Global Industrial Co. (Systemax Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing identifies the registrant as Systemax Inc.; its continuing operations comprise the Industrial Products Group (IPG) and France-based Europe Technology Products Group (ETG). Unless noted, amounts are in millions of dollars.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales, continuing operations | $355.2 | $302.5 | +17.4% |
| Gross profit / margin | $96.7 / 27.2% | $81.8 / 27.0% | +18.2%; margin +0.2 pts |
| SD&A / percentage of sales | $76.6 / 21.6% | $69.4 / 22.9% | +10.4%; ratio improved 1.3 pts |
| Operating income / margin, continuing operations | $20.1 / 5.7% | $12.4 / 4.1% | +62.1%; margin +1.6 pts |
| Income from continuing operations | $14.2 | $10.3 | +37.9% |
| Net income (loss), including discontinued operations | $14.6 | $(18.5) | Prior-year loss included discontinued-operation charges |
| Diluted EPS | $0.38 | $(0.50) | Continuing-operations diluted EPS: $0.37 vs. $0.28 |
| Operating cash flow | $16.4 | $(1.9) | Continuing operations: $15.2 vs. $(0.4) |
| Capital expenditures | $0.5 | $1.0 |
Business performance and changes
- IPG sales rose 11.6% to $212.2; segment operating income increased 30.4% to $16.3. Management cited broad-based demand, including material handling and storage, and improved product mix. IPG operating margin was 7.7% versus 6.6%.
- ETG (France) sales rose 27.3% to $143.0; segment operating income increased 60.3% to $9.3. On a constant-currency average-daily-sales basis, ETG growth was 12.1%; reported growth also reflects currency and the different number of selling days. ETG operating margin was 6.5% versus 5.2%.
- Consolidated sales increased 11.7% on a constant-currency average-daily-sales basis. Management attributed operating-income growth to sales growth, improved gross margins and operating-cost leverage, alongside cost-control efforts.
- Comparability is affected by the 2017 sale of the SARL European businesses, whose results are presented as discontinued operations. The 2017 discontinued-operations loss was $28.8, including a $23.3 loss on the SARL sale; Q1 2018 discontinued operations recorded $0.4 of income.
Financial position, liquidity and outlook
- Cash was $141.0 at March 31, down $43.5 from year-end, primarily reflecting $59.8 of dividends paid. Working capital was $190.3, up $12.0 from December 31. Accounts receivable were $186.3; inventory was $130.9.
- Total liabilities were $296.3 and shareholders’ equity was $224.0. The company had no revolver borrowings; the $75 million facility had $71.1 of excess availability after letters of credit. The company reported covenant compliance.
- Q1 dividends paid included the $55.7 special dividend declared in December 2017 and $4.1 of regular dividends. Dividends declared were $0.11 per share versus $0.05 a year earlier.
- Management said operating cash flow and credit availability should fund working capital and other cash needs for at least the next 12 months. Planned 2018 capital expenditures were up to $8.0, not contractually committed. The filing gives no specific revenue or earnings guidance.
- Cash held in foreign subsidiaries was approximately $52.8. Management reported more than $159 million of U.S. liquidity, including cash and undrawn credit availability.
Risks, contingencies and unusual items
- Former NATG facilities carried approximately $46.0 of lease obligations and a $13.7 reserve at quarter-end, based partly on expected sublease income. Management noted estimates may require revision if sublease assumptions do not hold. It expected $1.0–$2.0 of additional NATG discontinued-operation charges, with further lease-related costs possible.
- SARL wind-down costs included $0.1 of Q1 legal and professional fees; additional SARL charges were expected to be less than $1.0. These anticipated amounts are in discontinued operations.
- A software publisher’s lawsuit involving alleged sales-channel and intellectual-property violations by former NATG subsidiaries remained at an early stage; potential damages could not be estimated. The company also disclosed other litigation, tax and unclaimed-property matters, while stating that reasonably possible losses beyond accrued amounts were not expected to be material.
- The effective tax rate on continuing operations was 29.0%, versus 18.3%. The company had not completed its analysis of certain effects of the 2017 U.S. tax law and had recorded no Q1 adjustments to year-end provisional amounts.
- Risks identified include intense price competition, inventory and working-capital exposure, technology and cybersecurity disruptions, foreign-exchange movements, economic conditions and uncertainty in recovering costs through subleases.
Important facts for investors to verify
- Assess the sustainability of reported sales and margin growth, separating constant-currency performance from currency effects and considering the changed business portfolio.
- Monitor cash conversion and working-capital movements, especially receivables, and the effect of dividends on cash balances.
- Track NATG lease reserves against actual sublease proceeds and settlements, as well as remaining SARL and NATG wind-down costs.
- Review the company’s final accounting for the tax-law changes and the potential balance-sheet impact of adopting lease accounting in fiscal 2019.
- Follow the disclosed litigation and regulatory matters; the filing does not quantify potential damages for the software publisher’s lawsuit.