Business Context and Reporting Period
Company: ScanSource, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended March 31, 1999
Business Overview: ScanSource operates as a distributor of point-of-sale and bar code equipment. The company reported significant growth driven by sales force expansion, competitive pricing, and increased marketing to specialty technology resellers.
Key Financial Metrics
| Metric (in thousands) | Q1 1999 | Q1 1998 | 9 Months 1999 | 9 Months 1998 |
|---|---|---|---|---|
| Net Sales | $76,932 | $46,538 | $203,194 | $126,148 |
| Gross Profit | $8,581 | $6,249 | $23,179 | $16,350 |
| Gross Margin % | 11.2% | 13.3% | 11.4% | 13.0% |
| Operating Income | $3,199 | $1,890 | $8,417 | $5,233 |
| Net Income | $1,973 | $1,131 | $5,246 | $3,288 |
| Diluted EPS | $0.35 | $0.20 | $0.93 | $0.71 |
| Cash from Operations (9mo) | $18,750 | ($16,631) | $18,750 | ($16,631) |
| Total Cash (End of Period) | $12,732 | $1,466 | $12,732 | $1,466 |
| Current Ratio | 1.93 | 4.06 | 1.93 | 4.06 |
Debt and Liquidity: As of March 31, 1999, the company had no borrowings on its $35 million line of credit, with a borrowing base capacity of $31.9 million. Long-term debt totaled $1.7 million (primarily a building loan). Total liabilities were $53.3 million, and shareholders' equity was $55.5 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 65.4% for the quarter and 61.1% for the nine-month period compared to the prior year.
- Margin Compression: Gross profit margins declined from 13.3% to 11.2% (quarter) and 13.0% to 11.4% (nine months). Management attributes this to a shift in sales mix toward lower-margin products and volume discounts provided to resellers.
- Expense Efficiency: Operating expenses as a percentage of sales decreased from 9.5% to 7.0% (quarter) due to efficiencies gained from increased sales volume and reduced value-added services required for lower-margin sales.
- Cash Flow Reversal: Operating cash flow swung from a use of $16.6 million in the prior year to a generation of $18.8 million. This was primarily driven by a significant increase in accounts payable ($33.0 million increase) which funded growth in receivables and inventory.
- Profitability: Net income increased 81.8% for the quarter and 57.6% for the nine-month period.
Outlook, Risks, and Management Commentary
- Year 2000 (Y2K) Compliance: The company is actively addressing Y2K issues. IT systems are largely compliant, with remaining upgrades expected by the end of the second calendar quarter of 1999. Estimated total expenditures to address Y2K are capped at $100,000. Management notes that while they have a contingency plan, there is no assurance that all vendor or reseller systems will be compliant, which could impact sales volumes.
- Market Risks: The company faces risks related to interest rate fluctuations on its variable-rate line of credit and foreign exchange rates regarding Canadian operations. However, management does not consider these risks material at this time.
- Forward-Looking Statements: Future results depend on vendor relationships, product supply, competition, and the ability to manage working capital increases. The company is susceptible to quarterly fluctuations in sales.
- Accounting Changes: The company is assessing the impact of SFAS No. 133 (Derivatives and Hedging), effective for fiscal years beginning after June 15, 1999.
Investor Verification Checklist
- Sustainability of Margin Decline: Verify if the shift to lower-margin products is a permanent strategic change or a temporary market condition.
- Working Capital Management: Confirm the ability to maintain the current level of accounts payable extension to fund inventory and receivables growth.
- Y2K Contingency: Review the status of vendor and reseller Y2K compliance surveys and the effectiveness of the contingency plan.
- Debt Covenants: Monitor the debt-to-net worth ratio to ensure compliance with the line of credit terms (ranging from .75:1 to 2:1).
- Customer Concentration: Assess reliance on specific resellers or vendors given the competitive nature of the distribution market.