Business context and reporting period
This filing is Systemax Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013; the actual fiscal quarter ended June 29. The filing is not identified as Global Industrial Co. Systemax operated Technology Products and Industrial Products segments, with the latter selling industrial products in North America.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $805.8 million | $849.2 million | $1,686.5 million | $1,762.4 million |
| Gross profit | $117.1 million | $118.0 million | $239.7 million | $248.7 million |
| Gross margin | 14.5% | 13.9% | 14.2% | 14.1% |
| Operating income (loss) | $(6.8) million | $(2.0) million | $(15.5) million | $8.8 million |
| Net income (loss) | $(6.1) million | $(2.3) million | $(12.4) million | $4.8 million |
| Diluted EPS | $(0.16) | $(0.06) | $(0.34) | $0.13 |
For the six months ended June 30, operating cash flow was $(0.5) million, investing cash flow $(7.1) million, and financing cash flow $(1.2) million. Cash declined to $138.6 million from $150.7 million at year-end 2012. Working capital was $347.2 million. Total debt on the balance sheet was $6.8 million, including $5.0 million outstanding under the equipment financing; no revolving-credit borrowings were outstanding. Revolver availability was $104.9 million, with $5.5 million of letters of credit, and the company reported covenant compliance.
Material changes versus prior comparable periods
- Q2 sales fell 5.1%; first-half sales fell 4.3%. Technology Products sales declined 8.0% in Q2 and 6.9% for the first half, while Industrial Products sales grew 15.3% and 16.0%, respectively.
- Consumer-channel sales declined 15.3% in Q2 and 12.9% for the first half; business-to-business sales increased 1.3% and 1.5%, respectively.
- Despite slightly improved consolidated gross margin, operating results deteriorated. Technology Products reported operating losses of $12.2 million in Q2 and $23.5 million in the first half; Industrial Products operating income increased to $11.1 million and $19.6 million, respectively.
- First-half special charges rose to $10.7 million from $4.1 million. The 2013 charges included workforce and exit costs, European shared-services start-up costs, retail-store closures, and legal and professional fees.
- First-half operating cash flow fell to $(0.5) million from $56.0 million, primarily reflecting changes in working-capital accounts and lower earnings. Inventory decreased $75.5 million from December 31, 2012.
Outlook, commentary, risks and unusual items
No quantified revenue or earnings guidance is provided. Management said cash, operating cash flows, and available credit were expected to cover working-capital and other cash requirements for at least the next 12 months. It highlighted competitive pricing and weak consumer demand, particularly in Technology Products, as sources of uncertainty; results are seasonal, and fourth-quarter earnings and cash flows have historically been somewhat higher.
- After quarter-end, the company closed two retail stores and planned to close another. It anticipated approximately $8.1 million of pretax charges in Q3 2013, primarily lease termination costs and asset write-offs.
- The August 5, 2013 expansion of the European shared-services center was expected to generate approximately $11.0 million of workforce-reduction, exit, and start-up costs from the second half of 2013 through 2014; scope and timing could change.
- Legal matters include a Texas sales-tax audit and a multistate unclaimed-property audit, as well as other ordinary-course claims and intellectual-property matters. Management did not expect a material adverse effect based on information then available, but outcomes were described as unpredictable.
- Foreign-currency movements affect reported results; the company had no outstanding currency options or forwards. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor verification points
- Confirm the intended issuer: this filing is for Systemax Inc., not an entity named Global Industrial Co.
- Assess whether Technology Products can stabilize sales and operating performance, and whether Industrial Products growth can continue.
- Track the cost, timing, cash impact, and expected benefits of store closures and the European shared-services expansion.
- Review working-capital cash generation, revolver availability and covenants, and obligations under leases and equipment financing.
- Monitor the Texas sales-tax and multistate unclaimed-property audits and other legal contingencies.