Systemax Inc. (now identified in the request as Global Industrial Co) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; the company states its actual fiscal quarter ended April 1, 2017. The filing is by Systemax Inc., not Global Industrial Co.
Business context
Systemax sells industrial maintenance, repair and operations products through its Industrial Products Group (IPG), and technology products through its Europe Technology Products Group (ETG). On March 24, 2017, it sold most of its European technology businesses to Hilco-related purchasers for nominal proceeds, retaining its France technology business and a 5% residual equity interest in the purchaser’s acquiring entity. The sold businesses are reported as discontinued operations. The company had also previously sold its North American Technology Group and certain other operations.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Continuing-operations net sales | $302.5 million | $286.8 million |
| Gross profit / gross margin | $70.8 million / 23.4% | $66.6 million / 23.2% |
| SG&A | $58.4 million | $61.9 million reported; $63.5 million including special charges in the company’s KPI comparison |
| Operating income from continuing operations | $12.4 million; 4.1% margin | $3.1 million; 1.1% margin |
| Income from continuing operations | $10.3 million | $1.5 million |
| Loss from discontinued operations | $(28.8) million | $(18.8) million |
| Net loss / diluted loss per share | $(18.5) million / $(0.50) | $(17.3) million / $(0.47) |
| Cash and working capital at quarter-end | $144.5 million and $197.6 million | Cash at Dec. 31, 2016: $149.7 million; working capital: $186.2 million |
| Operating cash flow | $(1.9) million total; $(0.4) million continuing operations | $(51.0) million total; $(36.6) million continuing operations |
Continuing-operations sales rose 5.5% year over year. IPG sales increased 11.5% to $190.2 million; France ETG sales increased 12.2% to $112.3 million. The company’s adjusted, non-GAAP comparison excludes divested businesses and certain other items, and shows sales of $302.5 million versus $270.7 million, up 11.7%, and operating income of $13.3 million versus $6.9 million. These adjusted figures are not GAAP results.
Total Q1 discontinued-operations sales were $117.0 million versus $155.1 million. The discontinued-operations loss included $23.9 million of special charges, primarily the $23.3 million loss on sale of the SARL Businesses. The filing reports $14.4 million of translation adjustments, $8.2 million of net asset write-offs and $0.7 million of sale-related professional and other costs.
Liquidity, debt and cash flow
Cash declined $5.2 million from year-end. The company reported $0.4 million of cash used in continuing operating activities, with working-capital movements using $12.6 million; discontinued operations used a further $1.5 million. Capital expenditures were $1.0 million, and dividends paid were $1.8 million. Accounts receivable days outstanding increased to 47.1 from 39.7, while inventory turns fell to 8.2 from 11.4.
There were no borrowings under the $75 million secured revolving credit facility at March 31. Excess availability was $65.1 million after $4.2 million of letters of credit, and the company was in covenant compliance. The company reported more than $174 million of U.S. liquidity, including cash and undrawn credit availability; $35.6 million of cash held in foreign subsidiaries was not readily available to the U.S. parent on a tax-efficient basis. Total liabilities were $246.4 million; contractual obligations included $131.8 million of operating leases and $22.6 million of purchase and other obligations.
Changes, outlook and risks
- Continuing-operations operating income improved to $12.4 million from $3.1 million. Management attributed improvement to sales growth, cost leverage, lower corporate costs and the absence of prior-year special charges; IPG and ETG operating margins both improved.
- IPG gross margin declined 40 basis points, partly due to temporary warehouse labor during a warehouse-management system transition expected to finish in the first half of 2017. France ETG gross margin declined 50 basis points excluding the effect of the German divestiture, reflecting product and customer mix.
- Management expects $0.5 million to $1.0 million of additional charges related to the SARL sale and $1.0 million to $2.0 million related to the NATG wind-down. Further costs could arise from post-closing working-capital tests, leased facilities and receivable collections. The company’s approximately $20 million of vendor guarantees are indemnified by the purchaser, which pledged collateral; potential exposure and recovery remain important to monitor.
- Management expects cash from operations and available credit to cover requirements for at least the next 12 months. Capital expenditures of approximately $1 million to $5 million were anticipated for the remainder of 2017. The filing gives no specific revenue or earnings guidance.
- Risks include intense price competition, inventory and working-capital demands, technology or e-commerce disruptions, foreign exchange and regulatory exposure, and unresolved litigation, tax and unclaimed-property matters. Management stated that reasonably possible legal losses in excess of accruals were not expected to be material, while noting outcomes are uncertain.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective approach; its evaluation was incomplete, though management did not expect a significant change in revenue timing or presentation. The lease-accounting standard was expected to apply starting in fiscal 2019.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Systemax Inc.; the request names Global Industrial Co.
- Track post-sale costs, working-capital true-ups and the enforceability and adequacy of indemnification and collateral for the vendor guarantees.
- Assess whether IPG growth and France ETG performance persist after the divestitures, and compare results using consistent continuing-business definitions.
- Monitor cash conversion, higher receivable days, lower inventory turns, lease commitments and dividend funding.
- Review the progress and cost of the warehouse and technology-system transitions, as well as remaining NATG lease and legal contingencies.