GLOBAL INDUSTRIAL Co quarterly report, Q1 FY2016

Full document

Business context and reporting period

Systemax Inc. filed this Form 10-Q for the quarter reported as ended March 31, 2016; its fiscal first quarter actually ended April 2, 2016 and covered 13 weeks. Systemax operated Industrial Products Group (IPG), EMEA Technology Products Group (EMEA), and Corporate and Other. The North American Technology Group (NATG) sale in December 2015 was treated as a strategic shift and presented as discontinued operations; wind-down activity continued during the quarter. IPG is the industrial-products business marketed in North America, including the Global Industrial brand.

Financial performance and liquidity

  • Revenue: Continuing-operations net sales were $429.8 million, down 16.1% from $512.1 million. The comparison includes $79.1 million of NATG sales in 2015, while no NATG sales were reported in continuing operations in 2016. NATG discontinued-operations sales were $12.1 million versus $273.7 million. On management’s supplemental non-GAAP basis, which treats all NATG as discontinued in both periods, sales were $429.8 million versus $433.0 million, down 0.7%.
  • Segments: IPG sales rose 7.4% to $170.6 million; management cited 3.6% growth excluding the Plant Equipment Group acquisition and on a constant-currency basis. EMEA sales fell 5.3% to $258.2 million, or 2.2% on a constant-currency basis.
  • Margins and earnings: Continuing-operations gross profit was $83.4 million versus $87.1 million; gross margin increased to 19.4% from 17.0%. Continuing-operations operating loss improved to $0.5 million from $12.1 million, and net loss improved to $1.1 million from $21.8 million. Including discontinued operations, net loss was $17.3 million versus $28.6 million; diluted loss per share was $0.47 versus $0.77. Discontinued-operations loss increased to $16.2 million from $6.8 million.
  • Cash flow: Operating cash use was $51.0 million, including $35.2 million from continuing operations and $15.8 million from discontinued operations; the prior-year total was $5.7 million. Investing cash use was $1.1 million, versus $28.7 million, which included the $24.9 million net Plant Equipment Group acquisition. Financing cash use was $0.1 million. Cash declined $51.9 million to $163.2 million.
  • Balance sheet and liquidity: At March 31, cash was $163.2 million, working capital $205.4 million, and total debt approximately $0.9 million. The $125 million secured revolving facility had no borrowings, $38.1 million availability, and $4.9 million in letters of credit; the company reported covenant compliance. The facility matures October 31, 2016. Cash included $62.7 million held in foreign subsidiaries that was not readily available to the U.S. parent on a tax-efficient basis.

Changes, outlook and notable items

  • The reported sales decline primarily reflects the NATG disposal and wind-down, rather than the supplemental comparable-sales trend. IPG’s operating income fell to $7.9 million from $9.7 million despite sales growth; management cited higher distribution-center, freight, advertising, and sales-force costs. EMEA’s operating loss narrowed to $0.8 million from $4.8 million, helped by improved gross margin and performance in France and the Netherlands.
  • Quarterly NATG special charges totaled approximately $9.5 million: $1.6 million in continuing operations and $7.9 million in discontinued operations. The charges mainly included lease termination and exit costs. Management expected a further $5–$7 million of NATG wind-down costs after the quarter, primarily for account settlements and outstanding leases; most wind-down activity was expected to be substantially complete by the end of Q2 2016, excluding remaining lease obligations.
  • Management anticipated approximately $15 million of 2016 capital expenditures, not contractually committed at quarter-end. It stated that cash and credit availability should fund working-capital and other needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
  • On March 1, 2016, a court awarded Systemax approximately $36 million in restitution from former NATG executives. The company said it would pursue collection; the filing does not establish that the award will be collected.
  • Risks include intense price competition, foreign-currency movements, working-capital demands, NATG exit and lease costs, and legal, tax, intellectual-property and unclaimed-property matters. The company also disclosed a continuing U.S. Attorney’s Office investigation related to allegations arising from the former executives’ case; its timing and outcome were uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Investor verification priorities

  1. Reconcile GAAP continuing-operations sales with the non-GAAP comparable presentation and the NATG discontinued-operations results.
  2. Track actual NATG wind-down costs, lease obligations, and completion progress against the stated $5–$7 million expected additional costs.
  3. Monitor operating cash use, working-capital movements, and the accessibility of foreign-held cash.
  4. Verify refinancing or renewal plans for the revolving credit facility ahead of its October 31, 2016 maturity, and monitor borrowing availability and covenant compliance.
  5. Assess collection prospects for the $36 million restitution award and developments in the disclosed government investigation and other legal and regulatory matters.