Business context and reporting period
This Form 10-Q is for Systemax Inc. (the issuer named in the filing), for the quarter ended September 30, 2016; the company states its actual fiscal third quarter ended October 1. Results cover continuing operations unless noted. Following the 2015 sale of its North American Technology Group (NATG), Systemax operated primarily through its Industrial Products Group (IPG) and EMEA Technology Products Group (EMEA); NATG wind-down results appear partly in discontinued operations.
Financial performance
Amounts are in millions of dollars except per-share figures. The comparable periods are the three and nine months ended September 30.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales, continuing operations | $414.8 | $423.3 | $1,265.4 | $1,389.5 |
| Gross profit | $78.1 | $82.8 | $243.0 | $256.4 |
| Gross margin | 18.8% | 19.6% | 19.2% | 18.5% |
| Operating income (loss), continuing operations | $(3.5) | $3.4 | $(2.9) | $(25.4) |
| Net income (loss), continuing operations | $(5.5) | $1.7 | $(8.6) | $(36.8) |
| Net income (loss), including discontinued operations | $(5.8) | $(10.3) | $(30.5) | $(67.3) |
- Q3 diluted loss per share was $0.15 from continuing operations and $0.01 from discontinued operations. Nine-month diluted losses were $0.23 and $0.59 per share, respectively.
- Q3 IPG sales grew 4.1% to $187.4, while EMEA sales fell 6.3% to $226.5. IPG operating income declined to $8.3 from $10.3; EMEA operating loss widened to $7.4 from $1.8.
- For nine months, IPG sales rose 3.8% to $539.8 and EMEA sales declined 5.8% to $722.8. Consolidated sales fell 8.9%, reflecting in part the absence of NATG sales reported in the prior-year period.
- Q3 consolidated gross margin declined 0.8 percentage points year over year; for nine months it improved 0.7 points. The filing’s non-GAAP presentation, which removes NATG and Misco Germany and adjusts for specified items, reported operating income of $0.3 for Q3 versus $5.6 and $6.3 for nine months versus $16.5. These are non-GAAP measures, not substitutes for GAAP results.
Cash, liquidity and debt
- Cash was $152.4 at September 30, down $62.7 from December 31, 2015. Working capital was $188.5, down $23.4. Accounts receivable were $228.0 and inventory $119.5.
- Operating cash flow was negative $58.1 for the first nine months: negative $36.8 from continuing operations and negative $21.3 from discontinued operations. Investing cash outflow was $2.3 and financing cash outflow was $2.2, including $1.9 of dividends paid.
- Total debt was approximately $0.3 at September 30, with no revolver borrowings. The then-current $125 million facility had $46.6 million of availability and matured October 31. On October 28, the company entered a replacement $75 million secured revolver maturing October 28, 2021, subject to borrowing-base limits and covenants.
- Foreign subsidiaries held $38.2 of cash that was not readily available to the U.S. parent on a tax-efficient basis. Management reported more than $160 million of U.S. liquidity, including cash and undrawn line availability.
Changes, outlook and risks
- Systemax sold certain Misco Germany assets on September 2. The German operation remained in GAAP continuing operations and recorded Q3 sales of $7.5 and a net loss of $3.4; nine-month sales were $33.8 and net loss was $5.8.
- Management expected an additional $1 million to $2 million of NATG wind-down costs after Q3, with possible further costs from lease settlements, subletting and collection estimates. It anticipated $0.5 million to $1.0 million of capital expenditures for the remainder of 2016.
- Management believed cash and credit availability would cover working capital and other needs for at least 12 months. This is management’s assessment, not a guarantee. The filing provides no quantified earnings or revenue guidance.
- Management attributed IPG margin pressure to warehouse staffing and transition costs, increased sales and advertising investment, and a roughly $1.7 million inventory adjustment identified during an IT conversion. The new warehouse-management and distribution system was expected to be completed in the first half of 2017.
- EMEA faced UK market challenges, including Brexit-related pressures, competitive pricing and weak margins; France and Netherlands solutions businesses showed growth. Risks cited include intense competition, currency movements, technology and e-commerce disruptions, inventory exposure, and execution of IT and warehouse transitions.
- Special charges were $1.7 in continuing operations in Q3, primarily related to the Misco Germany asset sale; nine-month charges were $3.6 in continuing operations and $9.0 in discontinued operations. The company had $23.3 of related EMEA and NATG special-charge liabilities at September 30.
- A court awarded Systemax approximately $36 million in restitution from former NATG executives; the company received a partial payment of approximately $1.3 million in Q3 and said collection efforts continue. Other litigation, tax and unclaimed-property matters remain; the company said reasonably possible losses beyond accruals were not expected to be material, but outcomes are uncertain.
- The company declared a $0.05-per-share dividend. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $75 million replacement revolver provides sufficient borrowing capacity under its borrowing-base limits and covenants, and how much remains available.
- Whether operating cash flow improves as NATG wind-down obligations are settled and whether reported working-capital movements are sustainable.
- Progress and costs of the warehouse and IT-system transition, including resolution of inventory accuracy and margin pressures.
- Whether EMEA’s UK performance stabilizes and whether growth in France and Netherlands solutions can offset declines elsewhere.
- Actual remaining NATG exit costs and the amount, timing and collectibility of the restitution award.