Business Context and Reporting Period
This summary covers the Form 10-Q for Systemax Inc. (Note: The input metadata listed "GLOBAL INDUSTRIAL Co," but the filing text identifies the registrant as Systemax Inc., which operates the Global Industrial segment). The report covers the quarterly period ended June 30, 2010 (actual fiscal quarter ended July 3, 2010). Systemax is a direct marketer of brand name and private label products organized into two reportable segments: Technology Products (computers, consumer electronics) and Industrial Products (material handling, storage equipment). The Software Solutions segment was exited in 2009.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Net Sales | $805.9 million | $1,721.1 million |
| Gross Profit | $115.2 million | $241.5 million |
| Gross Margin | 14.3% | 14.0% |
| Operating Income | $16.0 million | $36.4 million |
| Operating Margin | 2.0% | 2.1% |
| Net Income | $9.5 million | $21.2 million |
| Diluted EPS | $0.25 | $0.56 |
| Cash and Equivalents | $32.8 million (as of June 30, 2010) | N/A |
| Working Capital | $271.6 million | N/A |
| Short-term Debt | $12.2 million | N/A |
| Net Cash Used in Operating Activities | N/A | $(15.0) million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 11.7% for the quarter and 16.8% for the six-month period compared to 2009. This was driven by a 38.9% increase in European sales (partially due to the WStore acquisition) and a 27.4% increase in Industrial Products sales.
- Profitability: Operating income surged 84.4% for the quarter and 53.5% for the six-month period. Net income increased 45.6% and 39.6%, respectively.
- Segment Performance:
- Technology Products: Sales grew 10.6% (quarter) and 16.4% (six months), though operating margin declined slightly to 2.0% due to price promotions and integration costs.
- Industrial Products: Sales grew 27.4% (quarter) and 23.6% (six months), with operating margin expanding to 9.9% (quarter) and 8.3% (six months) due to improved economic conditions and cost reductions.
- Cash Flow: Net cash used in operating activities increased to $15.0 million for the six months ended June 30, 2010, compared to $7.7 million in the prior year period. This was primarily due to a $19.0 million increase in inventory levels and a $18.3 million decrease in accounts payable.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue offering selective price incentives to maintain market share in the Technology segment. They anticipate cash needs of approximately $3.0 million in the second half of 2010 for WStore integration costs.
- Liquidity: The company maintains a $120.0 million secured revolving credit facility (expiring October 26, 2010) with $107.1 million in total availability. There were no outstanding advances on this facility as of June 30, 2010. Management believes current cash and credit availability are sufficient for the next 12 months.
- Legal Proceedings: The company is defending a lawsuit filed by the Florida Attorney General alleging deceptive trade practices regarding customer rebates. The company denies the allegations. Additionally, the company faces various other routine litigation regarding intellectual property and commercial matters.
- Market Risks: The company is exposed to foreign currency exchange rate fluctuations (Euros, Pounds, Canadian dollars) and intense price competition in the technology sector. As of June 30, 2010, the company held no outstanding foreign currency options or forward contracts.
Investor Verification Checklist
- Inventory Build-up: Verify the sustainability of the $14.8 million increase in inventory and its impact on future working capital requirements.
- WStore Integration: Monitor the $3.0 million in anticipated integration costs and the realization of synergies from the European acquisition.
- Credit Facility Renewal: Confirm the renewal of the $120 million revolving credit facility expiring in October 2010.
- Legal Exposure: Track the status of the Florida Attorney General lawsuit regarding rebate practices.
- Margin Pressure: Assess the impact of ongoing price promotions and freight incentives on the Technology Products segment's gross margin.