ScanSource, Inc. — Form 10-Q Summary
Business Context and Reporting Period
ScanSource 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 through North American and International distribution segments serving resellers in the United States, Canada, Latin America and Europe.
This unaudited Form 10-Q covers the quarter and six months ended December 31, 2012, representing fiscal 2013 second-quarter and year-to-date results. Comparisons are primarily with the corresponding periods ended December 31, 2011. The company had 27,827,381 common shares outstanding as of January 29, 2013.
Financial Metrics
| Metric | Quarter Ended Dec. 31, 2012 | Quarter Ended Dec. 31, 2011 | Six Months Ended Dec. 31, 2012 | Six Months Ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net sales | $747.7 million | $782.7 million | $1,481.3 million | $1,552.9 million |
| Gross profit | $74.4 million | $79.8 million | $148.4 million | $158.9 million |
| Gross margin | 9.9% | 10.2% | 10.0% | 10.2% |
| Operating income | $24.4 million | $32.1 million | $50.6 million | $63.7 million |
| Operating margin | 3.3% | 4.1% | 3.4% | 4.1% |
| Net income | $16.4 million | $21.4 million | $34.0 million | $39.7 million |
| Diluted EPS | $0.59 | $0.77 | $1.22 | $1.44 |
- Quarterly sales declined 4.5%, and six-month sales declined 4.6%.
- Quarterly operating income fell 23.9%; six-month operating income fell 20.5%.
- Quarterly net income declined approximately 23.4%; six-month net income declined approximately 14.5%.
- Annualized return on invested capital decreased to 15.2% from 19.3% in the prior-year quarter.
Segment Performance and Material Changes
- North America: Quarterly net sales declined 2.7% to $548.0 million and six-month sales declined 3.7% to $1,093.8 million. POS, barcode and security products showed modest growth, while combined communications sales declined 13.0% in the quarter and 11.4% year to date.
- International: Quarterly sales declined 9.1% to $199.7 million, or 4.4% on a constant-currency basis. Six-month sales declined 7.0% reported but increased 1.2% on a constant-currency basis. Europe experienced weaker demand and fewer large deals.
- Sales of Juniper Networks products declined significantly after the company’s distribution agreement ended in the first quarter of fiscal 2013. Lower Avaya-related activity also pressured North American communications sales.
- North American gross margin declined to 9.5% from 10.1% in the quarter, primarily because of product and customer mix and lower vendor programs. International gross margin increased to 11.2% from 10.3%, largely due to the timing of vendor rebates.
- International operating income declined 78.1% in the quarter and 68.8% year to date, reflecting Belgian tax-compliance and personnel-replacement costs, weaker European performance and higher European bad-debt expense.
Cash Flow, Liquidity and Debt
| Balance or Cash Flow | Dec. 31, 2012 | June 30, 2012 |
|---|---|---|
| Cash and cash equivalents | $31.5 million | $29.2 million |
| Accounts receivable | $464.3 million | $470.8 million |
| Inventories | $474.7 million | $475.5 million |
| Total assets | $1.204 billion | $1.202 billion |
| Revolving credit borrowings | $21.8 million | None |
| Long-term debt | $5.4 million | $5.4 million |
| Contingent consideration | $13.1 million | $16.7 million |
- Operating activities used $10.0 million during the six months, an improvement from the $22.7 million use in the prior-year period.
- Investing activities used $3.2 million, primarily for capital expenditures and ERP investment.
- Financing activities provided $15.0 million, including net revolving-credit borrowings and payments related to contingent consideration.
- The revolving credit facility had $278.2 million of reported availability at December 31, 2012, with no outstanding standby letters of credit. The company was in compliance with its debt covenants.
- Net working capital increased to $597.7 million from $533.5 million at June 30, 2012, primarily because of lower accounts payable resulting from the timing of vendor payments.
- Days sales outstanding remained 56 days. Inventory turnover was 5.7 times during the quarter, compared with 5.6 times in the sequential and prior-year quarters.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing cash, operating resources and available credit are expected to provide sufficient liquidity for at least the next twelve months. The filing does not provide formal revenue or earnings guidance.
- The company incurred $2.1 million of current-quarter costs for Belgian tax compliance, personnel replacement, severance and professional fees. Management presented adjusted after-tax income of $17.8 million and adjusted diluted EPS of $0.64, compared with GAAP net income of $16.4 million and diluted EPS of $0.59.
- The company is replacing former ERP implementation partner Avanade with Tata Consultancy Services. It filed a lawsuit against Avanade on January 2, 2013 alleging fraud, misrepresentation and breach of contract.
- ERP spending totaled approximately $38.0 million through December 31, 2012, of which $27.8 million was capitalized. Estimated total project spending is $58 million to $72 million, including litigation costs and expenses; fiscal 2013 remaining capital expenditures are expected to be $4 million to $6 million.
- ERP delays, cost overruns, implementation problems or disruption to legacy systems could adversely affect operations, customer service and financial results.
- Future CDC acquisition earnout payments are estimated to be up to $18.7 million on an undiscounted basis. The recorded liability was $13.1 million, including $5.0 million current, and is denominated in Brazilian reais, creating foreign-exchange exposure.
- Foreign currency forward contracts had $84.9 million of notional amounts outstanding. The company does not use derivatives for speculative purposes. A 100-basis-point interest-rate change would have affected quarterly pretax income by approximately $0.1 million.
- The company faces competition involving pricing, credit terms, service, product availability and distribution-channel access. It also remains exposed to foreign exchange, interest-rate, credit, inventory and vendor-program risks.
Most Important Facts for Investors to Verify
- Whether sales weakness following the Juniper agreement termination and lower communications demand stabilizes or persists.
- Whether gross-margin pressure, European bad debt and Belgian-related costs are temporary or indicate broader profitability deterioration.
- Progress, revised timing and total cost of the ERP implementation, including the Avanade litigation and the new TCS engagement.
- Revolving-credit utilization, covenant compliance and liquidity as working-capital requirements change.
- Future CDC earnout payments and their sensitivity to Brazilian operating results and currency movements.
- The filing’s forward-looking statements and risk factors, including risks incorporated by reference from the fiscal 2012 Form 10-K.