Business context and reporting period
This is Systemax Inc.’s Form 10-K for the year ended December 31, 2015 (53 weeks; the filing presents results as of December 31). Systemax marketed industrial/MRO and technology products. In December 2015 it sold certain North American Technology Products Group (NATG) assets to PCM and began winding down the remaining NATG business. The continuing businesses are Industrial Products Group (IPG), EMEA Technology Products Group, and Corporate and Other. The filing’s presentation of continuing and discontinued operations should be distinguished when comparing results.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Continuing-operations net sales | $1,854.7 million | $2,104.2 million |
| Gross profit / margin | $342.7 million / 18.5% | $377.2 million / 17.9% |
| Operating loss from continuing operations | $24.1 million | $13.7 million |
| Continuing-operations net loss | $48.3 million | $32.0 million |
| Discontinued-operations net loss | $51.5 million | $5.5 million |
| Total net loss | $99.8 million | $37.5 million |
| Cash and working capital at year-end | $215.1 million / $214.2 million | $165.0 million / $310.6 million |
| Operating cash flow, continuing operations | $135.6 million | $0.8 million |
| Operating cash flow, discontinued operations | $(49.1) million | $(0.9) million |
| Total debt at year-end | $1.0 million | $3.9 million |
Continuing-operations sales fell 11.9%, while gross margin rose 0.6 percentage points. The operating loss widened despite lower SG&A, reflecting $27.9 million of continuing-operations special charges and weak NATG results. The continuing-operations cash-flow increase was heavily supported by working-capital releases, including inventory liquidation; total operating cash flow was $86.5 million. Investing cash use was $34.7 million and financing cash use was $3.0 million.
Segment results: IPG sales rose 25.6% to $698.6 million, including $89.1 million from the acquired Plant Equipment Group (PEG); excluding PEG and currency effects, sales rose 10.1%. IPG operating income was $43.7 million, but operating margin declined to 6.3% from 7.4%. EMEA sales fell 11.5% to $1,052.9 million and its operating loss was $10.8 million. NATG continuing-operations sales fell 72.2% to $97.8 million and its operating loss was $38.2 million. Separately, NATG discontinued operations generated $1,053.4 million in sales and a $51.5 million net loss in 2015.
Material changes, outlook and risks
- Systemax sold certain NATG assets for approximately $14 million and sold the Circuit City name and trademarks for $2 million. The company expected additional NATG wind-down costs of $15–$25 million in 2016 or later, plus continuing exposure to lease obligations.
- Management expected wind-down activity to be substantially complete by the end of Q2 2016 and the remaining NATG exit to be completed in 2016, apart from settling lease commitments. Management said cash, operating cash flows and credit availability should fund requirements for at least 12 months; anticipated 2016 capital expenditures were approximately $15 million.
- At December 31, the $125 million secured revolving facility had $33 million of availability, $4.9 million of letters of credit and no borrowings. It matured October 31, 2016 and included financial and operating covenants. The company reported covenant compliance. Cash held in foreign subsidiaries was $66.6 million and was not readily available to the U.S. parent on a tax-efficient basis.
- Major risks include intense price competition, foreign-exchange movements, IT-system transitions and outages, acquisition integration, supplier concentration, inventory exposure, and the ability to complete the NATG exit within estimated costs. A 10% currency-rate change was estimated to affect sales by about $134.5 million and pretax loss by about $3.4 million.
- Tax valuation allowances increased; the company recorded $18.8 million in 2015 and reported $80.6 million of total valuation allowances at year-end. These reflected management’s view that certain deferred tax assets might not be realized given recent losses.
- A court awarded Systemax approximately $36 million in restitution from former NATG executives in March 2016. Collection is uncertain. The company also disclosed a continuing U.S. Attorney’s Office investigation; its Audit Committee reported no evidence of executive conflicts and no material evidence of internal-control or books-and-records violations in its review.
- Non-GAAP continuing-operations results, which exclude all NATG and specified adjustments, showed operating income of $16.8 million versus $20.5 million in 2014. These figures are supplemental and not directly interchangeable with GAAP results.
Important facts for investors to verify
- Reconcile reported continuing and discontinued operations, particularly NATG’s 2015 sales, losses, cash use and exit-related charges.
- Track actual remaining NATG wind-down costs, lease settlements and any cash recoveries, including collection of the $36 million restitution award.
- Assess whether IPG can sustain growth and improve margins after PEG integration, and whether EMEA can return to profitability amid currency and pricing pressure.
- Review the quality and repeatability of 2015 operating cash flow, given the significant contribution from working-capital reductions and discontinued-operations cash outflows.
- Monitor renewal or replacement of the revolving facility before its October 2016 maturity, covenant headroom, and availability of overseas cash.
- Review deferred-tax-asset recoverability, unresolved tax and unclaimed-property matters, and any developments in the government investigation.