Global Industrial Co. / Systemax Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing is by Systemax Inc.; it describes Technology Products and Industrial Products segments and does not identify the registrant as Global Industrial Co. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $849.5m | $872.2m | $1,763.1m | $1,802.0m |
| Gross profit / margin | $118.0m / 13.9% | $128.9m / 14.8% | $248.7m / 14.1% | $259.4m / 14.4% |
| Operating income (loss), continuing operations | $(2.0)m | $21.9m | $8.8m | $40.5m |
| Net income (loss) | $(2.2)m | $15.6m | $4.8m | $29.1m |
| Diluted EPS, continuing operations | $(0.06) | $0.42 | $0.14 | $0.78 |
- Q2 SG&A was $117.8m, versus $114.2m a year earlier; special charges were $2.2m, compared with a $7.2m net special gain in Q2 2011.
- For the first six months, operating cash flow was $55.8m, including $56.1m from continuing operations. Capital spending was $6.9m; investing cash outflow was $6.8m and financing cash outflow was $0.5m.
- Cash rose to $145.8m at June 30 from $97.3m at year-end. Working capital was $364.9m. Total reported debt was approximately $9.5m, including $6.8m outstanding under the bond/lease financing; there were no advances on the U.S. revolving facility. U.S. revolver availability was $113.6m, with $6.0m of letters of credit outstanding.
Material changes and management commentary
- Q2 sales declined 2.6%. Technology Products sales fell 5.9%, while Industrial Products sales rose 30.6%. Business-to-business sales grew 7.7%; consumer-channel sales declined 15.3%.
- Management attributed Technology Products weakness primarily to soft North American consumer internet, retail, and television-shopping sales. Industrial Products growth reflected expanded product offerings and categories, plus additional sales personnel.
- Gross margin declined amid North American technology price competition, freight incentives, and changes in geographic and product mix. Management cited reduced vendor cooperative funding, higher internet advertising, and increased rent and facility costs as factors raising SG&A.
- Technology Products reported a Q2 operating loss of $3.4m; Industrial Products operating income was $6.7m, down from $9.0m. The filing says Technology Products results benefited by approximately $2.6m from a favorable resolution of contingent liabilities.
- Software Solutions third-party activity ended in Q2 and is presented as discontinued operations; the company expected minimal future costs from that segment.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said cash and credit availability should fund working capital and other cash needs for at least the next 12 months, while noting larger growth initiatives or acquisitions could require additional capital.
- In April 2012, the company entered a lease through August 2032 for an approximately 500,000-square-foot Industrial Products distribution and call center in Robbinsville, New Jersey. Disclosed future lease payments total $33.8m after 2016, in addition to scheduled payments for 2012–2016.
- Industrial Products recorded approximately $2.2m of facility relocation and exit costs for the first half; the company anticipated minimal additional costs. North America Technology Products recorded approximately $1.9m of staffing-change and legal/professional costs for the first half.
- Risks highlighted include intense technology product price competition and narrow margins, consumer-spending weakness, working-capital and inventory demands, foreign-exchange movements, and the uncertain outcomes of commercial, intellectual-property, tax, and other legal matters. Management did not expect the legal matters to have a material adverse effect based on information then available, but acknowledged outcomes could affect a particular period.
- Results are seasonal, with the fourth quarter typically producing somewhat higher earnings and cash flows. The filing cautions that past performance may not predict future results. The company reported compliance with credit-facility covenants and effective disclosure controls as of June 30, 2012.
Most important facts for investors to verify
- Whether technology consumer-channel weakness and lower gross margins persist, and whether business-to-business and Industrial Products growth can offset them.
- How recurring operating performance compares after separating the prior-year special gain, current-period special charges, and the approximately $2.6m contingent-liability benefit.
- Cash conversion and working-capital movements, particularly receivables, inventory, and payables, alongside planned facility and technology spending.
- The costs, ramp-up, and long-term obligations associated with the new distribution and call center lease.
- Developments in legal, tax, and intellectual-property matters, and continued compliance with credit-facility availability and covenant requirements.