Systemax Inc. Form 10-Q — Quarter ended March 31, 2012
Filing identity: The supplied filing is for Systemax Inc., not Global Industrial Co. The filing covers the first quarter of 2012; both comparable quarters comprised 13 weeks. Systemax sells technology products in North America and Europe and industrial products in North America.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $913.6 million | $929.9 million | Down 1.8% |
| Gross profit / margin | $130.7 million / 14.3% | $130.5 million / 14.0% | Margin up 0.3 percentage point |
| Operating income / margin | $10.6 million / 1.2% | $18.6 million / 2.0% | Down 43.0%; margin down 0.8 point |
| Net income | $7.1 million | $13.6 million | Down 47.8% |
| Diluted EPS | $0.19 | $0.36 | Down $0.17 |
| Cash from operations | $14.8 million | $9.7 million | Up $5.0 million |
| Capital expenditures | $2.0 million | $3.7 million | Cash used |
Cash was $111.0 million at March 31, versus $97.3 million at year-end 2011. Working capital was $369.1 million, up $14.4 million from year-end. Total debt was approximately $9.1 million, including the capital equipment lease financing; there were no borrowings on the U.S. revolver or French facility. U.S. revolver availability was $110.4 million, with $9.1 million of letters of credit outstanding. The company reported compliance with credit-facility covenants.
Material changes and operating trends
- Technology Products sales fell 4.2% to $821.9 million; segment operating income fell 50.3% to $8.8 million. Management cited consumer-channel weakness, particularly television shopping, internet and retail, and lower gross profit to cover fixed costs.
- Industrial Products sales rose 27.7% to $90.4 million, while segment operating income increased 20.3% to $8.2 million. Growth reflected broader product offerings and added sales personnel.
- Business-to-business sales increased 6.7%; consumer sales declined 10.8%. Europe grew 4.5% as reported (7.2% excluding currency effects); North America declined 4.5%.
- Gross margin improved with a more favorable mix toward higher-margin Industrial Products and modest Technology Products freight-margin improvement. SG&A rose 7.3% to $120.1 million, including higher internet advertising, personnel and facility costs and reduced vendor co-op funding.
- Special charges totaled $1.9 million, principally senior staffing changes and legal/professional fees related to previously disclosed matters, plus facility exit costs. The company anticipated minimal further costs for the facility relocation.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected available cash and credit resources to fund working capital and other requirements for at least the next 12 months, and described liquidity as adequate for current growth initiatives.
- Plans include investment in technology and IT, new retail stores, and relocation of an Industrial Products distribution and call center. In April 2012, the company entered a lease for an approximately 500,000-square-foot Robbinsville, New Jersey facility through August 2032; disclosed payments include $1.2 million in 2013 and $33.8 million after 2016.
- The French receivables-backed credit facility, with approximately €19.2 million ($25.6 million) available and no borrowings, was scheduled to terminate June 9, 2012. The company also had approximately $7.2 million outstanding under its equipment lease financing.
- Management identified intense technology-product price competition, narrow margins, working-capital needs, consumer-spending weakness, currency movements and seasonality as relevant risks. Fourth-quarter earnings and cash flow are typically somewhat higher; management cautioned that past performance may not predict future results.
- Various commercial, employment, consumer, intellectual-property and tax matters were pending. Management did not expect them, based on available information, to materially adversely affect the company overall, but noted outcomes are unpredictable and could affect a particular period.
- Management stated disclosure controls were effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the intended issuer: the filing identifies Systemax Inc., whereas the request metadata names Global Industrial Co.
- Review the drivers and sustainability of the steep Technology Products operating-income decline and the growth in Industrial Products.
- Assess whether consumer-channel weakness, competitive pricing and reduced vendor co-op funding continue to pressure margins and earnings.
- Verify the June 2012 termination and any replacement arrangements for the French credit facility, and monitor liquidity, working capital and the long-term New Jersey lease commitment.
- Track outcomes and any additional costs from the disclosed legal matters, staffing changes and distribution-center relocation.