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| SCSC > SEC Filings for SCSC > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Overview
ScanSource, Inc. is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company distributes more than 55,000 products worldwide. The Company has two geographic distribution segments: one serving North America from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America (including Mexico) and Europe. The North American distribution segment markets automatic identification and data capture ("AIDC") and point-of-sale ("POS") products through the ScanSource POS and Barcoding sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony and communications products through its ScanSource Communications unit; and electronic security products and wireless infrastructure products through its ScanSource Security Distribution unit. The international distribution segment primarily markets AIDC and POS products through its ScanSource sales units. In addition, the Company expanded its communications business internationally through its acquisition of MTV Telecom (Distribution) PLC, a UK-based distributor of voice and data solutions in April 2008.
The Company was incorporated in December 1992 and is headquartered in Greenville, South Carolina. The Company serves North America from a single, centrally located distribution center located near the FedEx hub in Southaven, Mississippi. The single warehouse and strong management information system form the cornerstone of the Company's cost-driven operational strategy. This strategy has been expanded to Latin America and Europe, with distribution centers located in Florida and Mexico, and in Belgium, respectively.
Evaluating Financial Condition and Operating Performance
The Company's executives place a significant emphasis on operating income and return on invested capital ("ROIC") in evaluating and monitoring the Company's financial condition and operating performance. ROIC is used by the Company to assess its efficiency at allocating the capital under its control to generate returns. ROIC is computed by the Company as net income plus income taxes, interest expense, depreciation and amortization divided by invested capital. Invested capital includes all monetary capital invested calculated as the sum of average interest bearing debt and average shareholders' equity.
The following table summarizes the Company's annualized return on invested capital ratio for the quarter ended March 31, 2009 and 2008, respectively:
Quarter ended March 31, 2009 2008 Return on invested capital ratio, annualized 13.85 % 18.37 %
The discussion that follows this overview explains the decrease in ROIC from the comparative quarter. The Company uses ROIC as a performance measurement because it believes that this metric best balances the Company's operating results with its asset and liability management, it excludes the results of capitalization decisions, is easily computed, communicated and understood and drives changes in shareholder value.
The Company's operating income growth is driven not only by gross profits but by a disciplined control of operating expenses. The Company's operations feature a scalable information system, streamlined management, and centralized distribution, enabling it to achieve the economies of scale necessary for cost-effective order fulfillment. From its inception, the Company has managed its general and administrative expenses by maintaining strong cost controls. However, in order to continue to grow its markets, the Company has invested in new initiatives including investments in new geographic markets of Europe and Latin America, increased marketing efforts to recruit resellers, enhancements of employee benefit plans to retain employees, and strategic acquisitions in both the North American and International distribution segments.
Results of Operations
Net Sales
The following table summarizes our net sales results (net of inter-segment
sales) for the quarter and nine months ended March 31, 2009:
Quarter ended
March 31,
(in thousands) 2009 2008 $ Change % Change
North American distribution $ 313,250 $ 421,042 $ (107,792 ) (25.6%)
International distribution 76,565 93,378 (16,813 ) (18.0%)
Net sales $ 389,815 $ 514,420 $ (124,605 ) (24.2%)
Nine months ended
March 31,
(in thousands) 2009 2008 $ Change % Change
North American distribution $ 1,138,843 $ 1,329,741 $ (190,898 ) (14.4%)
International distribution 267,890 291,714 (23,824 ) (8.2%)
Net sales $ 1,406,733 $ 1,621,455 $ (214,722 ) (13.2%)
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Consolidated worldwide net sales for the quarter ended March 31, 2009 were $389.8 million, a 24.2% decrease from the comparative, prior year quarter. For the nine months ended March 31, 2009, consolidated net sales were $1.4 billion, a 13.2% decrease from the comparative prior year period. The decline in our consolidated sales for both periods reflects the overall decline in demand for technology products on a global basis as a result of the current economic downturn.
North American Distribution
North American distribution sales include sales to technology resellers in the United States and Canada from our Southaven, Mississippi distribution center. For the quarter and year-to-date periods ended March 31, 2009, net sales decreased over the comparative prior year periods by $107.8 million and $190.9 million, respectively. This represented a 25.6% and 14.4% decrease in net sales for these periods, respectively.
The Company's POS, Barcoding, and Security product categories saw revenues decrease by 28.4% in comparison to the prior year quarter and 12.4% for the prior nine-month period. Similar to last quarter, all of these units continue to be challenged by weaker end-user demand caused by tighter credit markets and uncertain economic conditions in North America. We continued to see delays and / or cancellations of many of the larger deals and projects that would normally occur within the quarter.
The Company has two North American sales units that sell communications products to our customers - the Catalyst Telecom sales unit and the ScanSource Communications sales unit. The combined sales of these units were 21.9% lower in the current quarter versus the prior year quarter and 16.7% lower in comparison to the prior-year nine month period. Both of these sales units continue to be impacted by the prevailing macroeconomic conditions in North America. As a result, the majority of our vendors in these units experienced lower sales on a comparative basis. As discussed in previous quarters, we continue to monitor reseller response to program changes implemented by our key vendor in the Catalyst Telecom sales unit. This vendor continues to make progress with their programs, products, and service offerings and we are encouraged that these changes will eventually be well-received by our resellers. Accordingly, we believe the overall lack of demand experienced this quarter was driven primarily by the uncertain economic climate and an absence of larger transactions that would normally occur in a more stable economic environment.
International Distribution
The international distribution segment includes sales to Latin America (including Mexico) and Europe from the ScanSource POS and Barcoding sales units and in Europe through the ScanSource Communications sales unit. For the quarter and year-to-date periods ended March 31, 2009, net sales for this segment decreased by $16.8 million and $23.8 million, respectively. This represented an 18% and 8.2% decrease in net sales for these periods, respectively. On a constant exchange rate basis, sales actually decreased by 8.8% and 4.6% for the quarter and nine-month period, respectively. The constant currency decline in sales for both of these geographies was driven by weakness in end-user demand which was attributable to the economic downturn and the impact of vendor price increases introduced
during the quarter.
Gross Profit
The following tables summarize the Company's gross profit for the quarter and nine month periods ended March 31, 2009 and 2008, respectively:
Quarter ended % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
North American distribution $ 34,792 $ 42,168 $ (7,376 ) (17.5%) 11.1 % 10.0 %
International distribution 12,743 9,551 3,192 33.4% 16.6 % 10.2 %
Gross profit $ 47,535 $ 51,719 $ (4,184 ) (8.1%) 12.2 % 10.1 %
Nine months ended % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
North American distribution $ 118,391 $ 134,466 $ (16,075 ) (12.0%) 10.4 % 10.1 %
International distribution 36,974 34,554 2,420 7.0% 13.8 % 11.8 %
Gross profit $ 155,365 $ 169,020 $ (13,655 ) (8.1%) 11.0 % 10.4 %
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North American Distribution
Gross profit for the North American distribution segment decreased 17.5% or $7.4 million for the quarter ended March 31, 2009 and 12.0% or $16.1 million for the nine month period as compared to the same periods in the prior year. The decrease in gross profit is primarily the result of lower sales volume in all of our sales units, as previously discussed. Gross profit as a percentage of net sales for the North American distribution segment increased to 11.1% and 10.4%, respectively, for the quarter and nine month periods ended March 31, 2009. From a gross profit percentage perspective, the improvement in the current quarter is attributable to higher vendor program benefits recognized versus the comparative prior period. In addition, we benefited from a more favorable product mix and less margin dilution from the absence of larger deals and projects that traditionally carry lower margins.
International Distribution
In our international distribution segment, gross profit increased by 33.4% or $3.2 million for the quarter ended March 31, 2009, and 7.0% or $2.4 million for the nine month period as compared to the same periods in the prior year. The increase in margin for both periods was generated in the current quarter by taking advantage of strategic inventory purchases in the anticipation of subsequent vendor price increases introduced during the quarter. These opportunistic purchases resulted in the achievement of significantly higher gross margins during the quarter, and as a result, gross profit expressed as a percentage of net sales for this segment increased to 16.6% and 13.8%, respectively for the quarter and nine-month period. While gross profit percentages of product sales in this segment are typically greater than the North American distribution segment, the significant increase in gross margin percentage experienced during the quarter is a direct result of this unique buying opportunity, and does not reflect a sustainable increase in profitability for this segment.
Operating Expenses
The following table summarizes our operating expenses for the periods ended
March 31, 2009 and 2008, respectively:
Period ended % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
Quarter $ 32,418 $ 32,723 $ (305 ) (0.9%) 8.3 % 6.4 %
Nine months $ 101,225 $ 99,238 $ 1,987 2.0% 7.2 % 6.1 %
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Operating expenses decreased by 0.9%, or $.3 million for the quarter ended March 31, 2009, as compared to the same period in the prior year. The decrease in operating expenditures for the current quarter is primarily attributable to our compensation programs for sales representatives and management which are variable in nature and declined in correlation with our sales volume and profitability. There also was a decrease in operating expenses incurred in our international segment due to favorable foreign exchange rate fluctuations between the two periods. To a much lesser extent, we also started to achieve savings through various cost reduction initiatives that were implemented earlier in the quarter in response to lower sales volumes. Offsetting these expense reductions in the
current quarter was a $1.1 million increase in bad debt expense over the prior year quarter and incremental expenditures associated with the acquisition of MTV Telecom of $0.7 million. MTV Telecom was not acquired until April 2008.
For the nine month period ended March 31, 2009, operating expenses increased by 2.0%, or $2.0 million. Offsetting the reduction in variable expenses mentioned earlier was a $2.5 million increase in bad debt expense for the current year-to-date period. Total bad debt expense for the year-to-date period was $6.0 million, compared to prior period bad debt expense of $3.5 million. This increase reflects additional reserves taken over the course of the fiscal year to ensure our allowance for doubtful accounts remains adequate to cover anticipated losses in our receivables portfolio. In addition to higher bad debt expense, we incurred incremental expenditures associated with the acquisition of MTV Telecom of $2.4 million that did not occur in the prior fiscal year.
Operating expenses as a percentage of sales increased to 8.3% and 7.2% for the quarter and nine month periods ended March 31, 2009. These increases can be attributable to the increase in bad debt expense in addition to our continued investment in our European Communications and ScanSource Security business units during a period of overall declining sales volumes for our consolidated operations
Operating Income
The following table summarizes our operating income for the quarters ended
March 31, 2009 and 2008, respectively:
Quarter ended % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
North American distribution $ 10,413 $ 16,789 $ (6,376 ) (38.0%) 3.3 % 4.0 %
International distribution 4,704 2,207 2,497 113.1% 6.1 % 2.4 %
$ 15,117 $ 18,996 $ (3,879 ) (20.4%) 3.9 % 3.7 %
Nine months % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
North American distribution $ 42,636 $ 57,864 $ (15,228 ) (26.3%) 3.7 % 4.4 %
International distribution 11,504 11,918 (414 ) (3.5%) 4.3 % 4.1 %
$ 54,140 $ 69,782 $ (15,642 ) (22.4%) 3.8 % 4.3 %
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Operating income decreased 20.4% or $3.9 million for the quarter ended March 31, 2009 to $15.1 million. For the nine months ended March 31, 2009, operating income decreased 22.4% or $15.6 million over the comparative prior year period. The decrease in operating income for both periods is primarily attributable to lower sales experienced during the current fiscal year, as previously discussed.
Total Other Expense (Income)
The following table summarizes our total other expense (income) for the quarter
and nine months ended March 31, 2009 and 2008, respectively:
Quarter ended % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
Interest expense $ 609 $ 1,097 $ (488 ) (44.5%) 0.2 % 0.2 %
Interest income (344 ) (401 ) 57 (14.2%) -0.1 % -0.1 %
Net foreign exchange losses (gains) 95 262 (167 ) (63.7%) 0.0 % 0.1 %
Other, net (41 ) 24 (65 ) 270.8% 0.0 % 0.0 %
Total other expense, net $ 319 $ 982 $ (663 ) (67.5%) 0.1 % 0.2 %
Nine months ended % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
Interest expense $ 1,810 $ 4,496 $ (2,686 ) (59.7%) 0.1 % 0.3 %
Interest income (1,119 ) (1,108 ) (11 ) 1.0% -0.1 % -0.1 %
Net foreign exchange losses (gains) 1,449 111 1,338 1,205.4% 0.1 % 0.0 %
Other, net (3,677 ) (229 ) (3,448 ) 1,505.7% -0.2 % 0.0 %
Total other expense, net $ (1,537 ) $ 3,270 $ (4,807 ) 147.0% -0.1 % 0.2 %
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Interest expense reflects interest paid on borrowings on the Company's revolving credit facility and long-term debt. Interest expense for the quarter and nine months ended March 31, 2009 was $0.6 million and $1.8 million, respectively. Interest expense for the quarter and nine months ended March 31, 2008 was $1.1 million and $4.5 million. The decrease in interest expense is primarily the result of lower average debt balances between the respective periods, and, to a lesser extent, lower interest rates experienced between the comparative periods.
Interest income for the quarter and nine months ended March 31, 2009 was consistent with the comparative prior year periods. The Company generates interest income on longer-term interest bearing receivables, and, to a lesser extent, interest earned on cash and cash-equivalent balances on hand.
Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange losses and gains are generated as the result of fluctuations in the value of the Euro versus the British Pound and the U.S. Dollar versus other currencies. In the current quarter and year-to-date periods, the Company generated a net foreign exchange loss due to the strengthening of the U.S. Dollar against the Euro, the British Pound, the Mexican Peso, and the Canadian Dollar. While the Company utilizes foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure, our foreign exchange policy prohibits us from entering into speculative transactions.
During the quarter ended December 31, 2008, the Company settled a claim against a former legal service provider resulting in a $3.5 million recovery. The settlement was received by the Company on December 5, 2008 and was recorded as other income.
Provision for Income Taxes
Income tax expense was $5.6 million and $20.5 million for the quarter and nine months ended March 31, 2009, reflecting an effective income tax rate of 37.6% and 36.8%, respectively. Income tax expense was $7.0 million and $25.3 million for the quarter and nine months ended March 31, 2008, reflecting an effective income tax rate of 38.8% and 38.1%, respectively. The decrease in the effective tax rate in the current quarter and year-to-date period is attributable to favorable adjustments to our tax liability upon filing our Federal and state income tax returns during the current quarter. In addition, in the prior quarter, the Company received a favorable tax ruling that was retroactive to fiscal 2008, which had the effect of decreasing our effective tax rate for the fiscal year.
Net Income
The following table summarizes our net income for the quarters and nine months
ended March 31, 2009 and 2008, respectively:
Period ended % of Sales
March 31, March 31,
(in thousands) 2009 2008 $ Change % Change 2009 2008
Quarter $ 9,229 $ 11,028 $ (1,799 ) (16.3%) 2.4 % 2.1 %
Nine months $ 35,184 $ 41,165 $ (5,981 ) (14.5%) 2.5 % 2.5 %
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The decrease in net income for the current quarter and year-to-date periods is attributable to the changes in operations, as discussed above.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations, borrowings under the revolving credit facility, secured and unsecured borrowings, and borrowings under the subsidiary's line of credit. The Company's cash and cash equivalent balance totaled $114.4 million at March 31, 2009, compared to $15.2 million at June 30, 2008. The Company's working capital increased to $381.2 million at March 31, 2009 from $368.6 million at June 30, 2008. The $12.6 million increase in working capital is primarily due to significantly higher cash reserves between the two periods, offset by lower receivables and inventory balances. As of March 31, 2009, there was no outstanding balance on the Company's revolving line of credit facility.
The number of days sales in receivables (DSO) was 58 at March 31, 2009, compared to 59 days at June 30, 2008 and 54 days at December 31, 2008.
During the quarter, lower than anticipated sales results and the opportunistic inventory purchases previously discussed resulted in 5.7 inventory turns for the period, which was lower than the 6.2 inventory turns generated in the quarter ended December 31, 2008 and 5.8 turns in the comparative quarter.
Cash provided by operating activities was approximately $131.1 million for the nine months ended March 31, 2009, compared to $9.9 million of cash provided by operating activities for the comparative prior year period. This increase was driven primarily by a reduction in receivables and a corresponding decrease in inventory purchases due to lower than anticipated sales, partially offset by the timing of vendor payments between the periods.
Cash used in investing activities for the nine months ended March 31, 2009 was $2.8 million, compared to $1.8 million used in the comparative prior year period. For the nine months ended March 31, 2009, the Company had worldwide capital expenditures of $3.4 million versus $5.6 million in the comparative prior year period. Cash used for capital expenditures was offset by the receipt of proceeds from the sale of property and equipment of $0.6 million and $6.1 million for the nine months ended March 31, 2009 and 2008, respectively. These proceeds reflect the sale of a Company owned property in the United Kingdom in the current year and the sale of our former distribution facility in Memphis, Tennessee in the prior year period. There was no acquisition activity in the current year, however, in the prior year the Company purchased the assets of PC4 in January 2008 for $1.2 million and purchased the remaining outstanding shares of Netpoint for $1.1 million.
Cash used in financing activities was approximately $28.4 million for the nine
months ended March 31, 2009 compared to cash used of $4.4 million for the
comparative prior year period. The majority of the funds used for both periods
were for the purpose of making payments on our revolving credit facility and
short term borrowing agreements, which was partially offset by cash proceeds
from the exercise of stock options and the receipt of remediation payments from
Section 16 officers in connection with our stock option investigation in the
prior year. In addition, the Company received proceeds related to the issuance
of long-term debt in both periods, primarily related to the purchase of
equipment and other building improvements related to our distribution facility
located in Southaven, Mississippi.
The Company has a revolving credit facility secured by the assets of its European operations and guaranteed by the Company. This facility was amended on May 14, 2008 to increase the borrowing limit to €6.0 million for the Company's European operations. At March 31, 2009, there was no outstanding balance on this facility and the effective interest rate on this facility was 1.62%.
On January 2, 2008, the Company entered into a $25 million promissory note with a financial institution. This note payable accrues interest on the unpaid balance at a rate per annum equal to the 30 day LIBOR plus 0.65% and matures on September 28, 2012. The terms of the note payable allow for payments to be due and payable in consecutive monthly payment terms of accrued interest only, commencing on January 31, 2008, and continuing on the last day of each month thereafter until fully paid. In any event, all principal and accrued interest will be due and payable on September 28, 2012. The note may be prepaid in whole or in part at any time without penalty.
On January 4, 2008, the Company entered into an interest rate swap with a notional amount of $25 million and designated this instrument as a cash flow hedge of our exposure to variability in future cash flows associated with this note payable. Under the terms of the swap, the Company pays a fixed rate of 3.65% plus a fixed spread of 0.65% on the $25 million notional amount and receives payments from a counterparty based on 30 day LIBOR plus a fixed spread of 0.65% for a term ending on September 28, 2011.
On September 28, 2007, the Company entered into a $250 million multi-currency revolving credit facility with a syndicate of banks that matures on September 28, 2012. This revolving credit facility has a $50 million accordion feature that allows the Company to increase the availability to $300 million, subject to obtaining commitments for the incremental capacity from existing or new lenders. The facility is guaranteed by the Company and certain of its subsidiaries and is secured by substantially all of the domestic assets of the . . .
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