Business context and reporting period
Systemax Inc. (NYSE: SYX; identified in the request as Global Industrial Co.) filed this Form 10-Q for the quarter ended March 31, 2020. The fiscal quarter actually ended March 28 and comprised 13 weeks. The company operates one reportable segment, marketing industrial and business equipment and supplies in North America through e-commerce and relationship sales channels. Results below are from continuing operations unless noted.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $227.3 million | $232.2 million; down 2.1% |
| Gross profit / margin | $76.7 million / 33.7% | $80.3 million / 34.6% |
| SD&A expenses | $65.2 million; 28.7% of sales | $67.1 million; 28.9% of sales |
| Operating income / margin | $11.5 million / 5.1% | $13.2 million / 5.7% |
| Net income from continuing operations | $8.3 million; diluted EPS $0.21 | $10.0 million; diluted EPS $0.26 |
| Total net income | $8.2 million | $9.7 million |
| Operating cash flow, continuing operations | $13.7 million | $23.8 million |
At March 31, cash was $64.1 million, working capital $107.9 million, total assets $361.3 million and total liabilities $223.6 million. The company had no borrowings on its $75 million secured revolving facility; excess availability was $71.4 million after $1.6 million of letters of credit. It reported covenant compliance. Operating lease liabilities totaled $65.8 million. Cash declined $33.1 million during the quarter, principally reflecting $43.3 million in dividends paid and $3.4 million in share repurchases.
Material changes versus the prior comparable period
- Operating income fell 12.9%, continuing-operations net income declined 17.0%, and gross margin contracted 90 basis points. Management attributed the margin decline principally to a shift toward lower-margin safety and PPE products and the absence of prior-year tariff-related pricing and inventory benefits.
- SD&A decreased 2.8%; lower compensation and internet advertising costs were partly offset by higher fixed costs associated largely with the Dallas distribution center. SD&A as a percentage of sales improved 20 basis points.
- U.S. revenue declined 2.5%; Canadian sales increased 5.3% (6.8% constant currency). Average daily sales declined 2.1% on a constant-currency basis.
- Cash from continuing operations decreased from $23.8 million to $13.7 million. The company paid a $1.00-per-share special dividend and a $0.14 regular dividend; total dividends declared were $1.14 per share versus $0.12 in Q1 2019.
Outlook, risks and unusual items
Management said COVID-19 began affecting results in the closing weeks of Q1. Demand shifted from core products toward cleaning supplies, PPE and other pandemic-response goods; constrained supply increased backlog and limited fulfillment. Revenue declines in the closing weeks were in the low double digits and appeared to stabilize at approximately 20% in April. The company expected to ship part of the backlog in Q2 as supply-chain visibility improved, but cautioned that timing was uncertain. Management expected pandemic effects to continue into Q2 and noted uncertainty about shutdown duration, customer demand, supply availability and distribution-center operations.
The company stated cash on hand, operating cash flow and credit availability should cover working capital and other needs for at least 12 months, including under then-current conditions. It anticipated 2020 capital expenditures of $3 million to $5 million, not contractually committed. In April, it initiated a workforce reduction and expected approximately $0.8 million of employee separation costs in Q2. Management also described cost actions including limiting discretionary spending, reducing overtime and temporary labor, and managing advertising.
Discontinued operations related to the North American Technology Group sold in 2015 recorded a $0.1 million loss in Q1 2020; management expected additional related charges to remain below $0.5 million. The company disclosed various litigation, tax, trade and other matters, including unclaimed-property proceedings involving 28 states and separate payment demands from 20 states. It did not expect reasonably possible losses beyond accruals to be material, while noting outcomes are inherently unpredictable. Key risks include pandemic-related sales and supply-chain disruption, distribution-center closures or staffing shortages, freight and product costs, customer credit and demand, and competition.
Important facts for investors to verify
- Whether Q2 shipments convert the pandemic-related backlog into revenue, and how demand and fulfillment evolve.
- Whether gross margins recover or remain pressured by product mix, pricing, tariffs and supply costs.
- Cash generation and liquidity after dividends and repurchases, including compliance with revolver availability and covenants.
- The actual timing and amount of workforce-reduction costs and planned capital expenditures.
- Developments in unclaimed-property claims and other legal or tax proceedings, including any change in estimated exposure.