Business context and reporting period
This Form 10-Q is filed by Systemax Inc. for the quarter reported as ended June 30, 2016; the company states its actual fiscal second quarter ended July 2, 2016. The filing describes Industrial Products Group (IPG), EMEA Technology Products Group (EMEA), and Corporate and Other as continuing operations. The North American Technology Group (NATG) was sold in December 2015 and was being wound down; its results are presented partly as discontinued operations and partly in continuing operations under GAAP. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Continuing-operations net sales | $420.8 | $454.1 | $850.6 | $966.2 |
| Gross profit / margin | $81.5 / 19.4% | $86.5 / 19.0% | $164.9 / 19.4% | $173.6 / 18.0% |
| Operating income (loss), continuing operations | $1.1 | $(16.7) | $0.6 | $(28.8) |
| Net income (loss), continuing operations | $(2.0) | $(16.7) | $(3.1) | $(38.5) |
| Net income (loss), including discontinued operations | $(7.4) | $(28.4) | $(24.7) | $(57.0) |
| Basic and diluted EPS, total | $(0.20) | $(0.77) | $(0.66) | $(1.54) |
Q2 continuing-operations sales declined 7.3% year over year, while six-month sales declined 12.0%. Management’s non-GAAP comparison, which treats all NATG as discontinued and adjusts for specified items, showed sales down 3.2% in Q2 and 2.0% for the first half; non-GAAP operating income was $2.3 in Q2 and $4.2 for the first half, versus $7.3 and $8.9, respectively, in 2015. These non-GAAP figures are not directly equivalent to GAAP results.
- Segment trends: Q2 IPG sales rose 0.5% to $181.8, but operating income fell to $8.6 from $14.0. EMEA sales fell 5.7% to $238.1 and operating loss widened to $2.4 from $1.6. Constant-currency sales declined 5.6% in EMEA. Sales of the NATG segment in continuing operations were zero in Q2 2016 versus $19.2 a year earlier.
- Cash flow: For the first six months, operating cash flow was $(47.4), comprising $(26.4) from continuing operations and $(21.0) from discontinued operations; total operating cash flow was $6.8 in the prior-year period. Investing cash flow was $(1.8), and financing cash flow was $(0.2).
- Liquidity and debt: Cash was $165.2 at June 30, 2016, down $49.9 from year-end 2015; working capital was $194.8. Total debt was approximately $0.3, with no revolver borrowings. The $125.0 secured revolving facility (potentially expandable to $200.0 subject to conditions) had $38.9 availability after $5.5 in letters of credit and matured October 31, 2016. The company reported covenant compliance.
- Other balance-sheet indicators: Total assets were $593.2 versus $710.1 at year-end; total liabilities were $364.2 versus $456.2. Accounts receivable days outstanding increased to 42.5 from 37.4; inventory turns improved to 12.2 from 10.1.
Material changes, outlook, and risks
- Reported sales comparisons are affected by NATG’s sale and wind-down. For the first half, discontinued operations had $12.0 of net sales and a $21.6 net loss, compared with $559.6 of sales and an $18.5 net loss in the prior-year period.
- Special charges were $1.7 in Q2 2016 and $11.2 in the first half, mostly NATG exit and lease costs. Management expected a further $1–$2 of NATG wind-down costs after Q2; additional costs could arise as leases are settled or sublet. NATG wind-down was substantially complete apart from receivable collection and remaining leases and contingencies.
- IPG’s margin was pressured by a $1.7 inventory adjustment identified during an IT-system conversion, severance and cost-reduction expenses, distribution-center costs, and increased online advertising. EMEA continued to face a challenging UK market; management cited growth in France and Netherlands Solutions as offsets.
- Management expected cash and credit availability to cover working capital and other cash needs for at least 12 months, and anticipated about $8.0 of capital expenditures for the remainder of 2016. It also cited possible future dividend, technology, warehouse, acquisition, and NATG wind-down cash needs. No formal earnings or revenue guidance was provided.
- About $62.0 of cash was held in foreign subsidiaries and was not readily available to the U.S. parent on a tax-efficient basis. The company reported more than $142 of U.S. liquidity, including cash and undrawn credit availability.
- A July 2016 agreement to sell certain assets of the Misco Germany branch, including customer relationships and employee hiring, was expected to close in Q3, subject to conditions. The filing gives no transaction value.
- A court awarded the company approximately $36 of restitution from former NATG executives; collection was uncertain, and the company said it was pursuing available means. The company also disclosed ordinary-course litigation, tax and unclaimed-property matters, and an unresolved possibility of further government action related to an investigation. Management did not expect reasonably possible losses beyond accruals to be material, while noting outcomes are unpredictable.
- Key risks include competitive pricing and narrow EMEA margins, foreign-exchange movements, IT-system disruption, inventory exposure, the ability to complete NATG wind-down, and the approaching revolver maturity. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts to verify
- Confirm issuer identity: the supplied filing names Systemax Inc., whereas the request metadata names GLOBAL INDUSTRIAL Co.
- Review the revolver’s October 31, 2016 maturity and subsequent refinancing or replacement, along with ongoing covenant and availability terms.
- Track continuing-operations cash generation, receivable collection, working-capital needs, and whether the stated 12-month liquidity expectation was achieved.
- Monitor final NATG lease settlements and total wind-down costs against management’s additional $1–$2 estimate.
- Assess whether IPG’s inventory adjustment and margin pressure, EMEA’s UK weakness, and the IT-system transition recur or improve.
- Verify any recovery of the approximately $36 restitution award and developments in the disclosed investigations, legal matters, and Misco Germany asset sale.