ScanSource, Inc. Form 10-Q Summary
Business context and reporting period
ScanSource is a wholesale distributor of specialty technology products serving resellers through North American and international distribution segments. The filing covers the quarter and nine months ended March 31, 2012, compared with the corresponding 2011 periods. The request metadata identifies “2011 Q3,” but the filing itself reports fiscal 2012 third-quarter results.
The international segment includes the CDC Brasil acquisition, completed April 15, 2011. The financial statements are unaudited interim statements prepared under U.S. GAAP.
Key financial metrics
| Metric | Quarter ended March 31, 2012 | Quarter ended March 31, 2011 | Nine months ended March 31, 2012 | Nine months ended March 31, 2011 |
|---|---|---|---|---|
| Net sales | $707.9 million | $613.5 million | $2.261 billion | $1.932 billion |
| Gross profit | $69.3 million | $65.8 million | $228.2 million | $199.9 million |
| Gross margin | 9.8% | 10.7% | 10.1% | 10.4% |
| Operating income | $21.5 million | $25.5 million | $85.2 million | $83.9 million |
| Operating margin | 3.0% | 4.2% | 3.8% | 4.3% |
| Net income | $14.8 million | $16.5 million | $54.5 million | $53.9 million |
| Diluted EPS | $0.53 | $0.60 | $1.97 | $1.98 |
| Cash flow from operations | Not separately provided | Not separately provided | $25.1 million | $(1.5) million |
- Quarterly sales increased 15.4%; nine-month sales increased 17.0%.
- Quarterly net income declined 10.8%, while nine-month net income increased 1.2%.
- Annualized return on invested capital declined to 13.5% from 18.2%.
- Cash and cash equivalents were $34.3 million at March 31, 2012, versus $28.7 million at June 30, 2011.
- Accounts receivable were $445.2 million and inventories were $502.0 million at March 31, 2012.
- Working capital was $567.8 million, compared with $532.2 million at June 30, 2011.
Debt and liquidity
- Borrowings under the $300 million senior secured revolving credit facility were $41.5 million at March 31, 2012, with approximately $258.5 million available. The facility matures October 11, 2016 and includes a potential $150 million accordion feature.
- The company had no borrowings under its €6.0 million European revolving facility, compared with $3.2 million at June 30, 2011.
- Long-term debt was $5.4 million, consisting primarily of an industrial development revenue bond. The $25.0 million unsecured note outstanding at June 30, 2011 was repaid during the period.
- Total debt-related borrowings increased, with average funded debt of $111.2 million in the quarter versus $51.1 million in the prior-year quarter.
- Management stated that existing cash, operating cash flow and available credit are expected to provide sufficient liquidity for at least the next twelve months.
Material changes versus the prior comparable period
- North American sales increased 14.7% for the quarter and 12.6% year to date; North American operating income increased 6.9% and 9.5%, respectively.
- International sales increased 17.6% for the quarter and 31.4% year to date, primarily due to CDC Brasil. However, international operating income fell to $14 thousand from $5.4 million in the quarter and declined 41.1% year to date.
- Consolidated gross margin declined 90 basis points in the quarter and 30 basis points year to date, reflecting product mix, vendor incentive changes and pricing pressure.
- SG&A increased 15.8% in the quarter and 22.1% year to date due to CDC-related costs, additional headcount and international investment.
- The company recorded $1.1 million of quarterly and $1.2 million of year-to-date expense from remeasuring CDC contingent consideration; no comparable expense was recorded in 2011.
- The quarter included $0.4 million of incremental amortization expense related to finalized CDC purchase accounting.
- Operating cash flow improved to $25.1 million from an operating cash use of $1.5 million in the prior-year nine-month period.
Outlook, commentary, risks and unusual items
- Management reported weaker-than-expected international results as European and Latin American markets contracted, projects were delayed and competition intensified. The company continues to invest internationally despite lower near-term returns.
- The company is developing a global ERP system. A third-party study indicated implementation will take longer and exceed the previously disclosed high-end cost estimate of $38.5 million. Implementation will not occur during calendar 2012; additional costs and delays remain possible.
- ERP spending totaled approximately $30.2 million through March 31, 2012, including $24.7 million of capital expenditures. Expected spending for the quarter ending June 30, 2012 was approximately $3.5 million.
- Inventory was $100.7 million above the March 31, 2011 level, although it declined $14.7 million from the December 2011 quarter end. Inventory turns declined to 5.0 from 5.5 in the prior-year quarter.
- CDC contingent consideration had a fair value of $19.7 million, including $5.1 million current. Future undiscounted payments may reach $31.7 million and are subject to operating performance and Brazilian real exchange-rate movements.
- The company recorded a nonrecurring $2.5 million foreign-exchange loss in September 2011 on an unfavorable Brazilian real forward contract. Year-to-date net foreign-exchange losses were $3.6 million.
- Brazilian pre-acquisition tax contingencies were recorded at $11.4 million, with reasonably possible undiscounted exposure estimated as high as $15.0 million; identified exposures are indemnifiable under the acquisition agreement.
- Foreign currency forward contracts had $69.9 million of notional amounts and a net liability fair value of approximately $0.3 million at March 31, 2012. A 100-basis-point change in interest rates would have affected quarterly pretax income by approximately $0.6 million.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether international operations can restore margins and operating income after the sharp quarterly decline.
- The revised total cost, implementation schedule and operational risks of the delayed ERP project.
- Inventory normalization, working-capital requirements and the resulting need for revolving-credit borrowings.
- The timing and ultimate amount of CDC earnout payments, including sensitivity to Brazilian operating results and currency movements.
- Exposure to European and Latin American economic contraction, competitive pricing pressure and foreign-exchange volatility.
- Whether sales growth, particularly from CDC Brasil, translates into sustainable earnings and cash-flow growth rather than primarily higher working-capital investment.