Business Context and Reporting Period
ScanSource, Inc. is a wholesale distributor of specialty technology products, including point-of-sale, barcoding, security, communications and wireless infrastructure products. It operates through North American and international distribution segments and serves more than 30,000 reseller customers.
The provided filing is a Form 10-K for the fiscal year ended June 30, 2012, filed August 24, 2012. The request metadata references “2011 Q4,” but the filing’s fourth-quarter data is for the three months ended June 30, 2012; the comparable quarter ended June 30, 2011.
Key Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net sales | $3.015 billion | $2.667 billion | Up 13.1% |
| Gross profit | $302.0 million | $274.3 million | Up 10.1% |
| Gross margin | 10.0% | 10.3% | Down 30 bps |
| Operating income | $113.5 million | $113.1 million | Up 0.4% |
| Operating margin | 3.8% | 4.2% | Down 40 bps |
| Net income | $74.3 million | $73.5 million | Up 1.0% |
| Diluted EPS | $2.68 | $2.70 | Down $0.02 |
| Operating cash flow | $60.0 million | $10.7 million | Up $49.3 million |
| Cash and equivalents | $29.2 million | $28.7 million | Up $0.4 million |
| Total debt, including short-term borrowings | $9.7 million | $60.1 million | Down $50.4 million |
Fourth-quarter fiscal 2012 net sales were $754.5 million, gross profit was $73.8 million and net income was $19.8 million. Diluted EPS was $0.71. Fourth-quarter sales increased from $734.9 million in the prior-year quarter, while gross profit and net income were approximately $74.4 million and $19.7 million, respectively, in the comparable period.
Fiscal 2012 working capital was $533.5 million, compared with $532.2 million in fiscal 2011. Total assets were $1.202 billion and shareholders’ equity was $652.3 million at June 30, 2012.
Material Changes Versus the Prior Comparable Period
- North American sales increased 10.6% to $2.236 billion, supported by growth across all sales units, particularly security and communications.
- International sales increased 21.0% to $778.8 million, primarily because fiscal 2012 included a full year of CDC Brasil results. Excluding the acquisition effect, international markets were pressured by the Eurozone downturn, competition and currency movements.
- POS, barcoding and security sales rose 13.7% to $1.837 billion; communications sales rose 12.1% to $1.178 billion.
- Gross margin declined because of unfavorable vendor programs, competitive pricing, increased European inventory reserves and product mix.
- Selling, general and administrative expense increased 16.8% to $188.4 million, driven by CDC’s full-year costs, higher compensation and ERP implementation expenses.
- International operating income fell 47.9% to $9.5 million, while North American operating income increased 9.6% to $104.0 million.
- Net foreign exchange losses increased to $3.8 million from $1.0 million, including a non-recurring $2.5 million loss on a Brazilian real forward contract.
- Operating cash flow improved substantially as growth in trade receivables and inventory was slower than in the prior year.
Liquidity, Debt and Capital Allocation
- ScanSource entered into a five-year, $300 million senior secured, multi-currency revolving credit facility maturing October 11, 2016. No borrowings or letters of credit were outstanding under the facility at June 30, 2012, leaving $300 million available.
- The company had $4.3 million outstanding under a European subsidiary credit line and $5.4 million of industrial development revenue bonds. It repaid the prior $25.0 million unsecured note during fiscal 2012.
- Capital expenditures were $12.8 million in fiscal 2012, primarily for the ERP system and facility improvements.
- The company believes cash, operating cash flow and available credit will fund working capital and cash requirements for at least the next twelve months.
- CDC-related contingent consideration was $16.7 million at June 30, 2012, including $5.0 million due within one year. Estimated future undiscounted earnout payments were approximately $23.9 million.
- The company has never paid a cash dividend, and its credit facility prohibits cash dividends.
Guidance, Outlook, Risks and Unusual Items
- Management stated that international markets, especially Europe, were weaker than expected and that it was accepting lower-than-normal returns and continuing to invest to protect market share.
- The ERP project is expected to take longer and cost more than previously estimated. Total spending was revised to $58 million-$72 million, extending beyond fiscal 2013; fiscal 2013 capital expenditures were projected at $9 million-$15 million.
- Management expected the fiscal 2013 effective tax rate to be more consistent with fiscal 2011, after the fiscal 2012 rate declined to 33.2% from 34.3%.
- Brazilian goodwill of $19.8 million had only a 7% estimated fair-value cushion at the latest impairment test. Management reported no impairment but stated that future impairment was reasonably possible if operating margins, working capital performance or discount rates deteriorate.
- Key risks include global economic weakness, European demand contraction, foreign-exchange volatility, vendor concentration, competitive pricing, customer credit losses, inventory obsolescence, ERP delays and cost overruns, cybersecurity, dependence on centralized facilities and third-party logistics providers, and Brazilian tax and regulatory exposures.
- Brazilian pre-acquisition tax contingencies were estimated at up to $12.4 million undiscounted, although the company stated that they were indemnifiable under the CDC purchase agreement.
- The company reported unqualified audit opinions on its financial statements and internal control over financial reporting, and management concluded that disclosure controls and internal control were effective.
Investor Verification Points
- Verify the requested reporting period: the filing is fiscal 2012, not fiscal 2011, and the reported fourth quarter ended June 30, 2012.
- Assess whether international operating performance and European margins recover without further inventory reserves or elevated operating investment.
- Track ERP implementation timing, total spending against the $58 million-$72 million estimate and any operational disruption.
- Monitor Brazilian operations, CDC earnout payments, foreign-exchange exposure and the limited goodwill impairment cushion.
- Review vendor rebate and pricing programs, particularly involving Motorola and Avaya, which each represented more than 10% of annual net sales.
- Evaluate working-capital trends, inventory turnover, customer receivables and the $27.3 million allowance for receivable losses.
- Confirm future cash requirements for CDC earnouts, leases, ERP capital expenditures and foreign subsidiary funding.