Business context and reporting period
This is Systemax Inc.’s Form 10-K for the fiscal year ended December 31, 2020; the company markets industrial and business equipment and supplies in North America under the Global Industrial banner. Its fiscal 2020 comprised 53 weeks and actually ended January 2, 2021. The filing is by Systemax Inc., not a separately identified “Global Industrial Co.” It reports one continuing operating segment; former businesses are presented as discontinued operations.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $1,029.0 million | $946.9 million | +8.7% |
| Gross profit / margin | $356.9 million / 34.7% | $325.7 million / 34.4% | Margin +0.3 percentage points |
| Operating income / margin | $84.1 million / 8.2% | $66.1 million / 7.0% | Income +27.2% |
| Continuing-operations net income | $64.1 million | $50.0 million | +28.2% |
| Diluted EPS from continuing operations | $1.68 | $1.32 | +27.3% |
| Cash from continuing operating activities | $67.3 million | $70.3 million | Down $3.0 million |
Reported average daily sales on a constant-currency basis increased 7.0%; the year also had four more selling days than 2019. U.S. sales rose 7.4%, while Canadian sales increased 33.6% (34.8% constant currency). The effective tax rate fell to 23.7% from 24.4%. Including discontinued operations, net income was $65.4 million versus $48.5 million.
At year-end, cash and cash equivalents were $22.4 million, accounts receivable $102.3 million, and inventory $132.3 million. Working capital declined to $77.4 million from $144.5 million, primarily following a $2.00-per-share special dividend, of which $75.1 million was paid in December. Inventory turns decreased to 5.3 from 5.9; receivable days rose to 37.4 from 35.9. Continuing-operations investing cash outflow was $2.7 million. Financing cash outflow was $138.8 million, mainly reflecting dividends and $7.2 million of share repurchases.
The company had no revolving-credit borrowings at year-end and reported $72.6 million of excess availability under its $75 million secured facility. The facility matures October 2021; management expected to renew it before expiration. Total liabilities were $268.1 million, including $87.5 million in recognized operating-lease liabilities; scheduled undiscounted lease payments totaled $112.6 million. Shareholders’ equity was $106.8 million, down from $175.5 million.
Material changes versus the prior year
- Sales and operating profit grew, with gross margin up modestly and operating margin improving 1.2 percentage points. Management attributed the improvement to stronger in-stock and private-label mix, price rationalization, marketing efficiencies, fixed-cost leverage, and April workforce reductions.
- SD&A rose 4.8% to $272.8 million, but declined as a share of sales to 26.5% from 27.5%. Lower advertising and catalog/trade-show costs were partly offset by higher compensation, consulting, facility, and credit-card costs.
- Cash fell by $74.8 million from year-end 2019, while working capital fell by $67.1 million, largely reflecting substantial dividend payments. Inventory increased as the company stocked pandemic-related products and certain core products.
- 2020 had no special charges in continuing operations; 2019 included a $0.8 million special gain. 2020 discontinued operations reported $1.3 million of net income, versus a $1.5 million loss in 2019.
Outlook, risks and unusual items
Management’s 2021 priorities include customer experience, private-label expansion, e-commerce, service automation, and distribution-center improvements. It forecast capital expenditures of $5 million to $7 million and said cash and operating cash flow should cover requirements for at least the next 12 months. No revenue or earnings guidance was provided.
Management warned of early-2021 supply-chain disruption, including shipping-container shortages, port congestion, winter-storm impacts to domestic less-than-truckload carriers, and higher freight costs. It expected fourth-quarter freight pressures to continue into the first quarter of 2021 and anticipated temporary additional costs during a transition to a new third-party logistics partner. Other key risks include pandemic-related demand and operating disruption, vendor allocation and product availability, tariffs and possible steel-rack anti-dumping duties, labor tightness, margin changes from product/channel mix, inventory obsolescence, and technology or cybersecurity incidents.
Discontinued NATG operations recorded approximately $1.9 million of restitution receipts and $0.5 million of professional fees in 2020. In February 2021, the company recorded approximately $15 million in restitution receipts and $3 million in professional fees, to be reported in first-quarter 2021 discontinued operations. The company expects up to $0.5 million of further NATG exit costs. It reported ongoing legal, tax, customs, and unclaimed-property matters, but did not expect reasonably possible losses beyond recorded accruals to be material. The auditor issued unqualified opinions on the financial statements and internal controls; inventory valuation reserves were identified as a critical audit matter.
Important facts for investors to verify
- Whether 2021 sales growth and margins can be sustained after pandemic-related product demand, and amid freight and supply constraints.
- Renewal terms and continued availability of the revolving credit facility before its October 2021 maturity.
- Inventory recoverability and the effect of slower inventory turns, particularly for pandemic-related and slower-moving core products.
- The timing and net financial impact of the 2021 restitution receipts, associated fees, and remaining discontinued-business exit obligations.
- Dividend capacity and the effect of distributions on liquidity: 2020 declared dividends were $3.56 per share, including special dividends.
- Potential outcomes of the steel-rack trade investigation and legal, tax, and unclaimed-property matters.