately $54 million of right-of-use assets and $64 million of lease liabilities at adoption, with no opening retained-earnings adjustment. The balance-sheet presentation has no comparable 2018 lease balances.
- On April 18, 2019, the company entered into a lease for approximately 490,000 square feet of Texas distribution space for 125 months, with an approximately $20 million lease obligation.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected 2019 capital expenditures of $6 million to $8 million and said operating cash flow and available credit should fund working capital and other cash needs for at least the next 12 months.
- Management cited continued demand, digital customer acquisition, newer product-line growth, and strength in Canada. It also noted that competitive pricing, product mix, freight costs, tariffs and trade measures, supplier availability, labor conditions, distribution capacity, and e-commerce or cybersecurity disruptions could affect results.
- The company reported ongoing legal, tax, customs, intellectual-property, and unclaimed-property matters. An entity representing 26 states was auditing unclaimed property, and 21 states had made separate demands. Management said it did not expect these matters to have a material adverse effect based on available information, but outcomes are uncertain; potential damages in a software-publisher case involving former NATG subsidiaries could not be estimated.
- Management expected less than $0.5 million of additional NATG wind-down charges after Q1, to be reported in discontinued operations.
Investor verification points
- Confirm the continuing-operations basis when comparing sales and earnings with Q1 2018, which included the subsequently sold France business in discontinued operations.
- Assess cash and liquidity after the $243.5 million special dividend, and review the remaining credit availability and facility covenants.
- Review the impact of the new Texas distribution lease and planned $6 million to $8 million of 2019 capital expenditures on future cash requirements.
- Track whether sales momentum, Canadian growth, gross-margin improvement, and expense discipline persist, including the effect of tariffs, freight, labor, and fulfillment capacity.
- Monitor the unresolved legal and unclaimed-property matters and remaining NATG wind-down costs; disclosed potential exposure in the software-publisher case was not estimable.