Business context and reporting period
Systemax Inc. (NYSE: SYX), whose North American industrial-products business operates under the Global Industrial brand, filed this Form 10-Q for the quarter reported as ended March 31, 2021. The company says its actual fiscal quarter ended April 3, 2021; both comparison quarters contained 13 weeks. The filing identifies the registrant as Systemax Inc., not Global Industrial Co.
Systemax markets industrial and business equipment and supplies through e-commerce websites and relationship marketers. It reports one operating segment. Continuing operations are the industrial-products business; discontinued operations relate to the former North American Technology Group (NATG), sold in 2015.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales, continuing operations | $251.1 million | $227.3 million |
| Gross profit / margin | $77.3 million / 30.8% | $76.7 million / 33.7% |
| SD&A expense / percent of sales | $70.7 million / 28.2% | $65.2 million / 28.7% |
| Operating income / margin, continuing operations | $6.6 million / 2.6% | $11.5 million / 5.1% |
| Net income, continuing operations | $5.5 million | $8.3 million |
| Net income (loss), discontinued operations | $9.7 million | $(0.1) million |
| Total net income | $15.2 million | $8.2 million |
| Diluted EPS, continuing / total | $0.14 / $0.39 | $0.21 / $0.21 |
Sales increased 10.5%; U.S. sales rose 8.5%, and Canadian sales rose 46.7% (38.6% in local currency). Continuing-operations gross margin fell 2.9 percentage points and operating income declined 42.6%. Excluding a $2.7 million PPE inventory write-down, gross margin still declined 1.4 percentage points, according to management.
Cash flow, liquidity and capital
- Cash and cash equivalents were $36.9 million at March 31, versus $22.4 million at December 31, 2020. Working capital was $88.3 million, up $10.9 million.
- Operating cash flow was $20.9 million, including $8.9 million from continuing operations and $12.0 million from discontinued operations. Continuing-operations operating cash flow was down from $13.7 million a year earlier.
- Investing cash outflow was $0.9 million, principally for warehouse equipment. Financing cash outflow was $5.5 million, including $6.4 million of dividends paid. The reported cash increase was $14.5 million.
- No borrowings were outstanding under the $75 million secured revolving facility; availability was $72.5 million and the company reported covenant compliance. The facility matures October 28, 2021, and management expected to renew it before expiration.
- Lease liabilities totaled $84.8 million ($9.8 million current and $75.0 million noncurrent). The filing reports no outstanding debt borrowings. Management cited more than $106 million of U.S. liquidity, including cash, restricted cash and undrawn credit availability.
- Quarterly dividend declared was $0.16 per share. The company reported no share repurchases in Q1 2021.
Material changes, outlook and risks
Management attributed margin and profit pressure to February winter storms, Texas distribution-center closure and carrier constraints, transition costs and higher LTL and ocean freight costs, and the PPE inventory write-down. These pressures were partly offset by improved product margins, including a larger private-label sales mix, and SD&A leverage. Management said freight pressures were expected to remain elevated in the near term but were temporary and expected to ease through the summer. It cited a new third-party logistics provider and e-commerce optimization as investments intended to improve long-term fulfillment, cost management and customer experience; no revenue or earnings forecast was provided.
Management expected cash on hand and operating cash flow to meet working-capital and other needs for at least 12 months. Planned 2021 capital expenditures were $5 million to $7 million, not contractually committed. The company identified pandemic-related disruption, supply availability and shipping costs, inflation, tariffs, labor constraints, inventory risk, technology and cybersecurity, and litigation as risks.
Discontinued operations received approximately $15 million in restitution, offset by approximately $3 million in related professional fees, and recorded approximately $2.9 million of income tax expense, among other items. This drove the $9.7 million discontinued-operations profit and contributed substantially to total net income; it is not representative of continuing operating earnings. Management anticipated up to $0.5 million of additional exit charges after the quarter. The filing also discloses approximately $3 million in contingent legal fees paid to a firm employing an immediate family member of a vice chairman, related to the restitution receipt.
Legal matters include tax, trade, intellectual-property and unclaimed-property proceedings. NATG subsidiaries face an unclaimed-property audit representing 27 states and separate payment demands from 19 states. The company intends to defend the matters and said it did not believe reasonably possible losses beyond accruals would be material, while noting outcomes are unpredictable. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether freight, 3PL transition, labor and other supply-chain costs ease as management expected, and whether margins recover.
- The extent to which revenue growth persists after the quarter’s recovery and strong demand for branded products, and how PPE demand normalization affects sales and inventory.
- Whether the revolving credit facility was renewed before its October 2021 maturity, and on what terms.
- Cash-flow sustainability excluding the $12.0 million of discontinued-operations cash flow and the one-time restitution-related benefit.
- Final outcomes and costs of restitution proceedings, remaining exit liabilities, and the state unclaimed-property and other legal matters.