Systemax Inc. 2011 Form 10-K Summary
Entity note: The filing is for Systemax Inc., not a registrant named Global Industrial Co. Global Industrial is a business within Systemax’s Industrial Products segment. Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results.
Business context and reporting period
Systemax markets technology and industrial products through e-commerce, catalogs, call centers and retail stores in North America and Europe. Technology Products accounted for 91% of 2011 sales; Industrial Products accounted for 9%. The company operated 42 North American retail stores at year-end. All three reported fiscal years contained 52 weeks.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $3,682.0 million | $3,590.0 million |
| Gross profit / margin | $530.7 million / 14.4% | $489.6 million / 13.6% |
| Operating income / margin | $80.5 million / 2.2% | $68.7 million / 1.9% |
| Net income | $54.4 million | $42.6 million |
| Diluted EPS | $1.47 | $1.13 |
| Operating cash flow | $18.2 million | $64.9 million |
| Cash at year-end | $97.3 million | $92.1 million |
| Working capital | $354.7 million | $300.9 million |
Year-over-year, sales rose 2.6%, operating income 17.2%, and net income 27.7%. Operating cash flow fell substantially, chiefly reflecting working-capital movements, including lower accounts payable and accrued liabilities. Year-end total debt was approximately $9.7 million, consisting of capital lease obligations; there were no advances under the U.S. or French revolving facilities. Total assets were $889.7 million and shareholders’ equity was $454.3 million.
Fourth-quarter 2011 sales were $978.8 million versus $1,006.2 million a year earlier; net income was $14.7 million versus $12.7 million. The filing does not provide a clear fourth-quarter operating cash-flow figure.
Material changes versus prior year
- Industrial Products sales increased 28.0% to $319.9 million, and segment operating income rose 45.4% to $34.6 million. Its larger sales contribution helped lift consolidated gross margin.
- Technology Products sales increased 0.6% to $3,358.8 million, but declined 1.0% on a constant-currency basis. Business-to-business sales grew while consumer-channel sales declined 6.8%.
- Foreign exchange movements added approximately $54.6 million to reported sales; consolidated sales grew 1% on a constant-currency basis.
- SG&A rose 9.3% to $455.7 million, faster than sales, reflecting staffing, retail-store and facility costs, advertising, and depreciation and amortization.
- Reported results included a net special gain of $5.6 million, largely related to the settlement with a former officer, compared with $4.3 million in special charges in 2010.
Outlook, risks, contingencies and unusual items
- Management expected 2012 capital expenditures of approximately $20 million, primarily for technology and infrastructure, retail stores and distribution capabilities. It stated that cash, operating cash flows and available credit were expected to cover requirements for at least the next 12 months. No earnings or revenue guidance was provided.
- The amended U.S. revolving facility has a $125 million maximum, subject to borrowing-base limits, and expires in October 2015. Year-end availability was $113.1 million, with $6.4 million in letters of credit outstanding; the company reported covenant compliance.
- Technology-market discounting, narrow margins, consumer-channel weakness, inventory obsolescence, supplier dependence, foreign-exchange exposure, information-system risks and retail-store costs are key stated risks. A primary financial system was being replaced.
- An Audit Committee investigation into alleged misconduct by former Technology Products chief Gilbert Fiorentino led to his resignation and a settlement involving assets valued at approximately $11 million. The company recorded an approximately $8.4 million financial-statement benefit, offset in part by $2.8 million of 2011 investigative and legal fees. The SEC opened a formal investigation; Systemax said it was cooperating and expected further related costs. In January 2012, the company sued former employees seeking damages. The internal investigation said the identified matters had no material impact on previously reported results; the settlement was not restitution.
- Other lawsuits, intellectual-property claims and tax-related inquiries were described as ordinary-course matters. Management did not expect them collectively to have a material adverse effect based on information then available, while noting outcomes were uncertain. Net non-cancelable operating lease commitments were approximately $204.4 million.
- Management and the auditor reported effective internal control over financial reporting as of year-end; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Confirm the intended issuer: this filing is Systemax Inc.; Global Industrial is a segment/business, not the registrant named on the 10-K cover.
- Review the sustainability of earnings growth excluding the $5.6 million special gain and assess the continuing investigation, litigation and legal costs.
- Reconcile net income growth with the sharp decline in operating cash flow and monitor working-capital trends, especially payables and receivables.
- Assess whether Industrial Products growth can offset weak consumer-channel performance and persistent technology-product pricing pressure.
- Check execution and costs of the planned financial-system replacement and approximately $20 million of anticipated 2012 capital expenditures, alongside lease commitments and credit-facility covenants.