Systemax Inc. (Global Industrial) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019 (13-week quarter; 39 weeks year to date). The company operates one reportable segment, the Industrial Products Group, selling industrial and general business supplies primarily in North America. Unless noted, amounts are in millions of U.S. dollars.
Financial performance and position
- Q3 sales: $243.9, up 3.4% year over year. Gross profit was $84.4; gross margin was 34.6%, down 0.3 percentage points. Operating income was $18.5, up 0.5%, with a 7.6% operating margin versus 7.8%. Continuing-operations net income was $13.7, down 9.3%; diluted EPS from continuing operations was $0.36 versus $0.40.
- Nine-month sales: $724.7, up 6.7%. Gross profit was $250.7, up 6.8%, at a 34.6% margin (flat). Operating income was $51.7, up 8.2%, and operating margin was 7.1% versus 7.0%. Continuing-operations net income was $38.6, up 3.8%; diluted EPS was $1.02 versus $0.98.
- Discontinued operations: Net loss was $1.0 in Q3 and $1.6 year to date in 2019. Comparisons with 2018 total net income are distorted by the $178.2 pre-tax gain on the France business sale; reported total net income was $12.7 for Q3 2019 versus $178.8 in Q3 2018, and $37.0 year to date versus $211.6.
- Cash flow: Nine-month cash from continuing operating activities was $64.9, versus $15.2 in 2018. Capital spending was $6.2. Cash declined $197.8 to $97.6, mainly reflecting $257.1 of dividends paid, including the $243.5 special dividend declared in December 2018.
- Liquidity and debt: Working capital was $131.5, up $13.7 from year-end 2018. No revolver borrowings were outstanding; the $75.0 secured facility had $71.7 of excess availability after letters of credit. The company reported covenant compliance and more than $165 of U.S. liquidity, including cash and undrawn credit.
- Balance sheet: Total assets were $399.6 and shareholders’ equity $165.9. Adoption of lease accounting added operating lease right-of-use assets and liabilities; at September 30, operating lease liabilities totaled $71.1, of which $11.2 was current.
Changes and management commentary
- Constant-currency average daily sales rose 3.5% in Q3 and 6.9% year to date. U.S. sales increased 3.4% in Q3 and 6.6% year to date; Canadian sales grew about 5.3% and 12.2%, respectively, on a local-currency average-daily-sales basis.
- Management described the market as soft, with cautious but committed customers. A large project-based customer order in the prior-year quarter reduced the comparative growth rates by an estimated 50 basis points in Q3 and 20 basis points year to date.
- Q3 results included approximately $1.7 of Texas distribution-center costs; management also cited about $1.5 of facility operating expense and $0.9 of ongoing stock-based compensation in SD&A. The center began receiving and shipping during Q3. Management expects the investment to improve service and anticipates better operating leverage as the network is optimized.
- U.S. tariffs on China-origin products, enacted in September 2018 and June 2019, were being managed through pricing, supplier discussions, and supply-chain review. Management said effects may emerge gradually; gross margin was broadly stable year to date.
- Q3 and year-to-date results included an approximately $0.8 gain from a revised estimate of a former German branch lease obligation. The company also recorded $1.2 of executive separation and transition costs and $3.3 of stock-based compensation in the first nine months.
Outlook, risks, and contingencies
- Management expected operating cash flow and available credit to fund working capital and other requirements for at least the next 12 months. Planned 2019 capital expenditures were $6.0–$8.0; actual nine-month spending was $6.2. No specific revenue or earnings guidance was provided.
- Key risks cited include economic and manufacturing-market conditions, tariffs and trade actions, freight costs, supplier delays, distribution capacity and labor availability, inventory obsolescence, e-commerce or information-system outages, cybersecurity, credit availability, and litigation or tax matters.
- The company expected approximately $1.0 of additional NATG wind-down charges after Q3, to be reported in discontinued operations. It had $3.0 of NATG non-lease exit liabilities at September 30.
- Legal matters include unclaimed-property demands from 20 states following an audit involving 28 states, and a software publisher’s claims against former NATG subsidiaries. A trial was scheduled for December 2019; potential damages were not estimable. Management did not believe reasonably possible losses beyond recorded accruals would be material, while noting outcomes are uncertain.
- Lease commitments totaled $90.9 in undiscounted future payments, with a present value of $71.1. The company also leased its headquarters from an entity owned by its principal shareholders.
Investor verification priorities
- Confirm the continuing-operations trend separately from discontinued operations and the prior-year France-sale gain.
- Track Texas distribution-center costs, service improvements, and whether the anticipated operating leverage materializes.
- Monitor sales growth, gross margin, tariff-related pricing and sourcing effects, and working-capital efficiency.
- Reconcile cash and dividend outflows with future capital spending, ongoing dividends, lease obligations, and revolver availability.
- Follow NATG wind-down costs and developments in the unclaimed-property and software-publisher litigation matters.