Business context and reporting period
This is Systemax Inc.’s Form 10-Q for the quarter ended June 30, 2015; the fiscal second quarter actually ended June 27, 2015. Systemax operates Industrial Products Group (IPG), EMEA Technology Products Group (EMEA), and North America Technology Products Group (NATG). The filing identifies the registrant as Systemax Inc., not “GLOBAL INDUSTRIAL Co”; Global Industrial is among the IPG’s brands.
Financial performance
Unless noted otherwise, amounts are in millions of dollars. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $740.0 | $831.1 | $1,525.8 | $1,704.5 |
| Gross profit | $111.5 | $123.3 | $219.3 | $251.2 |
| Gross margin | 15.1% | 14.8% | 14.4% | 14.7% |
| Operating loss | $(28.5) | $(5.4) | $(48.0) | $(6.7) |
| Net loss | $(28.4) | $(6.2) | $(57.0) | $(9.2) |
| Basic and diluted loss per share | $(0.77) | $(0.17) | $(1.54) | $(0.25) |
- Quarterly sales fell 11.0%; six-month sales fell 10.5%. Management attributed the declines to currency movements and weaker EMEA and NATG sales, partly offset by IPG growth.
- By segment, Q2 sales were IPG $180.9 million, up 27.3%; EMEA $252.6 million, down 8.8%; and NATG $305.1 million, down 25.7%. IPG’s reported growth included $25.2 million of P.E.G. acquisition sales. Excluding currency and acquisitions as applicable, management reported IPG growth of 10.0% for the quarter and NATG sales declines of 11.5% after excluding closed stores.
- Q2 operating loss included $28.5 million of special charges, versus $6.0 million a year earlier. Six-month special charges were $33.8 million versus $8.4 million.
- Six-month operating cash flow was positive $6.8 million, compared with negative $19.2 million in 2014. Investing cash outflow was $29.3 million, including $24.8 million for the P.E.G. acquisition; financing cash outflow was $1.2 million. Cash declined $21.0 million to $144.0 million.
- At June 30, cash was $144.0 million; working capital was $260.8 million, down $51.3 million from year-end. Total current assets were $733.6 million and current liabilities $472.8 million.
- Balance-sheet debt was approximately $2.4 million, including current and long-term debt. The revolving credit facility had no borrowings, $102.4 million of availability, and $6.1 million of letters of credit; the company reported covenant compliance. The facility was due to expire in October 2015, and management expected renewal or extension.
Material changes, outlook and risks
- NATG completed its exit from substantially all retail stores in Q2, shifting toward B2B and public-sector customers and online consumer sales. Management said substantially all related restructuring costs had been incurred by June 30; lease-exit payments were expected to continue through 2017. NATG recorded $27.8 million of Q2 special charges, including $24.2 million of lease termination costs.
- IPG acquired the Plant Equipment Group on January 30 for approximately $25.9 million in cash, expanding its North American MRO business. The acquisition contributed $41.7 million of sales during the first half from its acquisition date.
- Management expected operating cash flows and available credit to fund working capital and other needs for at least the next 12 months. It anticipated 2015 capital expenditures of approximately $15.2 million; this amount was not contractually committed.
- Management cited competitive pricing, narrow technology-product margins, currency movements, changing sales mix, and working-capital demands as factors affecting results. It noted $56.9 million of cash held in foreign subsidiaries that was not readily available to the U.S. parent on a tax-efficient basis.
- The filing describes ongoing legal matters and a U.S. Attorney’s Office investigation related to allegations arising from the Fiorentino matter. The company said its Audit Committee investigation found no evidence of executive conflicts and no material evidence of internal-control or books-and-records violations, but the government investigation’s outcome and potential impact remained uncertain. Restitution claims were pending.
- Management reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for Systemax Inc.; “GLOBAL INDUSTRIAL Co” does not match the filing’s legal company name.
- Track NATG’s post-retail sales, margins, transition costs, and remaining lease-exit cash payments through 2017.
- Monitor the credit facility renewal or extension ahead of its October 2015 expiration and any changes to availability or covenants.
- Assess whether IPG’s growth and P.E.G. integration offset continued weakness in EMEA and NATG, including the effects of foreign exchange.
- Follow developments in the USAO investigation, restitution proceedings, and other legal or regulatory matters.
- Compare actual cash generation and capital spending with management’s liquidity assessment and approximately $15.2 million 2015 capital-expenditure expectation.