ScanSource, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2015. The request identifies “2014 Q3,” but the filing is for fiscal 2015 third quarter. ScanSource is an international wholesale distributor of specialty technology products serving approximately 35,000 resellers in North America, Latin America, and Europe. Its reportable segments are Worldwide Barcode & Security and Worldwide Communications & Services.
Key Financial Metrics
| Metric | Quarter ended Mar. 31, 2015 | Quarter ended Mar. 31, 2014 | Nine months ended Mar. 31, 2015 | Nine months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Net sales | $763.2 million | $683.0 million | $2.362 billion | $2.156 billion |
| Gross profit | $80.0 million | $73.4 million | $235.8 million | $227.1 million |
| Gross margin | 10.5% | 10.7% | 10.0% | 10.5% |
| Operating income | $21.5 million | $25.7 million | $76.5 million | $81.3 million |
| Operating margin | 2.8% | 3.8% | 3.2% | 3.8% |
| Net income | $12.9 million | $16.9 million | $49.0 million | $54.7 million |
| Diluted EPS | $0.45 | $0.59 | $1.70 | $1.92 |
Quarterly revenue increased 11.7%, while gross profit increased 9.1%. Higher SG&A, acquisition-related costs, lower gross margins, increased interest expense, and foreign-exchange losses reduced profitability. Quarterly SG&A rose 24.7% to $58.2 million. Net foreign-exchange losses were $1.6 million versus $0.1 million in the prior-year quarter.
For the nine-month period, revenue increased 9.6%, but operating income declined 6.0% and net income declined 10.5%. The filing reports non-GAAP quarterly diluted EPS of $0.52 versus $0.63 in the prior-year quarter after excluding acquisition-related amortization, contingent-consideration changes, and acquisition costs.
Segment and Operating Changes
- Worldwide Barcode & Security quarterly sales decreased 7.4% to $422.1 million, with operating income down 25.3% to $10.3 million. Management attributed the decline to fewer large deals, unfavorable sales mix, lower margins, and foreign-currency translation.
- Worldwide Communications & Services quarterly sales increased 50.2% to $341.1 million, primarily reflecting the Imago ScanSource and Network1 acquisitions and growth in North American Communications and Catalyst operations. Segment operating income decreased 3.2% to $11.5 million because of lower margins and higher employee costs.
- Imago ScanSource was acquired in September 2014 for $35.5 million net cash. Network1 was acquired in January 2015 for $24.2 million net cash, with $34.7 million of net debt assumed.
- Gross margin declined because of less favorable product and geographic mix, lower-margin large deals, and lower vendor-program recognition.
- The company incurred $3.5 million of ERP-related capital expenditures in the quarter and $15.3 million for the nine months. European operations, excluding Imago ScanSource, began using the new SAP ERP system in February 2015; North American implementation was continuing.
Cash Flow, Liquidity, Debt, and Balance Sheet
| Item | Mar. 31, 2015 | Jun. 30, 2014 |
|---|---|---|
| Cash and cash equivalents | $93.6 million | $194.9 million |
| Accounts receivable | $487.1 million | $464.4 million |
| Inventory | $485.6 million | $504.8 million |
| Total assets | $1.347 billion | $1.335 billion |
| Interest-bearing current and long-term debt | $11.9 million | $5.4 million |
| Contingent consideration liability | $31.4 million | $11.1 million |
- Nine-month operating cash flow was $27.1 million versus $32.7 million in the prior-year period.
- Investing cash outflow was $79.6 million, including $59.7 million for acquisitions and $19.9 million of capital expenditures.
- Financing cash outflow was $36.2 million, including contingent-consideration payments, debt repayments, and $2.7 million of share repurchases.
- The $300 million revolving credit facility had no outstanding balance and was fully available at March 31, 2015. The company was in compliance with all debt covenants.
- Management stated that cash, operating cash flow, and available credit are expected to provide sufficient liquidity for at least the next twelve months.
Outlook, Risks, and Unusual Items
- Management expects a fiscal-year 2015 effective tax rate of approximately 34.5% to 35.0%.
- Fiscal 2015 capital expenditures are expected to range from $20 million to $21 million, primarily related to the ERP implementation.
- Future earnout obligations totaled $31.4 million at March 31, 2015, including approximately $4.2 million for CDC, $4.9 million for Imago ScanSource, and $22.3 million for Network1. Payments depend on acquired-business performance and foreign-exchange rates.
- Material risks include foreign-currency volatility, interest-rate exposure, vendor consolidation and supplier concentration, product availability, pricing competition, execution of acquisitions, ERP implementation, and potential Brazilian tax contingencies.
- Pre-acquisition Brazilian tax contingencies and corresponding indemnification receivables totaled approximately $14.0 million for Network1 and $3.6 million for CDC, presented gross on the balance sheet. Management believes existing litigation is unlikely to have a material adverse effect, although no assurance is provided.
- Accumulated other comprehensive loss increased to $71.9 million, primarily from foreign-currency translation. Quarterly comprehensive loss was $19.0 million despite net income of $12.9 million.
- The company is evaluating the new revenue-recognition standard, applicable beginning in fiscal 2018; the filing does not provide a quantified impact.
Investor Verification Points
- Verify the extent to which revenue growth and future earnings depend on the Imago ScanSource and Network1 acquisitions.
- Monitor gross-margin recovery, segment mix, large-deal activity, and vendor-program recognition.
- Reconcile cash usage with acquisition payments, ERP spending, working-capital requirements, and contingent consideration.
- Assess foreign-exchange exposure, particularly to the euro, British pound, and Brazilian real, and the effectiveness of related hedges.
- Review the timing and potential amount of Network1, Imago, and CDC earnout payments and related fair-value remeasurements.
- Track ERP implementation costs, North American rollout execution, and any changes to the fiscal 2015 capital-spending outlook.
- Consider supplier concentration, vendor consolidation, Brazilian tax contingencies, goodwill impairment sensitivity, and the company’s ability to sustain liquidity as working-capital needs change.