Business context and reporting period
Systemax Inc. (NYSE: SYX), whose Industrial Products Group markets products under the Global Industrial brand, filed this unaudited Form 10-Q for the quarter ended June 30, 2019. The company now reports one segment, Industrial Products Group (IPG), serving North American industrial and MRO markets. The fiscal second quarter comprised 13 weeks; the first half comprised 26 weeks.
Results from the France IT business sold in August 2018 are presented as discontinued operations, so 2019 continuing-operations sales are not directly comparable with total-company sales in prior periods that included that business.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales, continuing operations | $248.6 million | $231.2 million | $480.8 million | $443.4 million |
| Gross profit / gross margin | $86.0 million / 34.6% | $80.0 million / 34.6% | $166.3 million / 34.6% | $152.5 million / 34.4% |
| Operating income / margin | $20.0 million / 8.0% | $18.3 million / 7.9% | $33.2 million / 6.9% | $29.4 million / 6.6% |
| Continuing-operations net income | $14.9 million | $13.4 million | $24.9 million | $22.1 million |
| Diluted EPS, continuing operations | $0.39 | $0.35 | $0.66 | $0.58 |
| Total net income | $14.6 million | $18.2 million | $24.3 million | $32.8 million |
- Sales increased 7.5% in Q2 and 8.4% in the first half. Constant-currency average daily sales rose 7.8% and 8.7%, respectively. Management cited broad-based demand, managed-sales performance and continued growth in newer product lines. Canada recorded its tenth consecutive quarter of double-digit growth; sales there rose about 16% in local currency on an average-daily-sales basis.
- Q2 gross margin was flat year over year; first-half margin improved 0.2 percentage points. SD&A was 26.5% of sales in Q2 versus 26.7%, and 27.7% in the first half versus 27.8%. Management attributed operating-margin gains to sales growth, freight margin, fixed-cost leverage and spending discipline.
- Continuing-operations operating cash flow was $50.1 million for the first half, versus $18.0 million a year earlier. Capital expenditures were $2.4 million. Cash fell by $204.6 million to $90.8 million, mainly reflecting $252.5 million of dividends paid, including the $243.5 million special dividend declared in December 2018.
- At June 30, cash was $90.8 million, working capital was $125.2 million, and total liabilities were $233.4 million. The company had no revolver borrowings; of its $75 million secured facility, excess availability was $71.7 million after $1.3 million of letters of credit. It reported covenant compliance and more than $158 million of U.S. liquidity, including cash and undrawn credit.
- Operating lease liabilities totaled $74.2 million, including $11.4 million current. Adoption of the lease accounting standard added approximately $54 million of ROU assets and $64 million of lease liabilities at the start of 2019. A new Texas distribution-center lease added about $14.7 million in ROU assets and liabilities during Q2.
Material changes, outlook, and risks
- Continuing-operations diluted EPS increased 11.4% in Q2 and 13.8% in the first half. Total net income fell versus 2018 because the prior-year periods included earnings from the now-sold France business; discontinued operations recorded losses of $0.3 million in Q2 2019 and $0.6 million in the first half.
- Management expects the new Texas distribution center to begin operations in Q3 2019. It forecast 2019 capital expenditures of $5 million to $7 million, with approximately $1.5 million to $2.0 million contractually committed. The company said cash and available credit should meet requirements for at least 12 months. No specific revenue or earnings guidance was provided.
- U.S. tariffs on certain China-origin products rose to 25% in June 2019. Management said it was responding through pricing, supplier discussions and supply-chain review, and expected effects to emerge gradually. Freight-cost increases, supply availability, labor tightness, distribution capacity, competition, inventory risk, e-commerce or systems disruption, cybersecurity, and economic conditions are additional disclosed risks.
- The company expects approximately $1.0 million of additional NATG wind-down charges after Q2, to be reported in discontinued operations. It also disclosed unclaimed-property demands from 20 states and an audit involving an entity representing 28 states, as well as litigation and other tax, trade and intellectual-property matters. Management said it did not expect these matters, individually or collectively, to materially harm financial position or results, but outcomes remain uncertain.
- The regular quarterly dividend declared was $0.12 per share; first-half dividends declared were $0.24 per share. The filing identifies dividend and repurchase availability tests under the credit agreement.
Important facts for investors to verify
- Compare continuing-operations growth consistently, accounting for the France divestiture and discontinued-operations presentation.
- Track whether sales momentum, gross margin and operating leverage persist as tariffs, freight and competitive pricing evolve.
- Monitor Texas distribution-center launch timing, related costs and the planned $5 million to $7 million 2019 capital expenditure level.
- Assess cash generation and liquidity after the large special-dividend payment, including future dividends and credit-facility covenant headroom.
- Follow NATG wind-down costs and developments in unclaimed-property, intellectual-property and other legal matters; the filing does not quantify potential exposure for certain claims.