ScanSource, Inc. Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018. The request references “2017 Q4,” but the supplied filing is the fiscal 2018 Form 10-K; fourth-quarter fiscal 2018 data are included where relevant. ScanSource distributes technology products, software, services and connectivity through two segments: Worldwide Barcode, Networking & Security and Worldwide Communications & Services. It serves approximately 45,000 customers in the United States, Canada, Latin America and Europe.
Financial performance and position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $3.846 billion | $3.568 billion | +7.8% |
| Gross profit | $436.1 million | $383.6 million | +13.7% |
| Gross margin | 11.3% | 10.8% | +50 bps |
| Operating income | $67.6 million | $88.2 million | -23.3% |
| Operating margin | 1.8% | 2.5% | -70 bps |
| Net income | $33.2 million | $69.2 million | -52.1% |
| Diluted EPS | $1.29 | $2.71 | -52.4% |
| Cash flow from operations | $27.9 million | $94.9 million | -70.6% |
- FY2018 adjusted non-GAAP operating income was $124.0 million, compared with $110.2 million in FY2017; adjusted diluted EPS was $3.11 versus $2.75.
- FY2018 gross profit increased primarily from the POS Portal acquisition in Barcode, Networking & Security and Intelisys-related growth in Communications & Services.
- Cash and cash equivalents were $25.5 million at June 30, 2018, down from $56.1 million. Working capital increased to $651.9 million from $624.7 million.
- Total debt was $249.4 million, including $244.0 million drawn under the revolving credit facility, versus $97.3 million in FY2017. The facility had $156.0 million available and matures in April 2022; the company was in compliance with its covenants.
- Total assets were $1.945 billion and shareholders’ equity was $866.4 million at year-end.
- Cash used in investing activities was $151.9 million, primarily reflecting the $143.8 million net cash acquisition of POS Portal. Financing activities provided $97.5 million, principally from net revolving-credit borrowings.
Segments and material changes
- Worldwide Barcode, Networking & Security: Sales increased 10.0% to $2.629 billion; operating income increased 14.4% to $56.9 million. POS Portal, acquired July 31, 2017, contributed higher-margin payments capabilities and represented approximately 2% of consolidated FY2018 revenue and assets.
- Worldwide Communications & Services: Sales increased 3.3% to $1.217 billion, but operating income declined 72.6% to $10.9 million. The principal adverse factor was the $37.0 million increase in the fair value of acquisition-related contingent consideration, largely associated with Network1 and Intelisys.
- On a constant-currency, excluding-acquisitions basis, consolidated sales grew 4.1%; reported growth benefited from foreign-currency translation and acquisitions.
- International sales increased 13.2% to $999.1 million; approximately 75% of total sales were generated in the United States and Canada, 14% in Latin America and 11% in Europe.
- SG&A increased 12.2% to $297.5 million, while depreciation and amortization increased with acquired assets. The effective tax rate rose to 45.6% from 31.8%, primarily due to a $9.6 million provisional Tax Cuts and Jobs Act transition-tax expense, partly offset by deferred-tax remeasurement benefits.
- FY2017 included a $12.7 million net legal settlement gain that did not recur. FY2018 included approximately $2.9 million of Brazilian legal tax-settlement proceeds, including $2.5 million in SG&A and $0.4 million in interest income.
- No shares were repurchased under the $120 million authorization during FY2018; approximately $99.7 million remained available at June 30, 2018. The company has never paid a cash dividend.
Guidance, outlook, risks and unusual items
- Management expected a FY2019 effective tax rate of approximately 26% to 27% and FY2019 capital expenditures of $10 million to $15 million, primarily for rental equipment and facility improvements.
- Management stated that existing cash, operating cash flow and available credit were expected to fund working-capital and cash requirements for at least the next twelve months.
- Future contractual obligations included $108.2 million of discounted contingent consideration, $244.0 million of revolving-credit principal, operating leases of $38.1 million and capital-lease payments of $1.4 million. Network1’s final earnout was expected in FY2019; Intelisys had three annual installments remaining through FY2021.
- Key risks include intense price competition and narrow margins; dependence on major suppliers, including Avaya, Cisco and Zebra, each exceeding 10% of FY2018 sales; customer credit losses; inventory obsolescence; foreign-exchange and interest-rate volatility; acquisition integration and earnout valuation; cybersecurity and information-system disruptions; international political, regulatory and tax risks; and Brexit-related uncertainty.
- Avaya emerged from Chapter 11 on December 15, 2017. Management identified potential effects on customer confidence and sales as a risk.
- Goodwill was $298.2 million and identifiable intangible assets were $136.8 million. No goodwill impairment was recorded, but impairment testing depends on projected growth, margins, working-capital needs and discount rates.
- On August 20, 2018, after the reporting period, ScanSource acquired Canpango, a Salesforce implementation and consulting partner, for the Communications & Services segment. The filing text does not provide the purchase price.
Investor verification checklist
- Reconcile reported sales growth with the 4.1% constant-currency, acquisition-excluded growth rate and assess the sustainability of POS Portal and Intelisys contributions.
- Review the $37.0 million contingent-consideration expense, the $108.2 million remaining liability and the potential for future fair-value volatility.
- Assess leverage, refinancing requirements and interest-rate exposure, including the $244.0 million revolver balance and $156.0 million remaining availability.
- Evaluate operating cash conversion, particularly the decline in operating cash flow to $27.9 million amid higher receivables and inventory.
- Verify the final effects of the Tax Cuts and Jobs Act and whether the projected FY2019 tax rate of 26% to 27% was achieved.
- Monitor supplier concentration, customer-credit reserves, inventory turnover and the effect of foreign exchange on international results.
- Review the acquisition accounting, integration performance and subsequent disclosures for POS Portal and Canpango.