Systemax Inc. — Form 10-Q Summary
Issuer note: The supplied filing is for Systemax Inc., not Global Industrial Co. The company later used the Global Industrial name, but this filing identifies Systemax as the registrant.
Business context and reporting period
Systemax was a direct marketer of technology and industrial products, operating through Technology Products and Industrial Products segments. This 10-Q covers the quarter and nine months reported through September 30, 2011; the company states its actual fiscal third quarter ended October 1, 2011. The quarter and nine-month periods each comprised 13 and 39 weeks, respectively.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $901.2m | $862.7m | $2,703.3m | $2,583.8m |
| Gross profit / margin | $131.3m / 14.6% | $115.3m / 13.4% | $390.8m / 14.5% | $353.3m / 13.7% |
| Operating income / margin | $19.1m / 2.1% | $12.1m / 1.4% | $59.6m / 2.2% | $48.6m / 1.9% |
| Net income / diluted EPS | $10.6m / $0.29 | $8.6m / $0.23 | $39.8m / $1.07 | $29.8m / $0.79 |
- Cash flow: Nine-month operating cash flow was $45.7m, versus cash used of $24.5m in 2010. Investing used $9.1m, mainly for systems and retail-store expenditures; financing used $1.1m. Cash increased $34.3m to $126.4m.
- Balance sheet and liquidity: At September 30, cash was $126.4m and working capital was $335.7m, up from $300.9m at year-end 2010. Total debt on the balance sheet was approximately $8.5m, including $6.9m outstanding under the Recovery Zone financing. No advances were outstanding on the main revolving facility; availability was $106.6m, with $9.9m of letters of credit. A French facility had approximately $23.4m available and no borrowings.
- Segment performance: Q3 Technology Products sales rose 2.4% to $813.3m and operating income rose to $13.6m; Industrial Products sales rose 28.2% to $87.0m and operating income rose to $10.2m. For the first nine months, the segments generated $2,464.3m and $236.6m of sales, respectively.
Material changes versus the prior comparable period
- Q3 sales increased 4.5%, while nine-month sales increased 4.6%. Industrial Products grew 28.2% in both comparisons; Technology Products grew more modestly.
- Business-to-business sales rose 16.8% in Q3 and 13.4% year to date, while consumer-channel sales declined 8.1% and 4.2%, respectively. Management attributed the consumer decline mainly to weaker unassisted website sales in North America and Europe, partly offset by retail-store performance.
- Gross margin improved 1.2 percentage points in Q3 and 0.8 points year to date, primarily from segment and channel mix and improved Technology Products freight margins. SG&A costs as a share of sales increased 0.5 percentage points in both periods.
- Nine-month results included a net special gain of $6.2m, principally reflecting an $8.4m benefit from a former executive’s settlement, partly offset by related legal and professional fees. Excluding special gains and charges, Technology Products operating margin declined year to date, according to management.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management expected available cash and credit resources to meet working-capital and other needs for at least the next 12 months; larger acquisitions or a faster store-opening pace could require additional capital.
- Management cited intense price competition and narrow margins in technology products, working-capital-intensive distribution, consumer-spending sensitivity, foreign-exchange fluctuations, and seasonal earnings and cash flows. Fourth-quarter earnings and cash flows are typically somewhat higher. Management cautioned that prior performance may not indicate future results.
- The SEC had initiated a formal investigation into matters uncovered in the company’s Miami operations review. The former Technology Products executive resigned and surrendered assets valued at approximately $11m under a settlement. The company was cooperating, expected additional related expenses, and said the investigated matters had not materially affected previously reported results. The ultimate outcome of this investigation and other legal, intellectual-property, and tax matters remained uncertain.
- The company reported compliance with credit-facility covenants and effective disclosure controls as of September 30, 2011; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and filing identity: this document is Systemax Inc.’s 2011 third-quarter 10-Q.
- Assess whether sales growth and margin improvement are sustainable, particularly given declining consumer-channel sales and technology-sector pricing pressure.
- Separate recurring operating performance from the settlement-related special gain and associated legal costs.
- Monitor the SEC investigation, other contingencies, and any further legal expenses or financial impact.
- Review cash generation, working-capital trends, debt and credit availability, and planned spending on stores, systems, and acquisitions.