Global Industrial Co (Systemax Inc.) — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2020. The company reports that its actual fiscal third quarter ended September 26, 2020. Dollar amounts are in millions unless stated otherwise.
Business context
The registrant, Systemax Inc., markets industrial and business equipment and supplies in North America through e-commerce websites and relationship marketers. It reports one business segment. Its former North American Technology Group, sold in 2015, remains in discontinued operations.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $285.7 | $243.9 | $755.1 | $724.7 |
| Gross profit / margin | $102.3 / 35.8% | $84.4 / 34.6% | $263.8 / 34.9% | $250.7 / 34.6% |
| Operating income / margin | $31.4 / 11.0% | $18.5 / 7.6% | $63.0 / 8.3% | $51.7 / 7.1% |
| Continuing-operations net income | $24.1 | $13.7 | $47.7 | $38.6 |
| Diluted EPS, continuing operations | $0.64 | $0.36 | $1.26 | $1.02 |
| Total net income, including discontinued operations | $24.6 | $12.7 | $49.2 | $37.0 |
- Q3 sales increased 17.1%; nine-month sales increased 4.2%. Management cited PPE and other pandemic-related demand, broader private-label offerings, and renewed demand for core products. Canada sales grew faster than U.S. sales.
- Gross margin rose 1.2 percentage points in Q3 and 0.3 points year to date. Management attributed the quarterly improvement primarily to greater mix of in-stock and private-label products and lower freight damage.
- SD&A was $70.9 in Q3, up 6.3% in dollars, but fell to 24.8% of sales from 27.3%. Nine-month SD&A was $200.8, up 0.5%, or 26.6% of sales versus 27.6%. Lower advertising and marketing-related costs and April workforce reductions supported expense leverage; higher compensation and professional fees partly offset savings.
- Operating income increased 69.7% in Q3 and 21.9% for the first nine months. Continuing-operations net income increased 75.9% and 23.6%, respectively.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $42.4, including $41.5 from continuing operations, compared with $64.9 in the prior-year period. Working-capital changes used $13.7 of cash, including increases in receivables and inventory.
- Cash and cash equivalents were $78.4 at September 30, down from $97.2 at year-end 2019. Working capital was $141.8, versus $144.5. Inventory rose to $132.3 from $112.5; management cited PPE stocking and higher levels of some slower-moving core products.
- The company had no borrowings under its $75 million revolving facility; reported excess availability was $71.4, and it was in covenant compliance. The facility matures October 28, 2021.
- Nine-month financing cash outflow was $60.0, mainly dividends of $53.9 and share repurchases. The company reported $7.2 of repurchases under its authorization for the nine-month period. Q3 repurchases were 108,887 shares for approximately $2.4.
- Operating lease liabilities totaled $88.5, including current and noncurrent balances. New or extended lease commitments entered into during the first nine months added $36.8 of minimum rental payments. The company had no debt and stated it was not currently interest-rate sensitive.
- Management expected 2020 capital expenditures of $2.0–$3.0 and believed cash and operating cash flow would cover requirements for at least 12 months, assuming continuation of current business conditions. It reported more than $144 million of U.S. liquidity, including cash and undrawn credit.
Changes, outlook and risks
- Results rebounded from pandemic-related disruption: management said Q3 revenue rose 18% sequentially and 17% year over year. It cautioned that positive trends may not continue, particularly if business and school reopenings are delayed or the pandemic worsens.
- Management expects margin variability from product mix, PPE pricing and availability, seasonality, freight costs, competition and other factors. Supply-chain disruptions, vendor allocations, shipping constraints, labor availability, customer demand, and distribution capacity were identified as risks.
- The company expected up to $0.5 of additional exit charges after Q3 related to discontinued operations. NATG discontinued operations generated $0.5 of Q3 income and $1.5 for the nine-month period; these results included settlements, restitution receipts, facility costs and taxes.
- There were no special charges in continuing operations in 2020. Q3 2019 included a $0.8 special gain from settlement of a former German branch lease obligation.
- Legal matters include an unclaimed-property audit representing 28 states and payment demands from 20 states, as well as other commercial, tax, trade and intellectual-property matters. The company said it did not expect reasonably possible losses beyond accruals to be material, while noting outcomes are inherently uncertain.
Important facts for investors to verify
- Whether the Q3 recovery and PPE/private-label demand persist, and how the company performs as pandemic-related demand and business reopening patterns change.
- Inventory quality, turnover and cash conversion: inventory increased while nine-month operating cash flow declined from the prior year.
- Dividend and repurchase sustainability relative to operating cash generation, cash balances and credit-facility covenants.
- Lease commitments, the October 2021 credit-facility maturity and any renewal or refinancing developments.
- Progress and potential costs from NATG wind-down obligations and pending unclaimed-property and other legal or tax matters.