ScanSource, Inc. Form 10-K Summary
Business context and reporting period
ScanSource is an international wholesale distributor of specialty technology products, serving approximately 28,000 resellers and approximately 250 vendors across North America, Latin America and Europe. Its markets include POS and barcode, physical security, communications and related services.
The filing covers the fiscal year ended June 30, 2013, with comparative fiscal 2012 and fiscal 2011 data. Although the request references 2012 Q4, the filing is a fiscal 2013 Form 10-K. Fourth-quarter fiscal 2013 results are included where disclosed.
During the fourth quarter, ScanSource reorganized its reporting structure from geographic segments to two global technology segments: Worldwide Barcode & Security and Worldwide Communications & Services. Prior-period segment information was retrospectively reclassified.
Financial performance and key metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $2.877 billion | $3.015 billion | Down 4.6% |
| Gross profit | $292.9 million | $302.0 million | Down 3.0% |
| Gross margin | 10.2% | 10.0% | Up 20 bps |
| Operating income | $51.0 million | $113.5 million | Down 55.0% |
| Operating margin | 1.8% | 3.8% | Down 200 bps |
| Net income | $34.7 million | $74.3 million | Down 53.3% |
| Diluted EPS | $1.24 | $2.68 | Down 53.7% |
| Operating cash flow | $129.4 million | $60.0 million | Up $69.5 million |
FY2013 gross profit was 10.2% of sales, while SG&A was 6.6% of sales versus 6.2% in fiscal 2012. The effective tax rate was 34.6%, compared with 33.2% in fiscal 2012. Management reported adjusted net income of $69.3 million and adjusted diluted EPS of $2.47 after excluding specified ERP, goodwill, Belgian compliance and personnel-replacement costs.
Fourth-quarter fiscal 2013 net sales were $712.7 million and gross profit was $75.7 million. The quarter produced a net loss of $13.3 million, or $(0.48) diluted EPS, primarily because of the ERP and goodwill impairment charges.
Segments and material changes
- Worldwide Barcode & Security sales were $1.828 billion, down 0.5% reported but up $25.4 million, or 1.4%, on a constant-currency basis. Operating income was $34.7 million versus $56.7 million.
- Worldwide Communications & Services sales were $1.049 billion, down 11.0%. The decline primarily reflected the loss of Juniper Networks sales, which fell approximately $109 million after the distribution agreement ended in September 2012. Operating income was $44.6 million versus $56.8 million.
- Foreign-currency translation, particularly the Brazilian real, reduced reported sales and affected international results.
- European Communications was restructured in the third quarter. The company estimated annualized cost savings of approximately $3.1 million and recorded approximately $1.2 million of restructuring costs.
- SG&A increased 1.5%, primarily because of higher doubtful-account expense, including increased reserves related to Venezuela, plus Belgian tax compliance and personnel-replacement costs.
- Inventory turnover improved to 6.2 times in the fourth quarter from 5.4 times in the comparable prior-year quarter.
Liquidity, debt and financial position
- Cash and cash equivalents were $148.2 million at June 30, 2013, compared with $29.2 million at June 30, 2012.
- Working capital was $614.4 million, compared with $533.5 million at the prior year-end. Accounts receivable were $435.0 million and inventory was $402.3 million.
- Total debt, including short-term borrowings, was $5.4 million, consisting primarily of an industrial development revenue bond. No amounts were outstanding under the $300 million revolving credit facility, which had $300 million of availability and no outstanding letters of credit.
- Shareholders’ equity was $696.0 million, compared with $652.3 million.
- Cash used in investing activities was $4.8 million, principally for capital expenditures. Cash used in financing activities was $5.0 million, including $4.8 million of contingent-consideration payments.
- The company had $12.5 million of CDC Brasil contingent consideration recorded at fair value, including $3.7 million due within one year. Estimated undiscounted future earnout payments were $16.6 million.
Guidance, outlook, risks and unusual items
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. The only explicit fiscal 2014 guidance disclosed was an expected effective tax rate of approximately 34% to 35%. Management continued to target profitable growth in security and communications technologies and remained open to strategic acquisitions.
- The company discontinued development of its Microsoft Dynamics AX ERP project and recorded a $28.2 million pretax non-cash impairment charge, or $18.0 million after tax. Approximately $0.6 million of capitalized costs remained and was expected to be placed in service for an auxiliary database system. The company continued to evaluate alternatives for a new ERP system.
- Goodwill impairment charges totaled $20.6 million: $15.1 million for the Brazilian POS and Barcode reporting unit and $5.4 million for European Communications. Additional impairment remains reasonably possible if projected growth, margins, working capital or discount-rate assumptions deteriorate.
- Venezuelan resellers experienced difficulty obtaining U.S. dollars. At year-end, Venezuela accounts receivable totaled $2.2 million with $1.7 million of specific reserves.
- The company filed a lawsuit against former ERP integration partner Avanade alleging fraud, misrepresentation and breach of contract and seeking damages. The filing does not provide a clear expected recovery or ultimate outcome.
- Material operating risks include intense competition and narrow margins, vendor concentration and short-term distribution agreements, customer credit exposure, inventory obsolescence, foreign-currency volatility, international and Brazilian regulatory and economic risks, centralized distribution and information systems, cybersecurity, and potential future goodwill or long-lived-asset impairments.
- Motorola and Avaya each accounted for more than 10% of net sales. No single customer accounted for more than 6% of fiscal 2013 sales.
- The company has never paid a cash dividend, and credit-facility terms restrict dividend payments.
Most important facts for investors to verify
- Whether revenue and operating profitability recover after the loss of Juniper sales and the European Communications restructuring.
- Progress, cost and implementation plan for replacing the discontinued ERP project.
- Collection performance and reserve adequacy for Venezuelan and other international receivables.
- Potential additional goodwill impairment in European POS and Barcode and Latin American reporting units, whose estimated fair values exceeded carrying values by only 7.2% and 9.7%, respectively.
- Future CDC earnout payments, Brazilian operating performance and foreign-exchange exposure.
- Whether the reported improvement in operating cash flow is sustainable as sales and working-capital requirements change.
- The status and potential financial impact of the Avanade litigation and related ERP costs.