ScanSource, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2018. The filing corresponds to fiscal 2018 third quarter, although the request metadata identifies “2017 Q3.” Financial information is unaudited and presented under U.S. GAAP.
Business Context
ScanSource is a global technology-products and solutions provider operating in the United States, Canada, Latin America and Europe. Its two reportable segments are Worldwide Barcode, Networking & Security and Worldwide Communications & Services. The company serves more than 35,000 customers and sells products from more than 500 technology vendors.
On July 31, 2017, ScanSource acquired POS Portal for approximately $143.8 million net cash, expanding its payments business within the Barcode, Networking & Security segment.
Financial Results and Key Metrics
| Metric | Quarter ended March 31, 2018 | Quarter ended March 31, 2017 | Nine months ended March 31, 2018 | Nine months ended March 31, 2017 |
|---|---|---|---|---|
| Net sales | $895.6 million | $813.5 million | $2.852 billion | $2.651 billion |
| Gross profit | $103.9 million | $92.7 million | $322.8 million | $282.7 million |
| Gross margin | 11.6% | 11.4% | 11.3% | 10.7% |
| Operating income | $17.9 million | $20.0 million | $47.9 million | $66.1 million |
| Operating margin | 2.0% | 2.5% | 1.7% | 2.5% |
| Net income | $10.6 million | $12.4 million | $22.8 million | $50.3 million |
| Diluted EPS | $0.42 | $0.49 | $0.89 | $1.97 |
Quarterly sales increased 10.1%; excluding acquisitions and foreign-exchange translation, organic constant-currency sales increased 5.4%. Nine-month sales increased 7.6%, or 3.8% organically on a constant-currency basis. Quarterly gross profit increased 12.1%, while operating income declined 10.2% due primarily to higher operating expenses and contingent-consideration adjustments.
- Barcode, Networking & Security: Quarterly sales increased 10.1% to $604.3 million, including POS Portal; organic constant-currency sales increased 3.7%. Quarterly operating income increased 3.5% to $11.6 million.
- Communications & Services: Quarterly sales increased 10.1% to $291.3 million, or 9.1% organically in constant currency. Quarterly operating income declined 27.6% to $6.4 million, primarily because of contingent-consideration expense.
- Adjusted performance: Non-GAAP quarterly operating income was $27.8 million versus $26.2 million, and non-GAAP diluted EPS was $0.68 versus $0.65, excluding acquired-intangible amortization and contingent-consideration fair-value changes.
Cash Flow, Balance Sheet, Debt and Liquidity
| Balance-sheet metric | March 31, 2018 | June 30, 2017 |
|---|---|---|
| Cash and cash equivalents | $35.4 million | $56.1 million |
| Accounts receivable | $664.1 million | $637.3 million |
| Inventories | $569.5 million | $531.3 million |
| Total assets | $1.928 billion | $1.718 billion |
| Total debt | $282.2 million | $97.3 million |
| Revolving-credit borrowings | $276.7 million | $91.9 million |
| Shareholders’ equity | $877.8 million | $837.1 million |
- Nine-month operating cash flow was negative $3.2 million versus positive $84.1 million in the prior-year period, primarily because of higher receivables and inventory and lower accounts payable.
- Investing cash outflow was $149.1 million, including $143.8 million for the POS Portal acquisition and $5.3 million of capital expenditures.
- Financing cash inflow was $130.3 million, primarily from net revolver borrowings, partly offset by $54.0 million of contingent-consideration payments.
- The company had $123.3 million available under its $400 million revolving credit facility, which matures April 3, 2022. Management stated that liquidity sources should cover requirements for at least the next twelve months.
- Net working-capital investment increased to $699.4 million from $624.7 million at June 30, 2017. DSO increased to 64 days, excluding Intelisys, from 61 days at June 30, 2017.
Material Changes, Outlook and Unusual Items
- Operating results were affected by $28.6 million of nine-month expense from changes in the fair value of contingent consideration, versus $3.9 million in the prior-year period. The March 31, 2018 liability totaled $101.8 million, primarily related to Intelisys and Network1.
- Interest expense increased to $6.7 million for the nine months from $2.3 million, reflecting higher revolving-credit borrowings.
- The Tax Cuts and Jobs Act resulted in a provisional $9.3 million transition-tax expense and a $3.5 million deferred-tax remeasurement benefit. The nine-month effective tax rate was 46.9%, including $7.1 million of net discrete tax expense; management expected an approximately 30.4% fiscal-2018 rate excluding discrete items. Tax accounting remained subject to finalization.
- The company expects fiscal-2018 capital expenditures of $6 million to $8 million, primarily for information-technology investments.
- Management is evaluating the effects of the new revenue-recognition standard, applicable beginning July 1, 2018, including principal-versus-agent considerations and performance obligations. Lease accounting changes are expected to apply beginning July 1, 2019.
- Key risks include competition and pricing pressure, vendor concentration or termination of key vendor relationships, customer and vendor credit risk, acquisition integration and performance, foreign-exchange and interest-rate exposure, demand volatility, tax-law changes and working-capital requirements.
- The company reported no material off-balance-sheet arrangements and stated that pending litigation was not expected to have a material adverse effect based on information currently known.
Investor Verification Checklist
- Verify the filing period: March 31, 2018 fiscal third quarter, rather than 2017 Q3.
- Assess whether POS Portal contributes sustainable organic growth and margin improvement after acquisition effects are excluded.
- Monitor receivable aging, DSO, inventory turns and operating cash flow conversion.
- Review the higher revolver balance, borrowing costs, covenant compliance and remaining availability.
- Reconcile GAAP earnings with non-GAAP results, particularly the $28.6 million contingent-consideration expense and acquired-intangible amortization.
- Track finalization of the Tax Act accounting and the effect of revenue-recognition adoption on reported sales and margins.
- Evaluate future Intelisys and Network1 earnout payments, which remain subject to operating performance, valuation assumptions and foreign-exchange movements.