Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for Systemax Inc. (Note: The input metadata listed "GLOBAL INDUSTRIAL Co," but the filing text identifies the registrant as Systemax Inc.). Systemax is a direct marketer of brand name and private label products organized into three segments: Technology Products, Industrial Products, and Software Solutions. The company operates in North America and Europe. During the quarter, the company announced plans to exit the Software Solutions segment due to economic conditions and marketing difficulties.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Sales | $1,473,867,000 | $1,480,772,000 |
| Gross Profit | $214,604,000 | $228,503,000 |
| Operating Income | $23,689,000 | $47,151,000 |
| Net Income | $15,189,000 | $31,602,000 |
| Diluted EPS | $0.41 | $0.84 |
| Cash and Cash Equivalents (End of Period) | $87,923,000 | $66,775,000 |
| Working Capital | $258,888,000 | $253,092,000 (Dec 31, 2008) |
| Net Cash Used in Operating Activities | ($7,703,000) | $18,535,000 |
| Debt | No outstanding advances on credit facility | N/A |
Liquidity: The company maintains a $120.0 million secured revolving credit agreement (expandable to $150.0 million). As of June 30, 2009, total availability was $101.9 million with no outstanding borrowings. Letters of credit outstanding were $12.1 million.
Material Changes vs. Prior Period
- Revenue: Consolidated net sales decreased slightly by 0.5% for the six months ended June 30, 2009, compared to the prior year. This was driven by a 24.0% decline in European sales (impacted by the global economic slowdown and foreign exchange rates) partially offset by an 11.4% increase in North American sales.
- Profitability: Operating income declined 49.8% and net income declined 51.9% year-over-year. Gross margin decreased by 80 basis points to 14.6% due to pricing pressures, freight incentives, and a shift in product mix toward lower-margin Technology Products.
- Expenses: Selling, general, and administrative (SG&A) expenses increased 5.3% year-over-year. This increase was primarily due to a $6.2 million charge for severance, litigation, and lease terminations, including $2.3 million related to the exit of the Software Solutions segment.
- Cash Flow: Operating cash flow turned negative, using $7.7 million compared to providing $18.5 million in the prior year. This was caused by a $31.7 million cash outflow from changes in working capital (increased inventory and decreased accounts payable) and lower net income.
Guidance, Outlook, and Risks
- Segment Exit: The company is winding down the Software Solutions segment, expecting to incur total exit charges of $4.0 to $5.0 million in 2009. Approximately $2.4 million was incurred in the second quarter.
- Acquisitions: On May 19, 2009, the company acquired certain intellectual property and ecommerce assets from Circuit City for $14.0 million in cash, plus a royalty. On August 3, 2009 (subsequent event), the company signed an agreement to acquire WStore Europe, SA, expected to close in Q3 2009.
- Outlook: Management expects the trend of declining sales in Europe to continue until global economic conditions improve. The company has adjusted its cost structure, reduced headcount, and implemented hiring freezes in response to economic uncertainty.
- Risks: Key risks include intense price competition, narrow gross margins, foreign currency exchange fluctuations, and the global economic slowdown affecting business-to-business sales. Legal proceedings regarding rebate practices (Kevin Vukson v. TigerDirect) are ongoing, though the company intends to defend vigorously.
Investor Verification Checklist
- Verify the impact of the $6.2 million restructuring charge on future operating expenses and the timeline for the Software Solutions segment exit.
- Monitor the integration and performance of the Circuit City assets and the pending WStore Europe acquisition.
- Assess the sustainability of the 11.4% growth in North American sales versus the 24.0% decline in European sales.
- Review the status of the Kevin Vukson class action lawsuit and the Florida Attorney General investigation regarding rebate practices.
- Track inventory levels and turnover (currently 8.0 times annually) given the $19.4 million increase in inventory balances.