Table of Contents
UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2009
or
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
COMMISSION
FILE NUMBER 1-13792
Systemax
Inc.
(Exact name of
registrant as specified in its charter)
Delaware
|
|
11-3262067
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification
No.)
|
11 Harbor
Park Drive
Port
Washington, New York 11050
(Address of
principal executive offices, including zip code)
Registrants
telephone number, including area code:
(516) 608-7000
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
non-accelerated filer or a smaller reporting company. . See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) Yes
o
No
x
The number of
shares outstanding of the registrants Common Stock as of May 1, 2009 was
36,307,730.
Table of
Contents
Available Information
We
maintain an internet web site at www.systemax.com. We file reports with the
Securities and Exchange Commission (SEC) and make available free of charge on
or through this web site our annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, including all
amendments to those reports. These are
available as soon as is reasonably practicable after they are filed with the
SEC. All reports mentioned above are
also available through the SECs web site (www.sec.gov). The information on our
web site is not part of this or any other report we file with, or furnish to,
the SEC.
Our
Board of Directors has adopted the following corporate governance documents
with respect to the Company (the Corporate Governance Documents):
·
Corporate
Ethics Policy for officers, directors and employees;
·
Charter
for the Audit Committee of the Board of Directors;
·
Charter
for the Compensation Committee of the Board of Directors;
·
Charter
for the Nominating/Corporate Governance Committee of the Board of Directors and
·
Corporate
Governance Guidelines and Principles.
In
accordance with the corporate governance rules of the New York Stock
Exchange, each of the Corporate Governance Documents is available on our
Company web site (www.systemax.com) or can be obtained by writing to Systemax
Inc., Attention: Board of Directors (Corporate Governance), 11 Harbor Park
Drive, Port Washington, NY 11050.
3
Table of Contents
PART I - FINANCIAL INFORMATION
Item
1.
Financial Statements
Systemax
Inc.
Condensed Consolidated Balance Sheets
(In thousands)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
80,627
|
|
$
|
115,967
|
|
Accounts receivable, net
|
|
171,090
|
|
182,532
|
|
Inventories
|
|
309,871
|
|
290,594
|
|
Prepaid expenses and other current assets
|
|
14,514
|
|
12,667
|
|
Deferred income taxes
|
|
11,472
|
|
10,423
|
|
Total current assets
|
|
587,574
|
|
612,183
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
48,943
|
|
48,465
|
|
Deferred income taxes
|
|
9,943
|
|
11,452
|
|
Goodwill and intangibles
|
|
30,205
|
|
30,326
|
|
Other assets
|
|
707
|
|
837
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
677,372
|
|
$
|
703,263
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current portion of capitalized lease obligations
|
|
$
|
748
|
|
$
|
773
|
|
Accounts payable
|
|
260,778
|
|
284,378
|
|
Accrued expenses and other current liabilities
|
|
62,534
|
|
73,075
|
|
Deferred income taxes
|
|
865
|
|
865
|
|
Total current liabilities
|
|
324,925
|
|
359,091
|
|
|
|
|
|
|
|
Capitalized lease obligations, net of current portion
|
|
1,216
|
|
1,411
|
|
Deferred income taxes
|
|
256
|
|
254
|
|
Other liabilities
|
|
8,309
|
|
8,552
|
|
Total liabilities
|
|
334,706
|
|
369,308
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
389
|
|
389
|
|
Additional paid-in capital
|
|
179,076
|
|
179,241
|
|
Treasury stock
|
|
(30,337
|
)
|
(31,158
|
)
|
Retained earnings
|
|
201,099
|
|
192,401
|
|
Accumulated other comprehensive loss, net of tax
|
|
(7,561
|
)
|
(6,918
|
)
|
Total shareholders equity
|
|
342,666
|
|
333,955
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
677,372
|
|
$
|
703,263
|
|
See notes to
condensed consolidated financial statements.
4
Table of Contents
Systemax Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
Net sales
|
|
$
|
752,268
|
|
$
|
724,737
|
|
Cost of sales
|
|
644,718
|
|
610,988
|
|
Gross profit
|
|
107,550
|
|
113,749
|
|
Selling, general & administrative expenses
|
|
92,530
|
|
87,713
|
|
Operating income
|
|
15,020
|
|
26,036
|
|
Foreign currency exchange loss (gain)
|
|
781
|
|
(1,497
|
)
|
Interest and other income, net
|
|
(285
|
)
|
(778
|
)
|
Interest expense
|
|
158
|
|
50
|
|
Income before income taxes
|
|
14,366
|
|
28,261
|
|
Provision for income taxes
|
|
5,668
|
|
10,200
|
|
Net income
|
|
$
|
8,698
|
|
$
|
18,061
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
Basic
|
|
$
|
.24
|
|
$
|
.49
|
|
Diluted
|
|
$
|
.23
|
|
$
|
.48
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
|
36,621
|
|
36,806
|
|
Diluted
|
|
37,273
|
|
37,628
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
$
|
1.00
|
|
See notes to condensed
consolidated financial statements.
5
Table of Contents
Systemax
Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
8,698
|
|
$
|
18,061
|
|
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
2,676
|
|
2,282
|
|
Provision (benefit) for deferred income taxes
|
|
461
|
|
(252
|
)
|
Provision (reduction) for returns and doubtful accounts
|
|
960
|
|
(894
|
)
|
Compensation expense related to equity compensation plans
|
|
670
|
|
863
|
|
Excess tax benefit from exercises of stock options
|
|
(6
|
)
|
(1,182
|
)
|
Loss on dispositions and abandonment
|
|
10
|
|
13
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
8,523
|
|
(2,664
|
)
|
Inventories
|
|
(19,920
|
)
|
(17,813
|
)
|
Prepaid expenses and other current assets
|
|
(1,603
|
)
|
400
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
(32,489
|
)
|
10,339
|
|
Net cash provided by (used in) operating activities
|
|
(32,020
|
)
|
9,153
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of CompUSA
|
|
|
|
(30,400
|
)
|
Purchases of property, plant and equipment
|
|
(2,854
|
)
|
(6,059
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
30
|
|
43
|
|
Net cash used in investing activities
|
|
(2,824
|
)
|
(36,416
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Repayments of borrowings from banks
|
|
|
|
(2,344
|
)
|
Proceeds from (repayments of) capital lease obligations, net
|
|
(220
|
)
|
80
|
|
Proceeds from issuance of common stock, net of repurchases
|
|
3
|
|
887
|
|
Repurchase of common stock
|
|
(377
|
)
|
|
|
Excess tax benefit from exercises of stock options
|
|
6
|
|
1,182
|
|
Net cash used in financing activities
|
|
(588
|
)
|
(195
|
)
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
92
|
|
(1,832
|
)
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(35,340
|
)
|
(29,290
|
)
|
Cash and cash equivalents beginning of period
|
|
115,967
|
|
128,021
|
|
Cash and cash equivalents end of period
|
|
$
|
80,627
|
|
$
|
98,731
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
Acquisitions of equipment through capital leases
|
|
$
|
36
|
|
$
|
255
|
|
See notes to condensed consolidated financial
statements.
6
Table of
Contents
Systemax Inc.
Condensed Consolidated Statement of Shareholders Equity (Unaudited)
(In thousands)
|
|
Common
Stock
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
Number
of
Shares
Outstanding
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Treasury
Stock,
At Cost
|
|
Retained
Earnings
|
|
Comprehensive
Income,
Net of Tax
|
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2009
|
|
36,224
|
|
$
|
389
|
|
$
|
179,241
|
|
$
|
(31,158
|
)
|
$
|
192,401
|
|
$
|
(6,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock
|
|
100
|
|
|
|
(829
|
)
|
1,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
|
1
|
|
|
|
(12
|
)
|
15
|
|
|
|
|
|
|
|
Repurchase of
common stock
|
|
(32
|
)
|
|
|
|
|
(377
|
)
|
|
|
|
|
|
|
Income tax
benefit on stock-based compensation
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Change in
cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(643
|
)
|
$
|
(643
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
8,698
|
|
|
|
8,698
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
March 31, 2009
|
|
36,293
|
|
$
|
389
|
|
$
|
179,076
|
|
$
|
(30,337
|
)
|
$
|
201,099
|
|
$
|
(7,561
|
)
|
|
|
See notes to condensed
consolidated financial statements.
7
Table of Contents
Systemax
Inc.
Notes to Condensed
Consolidated Financial Statements (Unaudited)
1.
Basis of Presentation
The accompanying
condensed consolidated financial statements of the Company and its wholly-owned
subsidiaries are unaudited and have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the rules and regulations of the Securities and
Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America are not required in these interim financial statements and have been
condensed or omitted. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain prior year amounts have been
reclassified to conform to current year presentation.
In the opinion of
management, the accompanying condensed consolidated financial statements
contain all normal and recurring adjustments necessary to present fairly the
financial position of the Company as of March 31, 2009 and the results of
operations for the three month periods ended March 31, 2009 and 2008, cash
flows for the three month periods ended March 31, 2009 and 2008 and
changes in shareholders equity for the three month period ended March 31,
2009. The December 31, 2008
condensed consolidated balance sheet has been derived from the audited
consolidated financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
These condensed
consolidated financial statements should be read in conjunction with the Companys
audited consolidated financial statements as of December 31, 2008 and for
the year then ended included in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2008. The results for the three months ended March 31,
2009 are not necessarily indicative of the results for an entire year.
Systemax manages its
business and reports using a 52-53 week fiscal year that ends at midnight on
the Saturday closest to December 31. For clarity of presentation herein,
fiscal years and quarters are referred to as if they ended on the traditional
calendar month. The actual fiscal
quarters ended on April 4, 2009 and March 29, 2008. The first
quarters of both 2009 and 2008 included 13 weeks.
2.
Stock-based Compensation Plans
Pre-tax stock-based
compensation expense for the three months ended March 31, 2009 and 2008
was $670,000 and $863,000 respectively.
3.
Net Income per Common Share
In June 2008, the
FASB issued FASB Staff Position No. EITF 03-6-1 Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). This FSP was issued to clarify that instruments
granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. The guidance in this FSP
applies to the calculation of Earnings Per Share (EPS) under Statement 128
for share-based payment awards with rights to dividends or dividend
equivalents. Unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of EPS pursuant to the two-class method. This FSP
is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period EPS data
presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of this FSP. The Company adopted EITF 03-6-1 in January 2009.
The Companys adoption of EITF 03-6-1 did not have a material impact on its
consolidated financial statements.
Net income per common
share - basic was calculated based upon the weighted average number of common
shares outstanding during the respective periods presented using the two class
method of computing earnings per share in accordance with EITF 03-6-1 Net
income per common share - diluted was calculated based upon the weighted average
number of common shares outstanding and included the equivalent shares for
dilutive options outstanding during the respective periods, including unvested
options. The dilutive effect of outstanding options issued by the Company is
reflected in net income per share - diluted using the treasury stock method.
Under the treasury stock method, options will only have a dilutive effect when
the average market price of common stock during the period exceeds the exercise
price of
8
Table of
Contents
the options. The weighted
average number of stock options outstanding excluded from the computation of
diluted earnings per share was 710,000 and 649,000 shares for the three months
ended March 31, 2009 and 2008, respectively.
4.
Comprehensive Income
Comprehensive income
consists of net income and foreign currency translation adjustments, net of
tax, and is included in the Condensed Consolidated Statement of Shareholders
Equity. For the three month periods ended March 31, 2009 and 2008,
comprehensive income was $8,055,000 and $19,819,000, respectively.
5.
Credit Facilities
The Company maintains a
revolving credit agreement with a group of financial institutions at an amount
of $120 million (which may be increased by up to $30 million, subject to
certain conditions). The borrowings are secured by all of the domestic and
United Kingdom accounts receivable, the domestic inventories of the Company,
the Companys United Kingdom headquarters building and the Companys shares of
stock in its domestic and United Kingdom subsidiaries. The credit facility
expires and the outstanding borrowings thereunder are due on October 26,
2010. The revolving credit agreement contains certain financial and other
covenants, including maintaining a minimum level of availability and
restrictions on capital expenditures and payments of dividends. The Company was
in compliance with all of the covenants as of March 31, 2009. As of March 31,
2009, eligible collateral under the agreement was $107.3 million and total
availability was $98.5 million. There were outstanding letters of credit of
$8.8 million and there were no outstanding advances.
6.
Product Warranties
Provisions for estimated future expenses relating to
product warranties for the Companys assembled proprietary products are
recorded as cost of sales when revenue is recognized. Liability estimates are
determined based on management judgment considering such factors as the number
of units sold, historical and anticipated rates of warranty claims and the
likely current cost of corrective action.
The changes in accrued product warranties were as follows (in
thousands):
|
|
Three Months
ended
March 31, 2009
|
|
Balance,
beginning of year
|
|
$
|
693
|
|
Charged to
expense
|
|
365
|
|
Deductions
|
|
(361
|
)
|
Balance, end of
period
|
|
$
|
697
|
|
7.
Segment Information
Systemax is primarily a
direct marketer of brand name and private label products. Our operations are
organized in three reportable business segments Technology Products,
Industrial Products and Software Solutions. Our Technology Products segment
sells computers, computer supplies and consumer electronics which are marketed
in North America and Europe. Except for
certain personal computer (PC) products that we assemble ourselves and sell
under the trademarks
Systemax
and
Ultra,
substantially all of our products are manufactured
by other companies. We also sell certain computer-related products manufactured
for us to our own design under the trademark
Systemax
and Ultra
.
Our Industrial Products
segment sells a wide array of material handling equipment, storage equipment
and consumable industrial items which are marketed in North America.
Substantially all of these products are manufactured by other
9
Table of Contents
companies. Some products are manufactured for us to our
own design and marketed under the trademarks
Global
,
GlobalIndustrial.com
and
Nexel.
Our Software Solutions
segment participates in the emerging market for on-demand, web-based business
software applications through the marketing of our PCS ProfitCenter Software
application.
The Companys chief
operating decision-maker is the Companys Chief Executive Officer. The Company
evaluates segment performance based on income from operations before net
interest, foreign exchange gains and losses, restructuring and other charges
and income taxes. Corporate costs not identified with the disclosed segments
and restructuring and other charges are grouped as Corporate and other
expenses. The chief operating decision-maker reviews assets and makes capital
expenditure decisions for the Company on a consolidated basis only. The
accounting policies of the segments are the same as those of the Company.
Financial information
relating to the Companys operations by reportable segment was as follows (in
thousands):
|
|
Three Months Ended
March 31
|
|
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
Technology
Products
|
|
$
|
706,272
|
|
$
|
667,297
|
|
Industrial
Products
|
|
45,656
|
|
57,362
|
|
Software
Solutions
|
|
340
|
|
78
|
|
Consolidated
|
|
$
|
752,268
|
|
$
|
724,737
|
|
|
|
|
|
|
|
Operating income
(loss):
|
|
|
|
|
|
Technology
Products
|
|
$
|
22,033
|
|
$
|
29,426
|
|
Industrial Products
|
|
2,262
|
|
5,500
|
|
Software
Solutions
|
|
(2,727
|
)
|
(3,944
|
)
|
Corporate and
other expenses
|
|
(6,548
|
)
|
(4,946
|
)
|
Consolidated
|
|
$
|
15,020
|
|
$
|
26,036
|
|
Financial information
relating to the Companys operations by geographic area was as follows (in
thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
United States:
|
|
|
|
|
|
Technology
products
|
|
$
|
462,108
|
|
$
|
365,917
|
|
Industrial
products
|
|
45,656
|
|
57,362
|
|
Software
Solutions
|
|
340
|
|
78
|
|
United States
total
|
|
508,104
|
|
423,357
|
|
Other North
America (Technology products)
|
|
40,288
|
|
48,999
|
|
North America
total
|
|
548,392
|
|
472,356
|
|
Europe
|
|
203,876
|
|
252,381
|
|
Consolidated
|
|
$
|
752,268
|
|
$
|
724,737
|
|
Revenues are
attributed to countries based on the location of the selling subsidiary.
10
Table of Contents
8. Stock Repurchase
On May 12,
2008 the Companys Board of Directors authorized the repurchase of up to two
million shares of Company stock. During the first quarter of 2009, the Company
repurchased 32,444 shares for approximately $0.4 million. Total repurchases
made under this authorization since inception are 507,745. These shares are
included in treasury stock at cost in the Companys consolidated balance sheet.
9. Subsequent Event
On November 10,
2008, Circuit City Stores, Inc. and other related entities (Circuit City)
filed a petition for reorganization in the Bankruptcy Court for the Eastern
District of Virginia, Richmond Division. On January 16, 2009 Circuit
City announced that it was shutting down its stores and would be liquidating.
Starting in January 2009, the Company commenced discussions and then
negotiations with Circuit City management and advisors regarding an acquisition
of its ecommerce business. On April 5, 2009 the Company signed a stalking
horse agreement to purchase selected assets of Circuit Citys ecommerce
business for an up-front payment of $6.5 million plus a share of future revenue
generated utilizing those assets over a 30 month period. The stalking
horse agreement was approved by the Bankruptcy Court on April 16, 2009. An
auction was held on May 11, 2009 and the Companys increased bid
(described below) was accepted, subject to Bankruptcy Court approval. On
May 13, 2009, the Bankruptcy Court approved the sale and the related sale
order was filed with the Bankruptcy Court on May 14, 2009. The closing is
anticipated to occur on or about May 15, 2009. At the closing, the Company
will make an initial purchase price payment of $14 million cash and has
guaranteed to Circuit City that its share of the future revenue stream will be
at least $3 million.
Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Forward Looking
Statements
This report contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with the
Securities and Exchange Commission or otherwise. Statements contained in this report that are
not historical facts are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward- looking statements may include, but
are not limited to, projections of revenue, income or loss and capital expenditures,
statements regarding future operations, financing needs, compliance with
financial covenants in loan agreements, plans for acquisition or sale of assets
or businesses and consolidation of operations of newly acquired businesses, and
plans relating to products or services of the Company, assessments of
materiality, predictions of future events and the effects of pending and
possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion,
the words anticipates, believes, estimates, expects, intends, plans
and variations thereof and similar expressions are intended to identify
forward-looking statements.
Forward-looking
statements in this report are based on the Companys beliefs and expectations
as of the date of this report and are subject to risks and uncertainties which
may have a significant impact on the Companys business, operating results or
financial condition. Investors are cautioned that these forward-looking
statements are inherently uncertain. Should one or more of the risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein.
Statements in this report, particularly in Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations and the Notes to
Condensed Consolidated Financial Statements, describe certain factors, among
others, that could contribute to or cause such differences.
Readers are cautioned not
to place undue reliance on any forward-looking statements contained in this
report, which speak only as of the date of this report. We undertake no obligation to publicly
release the result of any revisions to these forward- looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unexpected events.
Overview
Systemax is primarily a
direct marketer of brand name and private label products. Our operations are
organized in three reportable business segments Technology Products,
Industrial Products and Software Solutions. Our Technology Products segment
sells computers, computer supplies and consumer electronics which are marketed
in North America and Europe. Except for
certain personal computer (PC) products that we assemble ourselves and sell
under the trademarks Systemax and Ultra, substantially all of our products
are manufactured by other companies. We
also sell certain computer-related
11
Table of Contents
products manufactured for
us to our own design under the trademark Systemax and Ultra. Technology
products accounted for 94% of our net sales in the first quarter of 2009.
Our Industrial Products
segment sells a wide array of material handling equipment, storage equipment
and consumable industrial items which are marketed in North America. Substantially all of these products are
manufactured by other companies. Some
products are manufactured for us to our own design and marketed under the
trademarks Global, GlobalIndustrial.com and Nexel. Industrial products accounted for 6% of our
net sales in the first quarter of 2009.
In both our Technology Products and Industrial Products segments, we
offer our customers a broad selection of products, prompt order fulfillment and
extensive customer service.
Our Software Solutions
segment participates in the emerging market for on-demand, web-based business
software applications through the marketing of our PCS ProfitCenter Software
application. PCS accounted for less than 1% of our net sales in the first
quarter of 2009. See Note 8 to the consolidated financial statements included
in Item 1 of this Form 10-
Q
for
additional financial information about our business segments as well as information
about our geographic operations.
The market for computer
products and consumer electronics is subject to intense price competition and
is characterized by narrow gross profit margins. The North American industrial
products market is highly fragmented and we compete against multiple
distribution channels. Distribution is working capital intensive, requiring us
to incur significant costs associated with the warehousing of many products,
including the costs of leasing warehouse space, maintaining inventory and
inventory management systems, and employing personnel to perform the associated
tasks. We supplement our on-hand product availability by maintaining
relationships with major distributors and manufacturers, utilizing a
combination of stocking and drop-shipment fulfillment.
The primary component of
our operating expenses historically has been employee related costs, which
includes items such as wages, commissions, bonuses, employee benefits and stock
option expenses. We continually assess
our operations to ensure that they are efficient, aligned with market
conditions and responsive to customer needs.
The discussion of our
results of operations and financial condition that follows will provide
information that will assist in understanding our financial statements, the
factors that we believe may affect our future results and financial condition
as well as information about how certain accounting principles and estimates
affect the consolidated financial statements. This discussion should be read in
conjunction with the condensed consolidated financial statements included
herein.
Critical
Accounting Policies and Estimates
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and revenues and expenses during the
period. Significant accounting policies employed by the Company, including the
use of estimates, were presented in the Notes to Consolidated Financial
Statements of the Companys 2008 Annual Report on Form 10-K.
Critical accounting
policies are those that are most important to the presentation of our financial
condition and results of operations, require managements most difficult,
subjective and complex judgments, and involve uncertainties. The accounting
policies that have been identified as critical to our business operations and
understanding the results of operations pertain to revenue recognition,
accounts receivable and allowance for doubtful accounts, inventories, goodwill
and intangible assets, long-lived assets, accruals, income taxes and
restructuring charges. The application of each of these critical accounting
policies and estimates was discussed in Item 7 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2008. There have been no
significant changes in the application of critical accounting policies or
estimates during 2009. Management believes that full consideration has been
given to all relevant circumstances that we may be subject to, and the condensed
consolidated financial statements of the Company accurately reflect managements
best estimate of the consolidated results of operations, financial position and
cash flows of the Company for the periods presented. Because of the uncertainty
in these estimates, actual results could differ from estimates used in applying
the critical accounting policies. We are not aware of any reasonably likely
events or circumstances which would result in different amounts being reported
that would materially affect its financial condition or results of operations.
12
Table of Contents
Recent
Accounting Pronouncements
In April 2009,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position
No, FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value of Financial
Instruments (FSP). This FSP expands the fair value disclosures required for
all financial instruments within the scope of FASB Statement No. 107 Disclosures
about Fair Value of Financial Instruments, to interim periods. This FSP is effective for interim reporting
periods ending after June 15, 2009.
The Company does not expect the adoption of this FSP to have a material
impact on the Companys consolidated financial statements.
Effective January 1,
2009 the Company adopted Statement on Financial Accounting Standards (SFAS) No. 141R,
Business Combinations, which replaces FASB Statement 141. SFAS No.141R
retains the requirement that the acquisition method of accounting be used for
business combinations. The objective of SFAS No. 141R is to improve the
relevance, representational faithfulness and comparability that reporting
entities provide in their financial reports about business combinations and
their effects. SFAS 141R establishes principles and requirements for how an
acquirer 1) recognizes and measures identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree, 2)
recognizes and measures the goodwill acquired in the combination or a gain from
a bargain purchase and 3) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS No. 141R is applied prospectively for
all business combinations entered into after the date of adoption. There were
no business combinations during the first quarter of 2009.
Effective January 1,
2009, the Company adopted SFAS No. 160, Accounting and Reporting of
Noncontrolling Interest (SFAS No. 160). The objective of SFAS 160 is to
improve the relevance, comparability and transparency of the financial
information that reporting entities provide related to noncontrolling
interests, sometimes referred to as minority interests. SFAS No. 160
requires, among other things, that noncontrolling interests be shown separately
in the consolidated entitys equity section of the balance sheet. SFAS No. 160
also establishes accounting and reporting standards for ownership interest
in subsidiaries held by parties other than the parent, for presentation of
amounts of consolidated net income attributable to the parent and the
noncontrolling interest, for consistency in accounting for changes in a parents
ownership interest when the parent retains a controlling interest, for the
valuation of retained noncontrolling equity interests when a subsidiary is
deconsolidated and for providing sufficient disclosure that identifies and
distinguishes the interests of the parent and the interests of the
noncontrolling owners. The adoption of SFAS No. 160 had no impact on the
Companys consolidated financial statements.
In June 2008, the
FASB issued FASB Staff Position No. EITF 03-6-1 Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF -3-6-1). This FSP was issued to clarify that instruments
granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. The guidance in this FSP
applies to the calculation of Earnings Per Share (EPS) under Statement 128
for share-based payment awards with rights to dividends or dividend
equivalents. Unvested share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of EPS
pursuant to the two-class method. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period EPS data presented shall
be adjusted retrospectively (including interim financial statements, summaries
of earnings, and selected financial data) to conform with the provisions of
this FSP. The Company adopted EITF 03-6-1 in January 2009. The Companys
adoption of EITF 03-6-1 did not have a material impact on its consolidated
financial statements.
13
Table of Contents
Results
of Operations
Three
Months Ended March 31, 2009 compared to the Three Months Ended March 31,
2008
Key Performance
Indicators (in thousands):
|
|
Three
Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
%
Change
|
|
Net
sales by segment:
|
|
|
|
|
|
|
|
Technology
products
|
|
$
|
706,272
|
|
$
|
667,297
|
|
5.8
|
%
|
Industrial
products
|
|
45,656
|
|
57,362
|
|
(20.4
|
)%
|
Software
Solutions
|
|
340
|
|
78
|
|
335.9
|
%
|
Total net sales
|
|
$
|
752,268
|
|
$
|
724,737
|
|
3.8
|
%
|
Net
sales by geography:
|
|
|
|
|
|
|
|
North America
|
|
$
|
548,392
|
|
$
|
472,356
|
|
16.1
|
%
|
Europe
|
|
203,876
|
|
252,381
|
|
(19.2
|
)%
|
Total net sales
|
|
$
|
752,268
|
|
$
|
724,737
|
|
3.8
|
%
|
Gross
margin
|
|
14.3
|
%
|
15.7
|
%
|
(1.4
|
)%
|
Selling, general
and administrative costs
|
|
$
|
92,530
|
|
$
|
87,713
|
|
5.5
|
%
|
Selling, general
and administrative as a % of net sales
|
|
12.3
|
%
|
12.1
|
%
|
.2
|
%
|
Operating income
|
|
$
|
15,020
|
|
$
|
26,036
|
|
(42.3
|
)%
|
Operating
margin
|
|
2.0
|
%
|
3.6
|
%
|
(1.6
|
)%
|
Effective income
tax rate
|
|
39.5
|
%
|
36.1
|
%
|
3.4
|
%
|
Net income
|
|
$
|
8,698
|
|
$
|
18,061
|
|
(51.8
|
)%
|
Net
margin
|
|
1.2
|
%
|
2.5
|
%
|
(1.3
|
)%
|
The
Technology Products net sales increase was driven by increased internet and
retail store sales primarily due to the acquisition of 16 retail stores and the
ecommerce business of CompUSA in the first quarter of 2008. Sales attributable
to CompUSA web and retail were $84.1 million for the first quarter of 2009
compared to $18.3 million in the first quarter of 2008. Excluding CompUSA
revenues, total Technology Products revenues declined approximately 4.1% in the
first quarter of 2009. In the United States, Technology Products sales
excluding CompUSA increased 8.7% in the first quarter of 2009 as compared to
prior year. In Europe sales declined approximately 19.2% in the first quarter
of 2009 as compared to the same period in 2008. Movements in foreign exchange
rates accounted for substantially all of the sales decline, negatively
impacting the European sales comparison by approximately $50.0 million in the
first quarter. Excluding this exchange rate impact, European sales would have
been flat compared to prior year. Sales
in Canada (Other North America) declined by 17.8% as compared to prior year. As
in Europe, movements in foreign exchange rates negatively impacted the Canadian
sales comparison by approximately $10 million in the first quarter. Excluding
this exchange rate impact, Canadian sales would have increased 3.0%.The lack of
significant growth in sales in Europe and Canada on a constant exchange rate
basis is the result of slower consumer and business to business sales as a
result of the worldwide slowdown in economic activity.
Industrial
Products sales declined in both business to business sales and internet and
inbound sales. The sales decline is largely attributable to the slowdown in
economic activity which started in the second half of 2008 and continued in the
first quarter of 2009. The Company has implemented strategies such as adding
additional products to its catalogs and website and closely monitoring its cost
structure to mitigate some of the effects of the decline in sales.
In
our Software Solutions segment revenues continue to be insignificant relative
to consolidated revenues. The Company continues to refocus its Software
Solutions business to reduce its net loss and negative cash flow and to attempt
to establish a sustainable business model.
The Company is undertaking an internal strategic review of the Software
Solutions business and will take further actions if necessary.
Consolidated gross margin declined for the
three month period ended March 31, 2009 by 140 basis points compared to
prior year. The Technology Products group lowered certain product prices and
offered freight incentives in order to gain market share and respond to
competitive pricing pressures starting in the fourth quarter of 2008. The
Company has continued to offer such selective incentives to grow market share
in anticipation of future gross margin expansion. Additionally, consolidated
gross margin was impacted by a shift in mix, as higher margin Industrial
Products accounted for a smaller portion of consolidated revenues than in
14
Table of
Contents
prior
quarters. Gross margin is dependent on
variables such as product mix, vendor price protection and other sales
incentives, competition, pricing strategy, cooperative advertising funds
required to be classified as a reduction to cost of sales, freight discounting
and other variables, any or all of which may result in fluctuations in gross
margin.
The increase in selling,
general and administrative expenses during 2009 was primarily the result of a
$1.5 million increase in bad debt expense, $1.5 million of increased credit
card fees, $1.0 million of increased rent and real estate taxes, and $0.4
million of increased telephone and utility charges. Included in these costs are
approximately $2.8 million of costs related to the CompUSA operations. Salary expense attributable to the CompUSA
operations increased approximately $3.5 million in the first quarter of 2009 as
compared to the same period last year due primarily to the Company operating
the CompUSA website and 16 retail stores for a full quarter in 2009 versus a
partial quarter in 2008. These costs were offset by realized costs savings in
our Software Solutions segment of approximately $0.8 million and favorable
movements in exchange rates.
The Companys effective
tax rate for the quarter was 39.5% compared to 36.1% in prior year. The higher
tax rate in 2009 is
primarily the result of a higher
percentage of taxable income in the U.S. in 2009 where corporate tax rates for
the Company are highest.
The rate in 2008 included the reversal of a tax liability of approximately $0.4
million related to favorable settlement of an outstanding tax issue.
Net income in the first
quarter of 2009 declined 51.8% to $8.7 million compared to $18.1 million in the
first quarter of 2008 The decline in net income is the result of a slowdown in
economic activity in all of the Companys segments and geographies. The Company
has adjusted its cost structure and reduced headcount during the first quarter
of 2009 and has implemented selected hiring freezes in certain business units
as the result of general economic uncertainty worldwide. The Company will
continue to monitor economic conditions and make further adjustments if
necessary.
Financial
Condition, Liquidity and Capital Resources
Our primary liquidity
needs are to support working capital requirements in our business, fund capital
expenditures, repurchase Company stock, fund special dividends declared by our
Board of Directors and fund acquisitions. We rely principally upon operating
cash flow to meet these needs. In addition the Company maintains a $120 million
credit facility which was undrawn as of the end of the first quarter of 2009.
We believe that cash flow available from these sources will be sufficient to
fund our working capital and other cash requirements for the next twelve months
and thereafter.
Selected liquidity data
(in thousands):
|
|
March 31,
2009
|
|
December 31,
2008
|
|
$ Change
|
|
Cash and cash
equivalents
|
|
$
|
80,627
|
|
$
|
115,967
|
|
$
|
(35,340
|
)
|
Accounts
receivable, net
|
|
$
|
171,090
|
|
$
|
182,532
|
|
$
|
(11,442
|
)
|
Inventories
|
|
$
|
309,871
|
|
$
|
290,594
|
|
$
|
19,277
|
|
Prepaid expenses
and other current assets
|
|
$
|
14,514
|
|
$
|
12,667
|
|
$
|
1,847
|
|
Accounts payable
|
|
$
|
260,778
|
|
$
|
284,378
|
|
$
|
(23,600
|
)
|
Accrued expenses
and other current liabilities
|
|
$
|
62,534
|
|
$
|
73,075
|
|
$
|
(10,541
|
)
|
Current portion
of capitalized lease obligations
|
|
$
|
748
|
|
$
|
773
|
|
$
|
(25
|
)
|
Working capital
|
|
$
|
262,649
|
|
$
|
253,092
|
|
$
|
9,557
|
|
Our working capital
increased in the first three months of 2009 primarily as the result of the cash
generated from net income for the period as adjusted for non cash charges of
approximately $13.5 million offset by purchase of fixed assets, debt repayment,
stock repurchases and exchange rate effects. The increase in inventory for the
period is primarily the result of strategic quarter end purchases. Our
inventory turnover decreased from 9.0 times to 8.6 times on an annual basis.
Future accounts receivable and inventory balances will continue to fluctuate with
changes in sales volume and the mix of our net sales between consumer and
business customers.
The decrease in cash
provided by operations in the first three months of 2009 resulted from changes
in our working capital accounts, which used $45.5 million in cash compared to
$9.7 million in the first three months of 2008, primarily the result of an
increase in inventories and a decrease in accounts payable, accrued expenses
and other current liabilities. Cash generated from net income adjusted by other
non-cash items provided $13.5 million for the three months ended March 31,
2009 compared to $18.9 million provided by these items for the three months
ended March 31, 2008.
15
Table of Contents
Cash flows used in
investing activities during the first three months of 2009 were primarily for
capital expenditures in retail stores and information technology. Cash flows
used in investing activities during 2008 consisted primarily of cash used for
the acquisition of CompUSA, upgrades and enhancements to our information and
communications systems hardware and facilities costs.
Net cash of $.6 million was used in financing activities for the first three months of 2009. We repaid approximately $0.2 million in capital leases and repurchased Company stock of approximately $ 0.4 million. In the first three months of 2008, we repaid $2.3 million in short-term loans, and proceeds from stock option exercises, net of repurchases and excess tax benefits, provided approximately $2.1 million of cash.
Under our $120 million (which may be increased by up to $30 million, subject to certain conditions) secured revolving credit agreement for borrowings in the United States and United Kingdom, as of March 31, 2009, eligible collateral was $107.3 million and total availability was $98.5 million. There were outstanding letters of credit of $ 8.8 million and there were no outstanding advances as of March 31, 2009. The borrowings are secured by all of the domestic and United Kingdom accounts receivable, the domestic inventories of the Company; the Companys shares of stock in its domestic subsidiaries and the Companys United Kingdom headquarters building. The credit facility expires and any outstanding borrowings thereunder are due on October 26, 2010. The revolving credit agreement contains certain financial and other covenants, including maintaining a minimum level of availability and restrictions on capital expenditures and payments of dividends. We were in compliance with all of the covenants under this facility as of March 31, 2009.
We also have certain
obligations with various parties that include commitments to make future
payments. Our principal commitments at March 31, 2009 consisted of
payments under operating leases for certain of our real property and equipment,
payments under capital leases for equipment, and payments under employment and
other service agreements.
Our current and
anticipated needs for cash include funding growth in working capital, capital
expenditures necessary for future growth in sales, implementation of financial
and retail point of sale systems, repurchase of Company stock and potential
expansion through acquisitions. We believe that our cash balances and our
availability under credit facilities will be sufficient to fund our working
capital and other cash requirements for the next twelve months.
We maintain our cash and
cash equivalents primarily in money market funds or their equivalent. As of March 31,
2009, all of our investments had maturities of less than three months. Accordingly, we do not believe that our
investments have significant exposure to interest rate risk.
Off-balance Sheet Arrangements
The Company has not
created, and is not party to, any special-purpose or off-balance sheet entities
for the purpose of raising capital, incurring debt or operating the Companys
business. The Company does not have any arrangements or relationships with
entities that are not consolidated into the financial statements that are
reasonably likely to materially affect the Companys liquidity or the
availability of capital resources.
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk.
We are exposed to
market risks, which include changes in U.S. and international interest rates as
well as changes in currency exchange rates (principally Pounds, Euros and
Canadian dollars) as measured against the U.S. dollar and each other.
The translation of
the financial statements of our operations outside of the United States is
impacted by movements in foreign currency exchange rates. Changes in currency
exchange rates as measured against the U.S. dollar may positively or negatively
affect sales, gross margins, operating expenses and retained earnings as
expressed in U.S. dollars. We have limited involvement with derivative
financial instruments and do not use them for trading purposes. We may enter into foreign currency options or
forward exchange contracts aimed at limiting in part the impact of certain
currency fluctuations, but as of March 31, 2009 we had no outstanding
forward exchange contracts.
Our exposure to
market risk for changes in interest rates relates primarily to our variable
rate debt. Our variable rate debt consists of short-term borrowings under
our credit facilities. As of March 31, 2009, there were no
outstanding balances under our variable rate credit facility. A hypothetical
change in average interest rates of one percentage point is not expected to
have a material effect on our financial position, results of operations or cash
flows.
16
Table of Contents
Item 4.
Controls and Procedures
Under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer,
the Company carried out an evaluation of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of March 31,
2009. Based upon this evaluation, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that the Companys disclosure controls
and procedures are effective.
Changes
in Internal Control Over Financial Reporting
There have been no
changes in the Companys internal controls over financial reporting during the
quarterly period ended March 31, 2009 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over
financial reporting.
PART II
- OTHER INFORMATION
Item 1.
Legal
Proceedings
Systemax is a
party to various pending legal proceedings and disputes arising in the normal
course of business, including those involving commercial, employment, tax and
intellectual property related claims, none of which, in managements opinion,
is anticipated to have a material adverse effect on our consolidated financial
statements.
Item 6.
Exhibits
31.1
|
Certifications
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certifications
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certifications
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certifications
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
17
Table of
Contents
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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SYSTEMAX INC.
|
|
|
|
|
|
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Date: May 14,
2009
|
|
By:
|
/s/ Richard
Leeds
|
|
|
|
|
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Richard Leeds
|
|
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Chairman and
Chief Executive Officer
|
|
|
|
|
|
|
|
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By:
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/s/ Lawrence P.
Reinhold
|
|
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Lawrence P. Reinhold
|
|
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Executive Vice
President and Chief Financial Officer
|
18
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