ScanSource, Inc. Form 10-Q Summary
Business Context and Reporting Period
ScanSource, Inc. is a wholesale distributor of specialty technology products, including automatic identification and data capture, point-of-sale, communications, security, and wireless infrastructure products. Operations are reported in North American and International distribution segments. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2010, compared with the corresponding 2009 periods. The company had 26,892,009 common shares outstanding as of February 4, 2011.
Financial Performance and Position
| Metric | Quarter Ended Dec. 31, 2010 | Quarter Ended Dec. 31, 2009 | Six Months Ended Dec. 31, 2010 | Six Months Ended Dec. 31, 2009 |
|---|---|---|---|---|
| Net sales | $683.6 million | $548.1 million | $1,318.2 million | $1,036.5 million |
| Gross profit | $70.6 million | $56.3 million | $134.1 million | $107.7 million |
| Gross margin | 10.3% | 10.3% | 10.2% | 10.4% |
| Operating income | $33.5 million | $18.1 million | $58.4 million | $35.8 million |
| Operating margin | 4.9% | 3.3% | 4.4% | 3.5% |
| Net income | $21.6 million | $11.8 million | $37.3 million | $22.8 million |
| Diluted EPS | $0.80 | $0.44 | $1.38 | $0.85 |
Quarterly net sales increased 24.7% and six-month sales increased 27.2%. Quarterly net income rose 83.0%, while six-month net income increased 64.1%. The effective tax rate was 35.7% for both the quarter and six-month period in 2010.
- North American sales increased 22.2% in the quarter and 23.3% year to date; international sales increased 33.9% and 42.4%, respectively.
- Quarterly North American operating income increased 104.6% to $29.3 million; international operating income increased 11.5% to $4.3 million.
- Cash and cash equivalents were $13.0 million at December 31, 2010, down from $34.6 million at June 30, 2010.
- Working capital increased to $495.3 million from $437.0 million, primarily because of higher receivables and inventory.
- Accounts receivable were $415.8 million and inventories were $389.4 million at December 31, 2010.
- Cash used in operating activities was $33.1 million for the six months, compared with $77.7 million in the prior-year period.
- Capital expenditures were $5.7 million, compared with $0.5 million in the prior-year period.
- Annualized return on invested capital increased to 25.0% from 16.1%; management stated that ROIC would have been 22.9% excluding a legal settlement recovery.
Debt and Liquidity
- The company had $12.8 million outstanding under its $250 million domestic revolving credit facility, leaving $237.2 million available. The facility matures in September 2012 and was subject to financial and restrictive covenants.
- The European revolving credit facility had $2.0 million outstanding against its €6.0 million capacity.
- Long-term debt totaled $30.4 million, consisting primarily of a $25.0 million unsecured note and a $5.4 million industrial development revenue bond.
- Total liabilities were $417.8 million and shareholders’ equity was $535.6 million at December 31, 2010.
- Management stated that existing cash resources, operating cash flow, and available credit were expected to meet present and future working-capital and cash requirements for at least the next twelve months.
Material Changes, Outlook, and Unusual Items
- Demand improved across geographic segments, supported by stronger end-user demand, market-share gains, improved inventory availability, vendor programs, and larger POS and barcoding transactions.
- The November 2009 acquisition of Algol Europe contributed to international sales and expanded the European communications distribution business. No acquisitions occurred during the six months ended December 31, 2010.
- Quarterly operating expenses decreased 2.8% despite higher activity, principally because of a $3.1 million recovery from a legal settlement with a former service provider. Excluding that recovery, operating expenses increased approximately $2.0 million in the quarter and $6.9 million year to date.
- Management increased headcount and marketing spending to support demand and continued investing in the international communications business.
- The company’s global enterprise resource planning project had incurred approximately $9.9 million through December 31, 2010. Management expected additional fiscal 2011 spending of $11 million to $14 million and fiscal 2012 spending of $7 million to $15 million.
- Foreign-currency forward contracts had aggregate notional amounts of $73.1 million and a net payable fair value of less than $0.2 million. An interest-rate swap had a fair-value liability of approximately $0.6 million.
- Management identified foreign-currency movements, floating interest rates, credit risk, inventory levels, customer receivables, and execution of the ERP project as relevant risk areas. A hypothetical 100-basis-point rate change was estimated to affect quarterly pre-tax income by less than $0.1 million.
- The company reported compliance with the covenants under its credit facilities, note payable, and industrial development revenue bond. It also stated that pending litigation was not expected to have a material adverse effect, although no assurance was provided.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2010, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether sales growth and operating-margin improvement were sustainable after adjusting for the $3.1 million legal settlement recovery and unusually favorable prior-year vendor-program comparisons.
- The conversion of higher earnings into cash, given $33.1 million of operating cash outflow and increased receivables and inventory.
- Future ERP implementation costs, timing, and the extent to which they require additional revolver borrowings.
- Exposure to foreign-currency and floating-interest-rate volatility, including the effectiveness and counterparty performance of derivative contracts.
- Debt maturities beginning with the $25.0 million note maturing in September 2012, covenant compliance, and available revolving-credit capacity.
- Whether international communications investments and the Algol acquisition generate expected returns without disproportionate operating-cost growth.
- The company’s forward-looking statements and risk disclosures, which remain subject to market demand, vendor relationships, economic conditions, currency movements, liquidity needs, and other risks identified in the filing and prior Form 10-K.