UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from __________ to __________
Commission File Number: 000-26926
SCANSOURCE, INC.
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0965380
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 Logue Court, Greenville, South Carolina 29615
(Address of principal executive offices) (Zip Code)
(864) 288-2432
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of September 30, 2001, 5,715,664 shares of the registrant's common stock, no
par value, were outstanding.
SCANSOURCE, INC.
INDEX TO FORM 10-Q
September 30, 2001
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2001 an September 30, 2001....................... 4
Unaudited Condensed Consolidated Income Statements
for the Quarters Ended September 30, 2000 and
2001............................................................ 6
Unaudited Condensed Consolidated Statements of
Cash Flows for the Quarters Ended
September 30, 2000 and 2001..................................... 7
Notes to Unaudited Condensed Consolidated
Financial Statements............................................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 19
Item 2. Changes in Securities and Use of Proceeds......................... 19
Item 3. Defaults Upon Senior Securities................................... 19
Item 4. Submission of Matters to a Vote of Security
Holders......................................................... 19
Item 5. Other Information................................................. 19
Item 6. Exhibits and Reports on Form 8-K.................................. 19
SIGNATURES......................................................................... 20
Cautionary Statements
Certain of the statements contained in this Form 10-Q, as well as in the
Company's other filings with the Securities and Exchange Commission, that are
not historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers of this report that a number of important factors could cause
the Company's activities and/or actual results in fiscal 2002 and beyond to
differ materially from those expressed in any such forward-looking statements.
These factors include, without limitation, the Company's dependence on vendors,
product supply, senior management, centralized functions, and third-party
shippers, the Company's ability to compete successfully in a highly competitive
market and manage significant additions in personnel and increases in working
capital, the Company's entry into new product markets in which it has no prior
experience, the Company's susceptibility to quarterly fluctuations in net sales
and results of operations, the Company's ability to manage successfully pricing
or stock rotation opportunities associated with inventory value
2
decreases, and other factors described herein and in other reports and documents
filed by the Company with the Securities and Exchange Commission, including
Exhibit 99.1 to the Company's Form 10-K for the year ended June 30, 2001.)
3
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANSOURCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Assets June 30, 2001* September 30, 2001
------ -------------- ------------------
Current Assets:
Cash $ 594 $ 307
Receivables
Trade, less allowance for
doubtful accounts of
$6,765 at June 30, 2001 and
$7,398 at September 30, 2001 86,917 95,362
Other 8,118 7,749
Inventories 157,468 155,624
Prepaid expenses and other assets 640 569
Deferred income taxes 9,904 9,915
-------- --------
Total current assets 263,641 269,526
-------- --------
Property and equipment, net 21,746 24,373
Intangible assets, net 1,277 4,823
Other assets 507 440
-------- --------
Total assets $287,171 $299,162
======== ========
* Derived from audited financial statements at June 30, 2001.
See notes to unaudited condensed consolidated financial statements.
4
SCANSOURCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
Liabilities and Shareholders' Equity June 30, 2001* September 30, 2001
- -------------------------------------- -------------- ------------------
Current Liabilities:
Current portion of long-term debt $ 444 $ 451
Trade accounts payable 157,847 138,447
Accrued expenses and other liabilities 9,433 9,227
-------- --------
Total current liabilities 167,724 148,125
Deferred income taxes ---- 346
Borrowings under revolving credit facility 17,104 43,463
Long-term debt 8,866 8,891
-------- --------
Total liabilities 193,694 200,825
-------- --------
Minority interest 115 358
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 3,000 shares
authorized, none issued ---- ----
Common stock, no par value; 10,000 shares
authorized, 5,711 and 5,716 shares
issued and outstanding at June 30, 2001
and September 30, 2001, respectively 44,572 44,663
Retained earnings 48,790 53,316
-------- --------
Total shareholders' equity 93,362 97,979
-------- --------
Total liabilities and shareholders' equity $287,171 $299,162
======== ========
*Derived from audited financial statements at June 30, 2001.
See notes to unaudited condensed consolidated financial statements.
5
SCANSOURCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except share and per share data)
Quarter ended
September 30,
------------------------
2000 2001
-------- --------
Net sales $156,286 $188,843
Cost of goods sold 139,366 167,931
-------- --------
Gross profit 16,920 20,912
Selling, general and administrative
expenses 10,279 13,004
-------- --------
Operating income 6,641 7,908
-------- --------
Other expense (income):
Interest expense 479 894
Interest income (4) (340)
Other expense - 54
-------- --------
Other expense, net 475 608
-------- --------
Income before income taxes 6,166 7,300
Provision for income taxes 2,343 2,774
-------- --------
Net income $ 3,823 $ 4,526
======== ========
Per share data:
Basic:
Earnings per share $0.68 $0.79
======== ========
Weighted-average shares
outstanding 5,648 5,716
======== ========
Diluted:
Earnings per share $0.62 $0.73
======== ========
Weighted-average shares
outstanding 6,139 6,167
======== ========
See notes to unaudited condensed consolidated financial statements.
6
SCANSOURCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
September 30,
-----------------------------
2000 2001
-------- --------
(In thousands)
Cash flows from operating
activities:
Net income $ 3,823 $ 4,526
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 874 1,269
Amortization of intangible assets 46 ---
Provision for (reduction of)
doubtful accounts (941) 326
Deferred income tax (benefit) provision (1,309) 20
Minority interest in net income --- 15
Changes in operating assets and liabilities:
Trade receivables (5,038) (2,715)
Other receivables (79) 1,133
Inventories (35,509) 13,957
Prepaid expenses and other assets (284) 71
Trade accounts payable 25,712 (26,449)
Accrued expenses and other liabilities 2,839 (252)
Other noncurrent assets 23 36
-------- --------
Net cash used in operating activities (9,843) (8,063)
-------- --------
Cash flows used in investing activities
Capital expenditures (1,734) (3,018)
Cash paid for business acquisitions --- (15,556)
-------- --------
Net cash used in investing activities (1,734) (18,574)
-------- --------
Cash flows from financing activities:
(Payments) advances on revolving credit, net (305) 26,359
revolving credit, net
Proceeds from long-term debt borrowings 7,495 ---
Repayments of long-term debt borrowings (151) (100)
Exercise of stock options 810 91
-------- --------
Net cash provided by financing activities 7,849 26,350
-------- --------
Decrease in cash (3,728) (287)
Cash at beginning of period 4,612 594
-------- --------
Cash at end of period $ 884 $ 307
======== ========
See notes to unaudited condensed consolidated financial statements
7
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) Basis of Presentation
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the consolidated
financial statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC), although the
Company believes that the disclosures made are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and related notes contained in the
Company's June 30, 2001 annual report on Form 10-K. Other than as indicated
herein, there have been no significant changes from the financial data published
in that report. In the opinion of management, such unaudited information
reflects all adjustments, consisting only of normal recurring accruals and other
adjustments as disclosed herein, necessary for a fair presentation of the
unaudited information.
Results for interim periods are not necessarily indicative of results
expected for the full year, or for any subsequent period.
(2) Business Description and Certain Accounting Policies
ScanSource, Inc. ("Company") is a leading distributor of specialty
technology products, providing both value-added distribution sales to technology
resellers and Internet-based fulfillment to manufacturers and others in
specialty technology markets. The Company markets automatic data capture (ADC)
and point-of-sale (POS) products through its ScanSource sales unit and business
telephone equipment through its Catalyst Telecom sales team. The Company's
ChannelMax unit provides logistics services for customers who enter orders
primarily over the web.
Consolidation Policy - The consolidated financial statements include the
accounts of the Company and all wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Minority Interest - Minority interest is the portion of common stock and
earnings from operations of subsidiaries of the Company owned by minority
shareholders. Total non-controlling interest in majority-owned subsidiaries as
of June 30, 2001 and September 30, 2001 was $115,000 and $358,000, respectively.
8
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant financial
statement estimates include the allowance for uncollectible accounts receivable
and inventory reserves to reduce inventories to the lower of cost or market.
Management determines the estimate of the allowance for uncollectible accounts
considering a number of factors, including historical experience, aging of the
accounts and the credit worthiness of its customers. Management determines the
inventory reserves to reduce inventories to the lower of cost or market based
principally on the effects of technological changes, quantities of goods on
hand, and other factors. Management believes that its estimates provided in the
financial statements, including those for the above-described items, are
reasonable. However, actual results could differ from those estimates.
Revenue Recognition - Revenues are recognized for the sale of products upon
shipment. The Company provides a reserve for estimated product returns and
allowances. The Company also has arrangements in which it earns a service fee
determined as a percentage of the value of products shipped on behalf of the
manufacturer who retains the risk of ownership and credit loss. Such service
fees earned by the Company are included in net sales.
Inventories - Inventories (consisting of automatic data capture, point-of-
sale, business phone and computer telephony equipment) are stated at the lower
of cost (first-in, first-out method) or market.
Accounting Standards Recently Adopted - Effective July 1, 2001, the Company
adopted Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
statements make significant changes to the accounting for business combinations,
goodwill, and intangible assets. SFAS 141 requires that the purchase method of
accounting be used for all business combinations and clarifies the criteria for
recognition of intangible assets acquired in a business combination (including
business combinations recorded in prior periods) separately from goodwill. SFAS
142 discontinues the amortization of goodwill and requires that goodwill be
tested for impairment annually or when events or circumstances occur between
annual tests indicating that goodwill for a reporting unit (as defined) might be
impaired. The Company early-adopted SFAS 142 and has six months from adoption
(December 31, 2001) to complete its initial assessment of goodwill impairment.
The Company has not yet completed its analysis of the potential impact, if any,
of performing this assessment of goodwill impairment.
Accounting Standards Not Yet Adopted - In October 2001, the Financial
Accounting Standards Board issued SFAS No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144
9
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
supersedes SFAS 121 and the accounting and reporting provisions of APB 30
related to the disposal of a segment of a business. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The Company is evaluating the
impact of the adoption of SFAS 144 and has not yet determined the effect, if
any, that adoption of the standard will have on the Company's financial position
and results of operations.
(3) Revolving Credit Facility
In July 2001, the Company put in place a new revolving credit facility with
its bank group extending to September 2003 with a borrowing limit of the lesser
of (i) $80 million or (ii) the total of 85% of eligible accounts receivable plus
the lesser of (a) 50% of eligible inventory or (b) $40 million. The facility
bears interest at the 30 day LIBOR rate of interest plus a rate varying from
1.00% to 2.50% tied to the Company's funded debt to EBITDA ratio ranging from
2.50:1 to 4.25:1 and fixed charge coverage ratio of not less than 2.75. The
revolving credit facility is collateralized by accounts receivable and eligible
inventory. The credit agreement contains certain financial covenants including
minimum net worth requirements, capital expenditure limits, maximum funded debt
to EBITDA ratio and a fixed charge coverage ratio. The effective interest rate
at September 30, 2001 was 4.83% and the outstanding balance was $43.5 million on
a borrowing base that exceeded $80 million, leaving $36.5 million available for
additional borrowings. The Company was in compliance with the various covenants
at September 30, 2001.
10
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(4) Long-term Debt
Long-term debt consists of the following at June 30, 2001 and September 30,
2001:
June 30, September 30,
2001 2001
---------- -------------
Note payable to a bank, secured by distribution center
land and building; monthly payments of principal and
interest of $65,000; 6.19% variable interest rate;
maturing in 2005 $7,168,000 $7,091,000
Note payable to a bank, secured by office, land and
building; monthly payments of principal and interest of
$15,000; 9.19% fixed interest rate; maturing in 2006 1,646,000 1,638,000
Note payable to a bank, secured by motor coach; monthly
payments of principal and interest of $7,000; 6.19%
variable interest rate; maturing in 2006 496,000 482,000
Other ---- 131,000
---------- ----------
9,310,000 9,342,000
Less current portion 444,000 451,000
========== ==========
$8,866,000 $8,891,000
========== ==========
The note payable secured by the distribution center contains certain
financial covenants, including minimum net worth, capital expenditure limits,
and a maximum debt to tangible net worth ratio; the payment of dividends is
prohibited. The Company was in compliance with the various covenants at
September 30, 2001.
(5) Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per
share are computed by dividing net income by the weighted-average number of
common and potential common shares outstanding.
11
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Per Share
Income Shares Amount
------- ------- ----------
(in thousands)
Quarter ended September 30, 2001:
Basic earnings per share $4,526 5,716 $0.79
=====
Effect of dilutive stock options 451
------ -----
Diluted earnings per share $4,526 6,167 $0.73
====== ===== =====
Quarter ended September 30, 2000:
Basic earnings per share $3,823 5,648 $0.68
=====
Effect of dilutive stock options 491
------ -----
Diluted earnings per share $3,823 6,139 $0.62
====== ===== =====
(6) Segment Information
The Company operates its business in two reportable segments.
The first reportable segment, value-added distribution, offers
approximately 18,000 products for sale in two primary categories: i) automatic
data capture and point-of-sale equipment sold by the ScanSource sales team and
ii) business telephones and computer telephony integration devices sold by the
Catalyst Telecom sales team. These products are sold to more than 12,000
resellers and integrators of technology products, who are geographically
disbursed over North America in a pattern that mirrors population concentration.
Of its customers, at September 30, 2001, no single account represented more than
4% of the Company's net sales, and its largest accounts receivable amount was 6%
of total accounts receivable.
The second reportable segment, e-logistics, provides real-time inventory
availability and web catalog, order entry, order tracking and logistics for
manufacturers and others in the automatic data capture and business telephone
markets. This unit serves less than 15 customers, the largest of whom accounted
for less than 11% of total Company sales and 10% of total accounts receivable at
September 30, 2001. Certain e-logistics sales are recognized on a net revenue
recognition basis (see Note 2).
The Company evaluates segment performance based on operating income.
Segment results for the quarter ended September 30, 2000 have been restated to
conform to the current-year presentation. Intersegment sales consist primarily
of fees charged by the e-logistics segment to the value-added distribution
segment. All intersegment revenues and profits are eliminated in the
accompanying consolidated financial statements.
Accounts receivable, a portion of inventories, and distribution center
property and equipment can be identified by segment. However, cash, other
current assets, other property and equipment and
12
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
other non-current assets are not distinguishable between business segments.
Operating results for each business unit are summarized below with
historical data for the quarter ended September 30, 2000 restated to conform to
the current organizational structure:
Quarter ended
September 30,
2000 2001
-------- --------
(In thousands)
Sales:
Value-added distribution......................................... $138,070 $164,092
E-logistics...................................................... 20,138 27,378
Less intersegment sales.......................................... (1,922) (2,627)
-------- --------
$156,286 $188,843
======== ========
Operating income:
Value-added distribution......................................... $ 6,370 $ 7,116
E-logistics...................................................... 271 792
-------- --------
$ 6,641 $ 7,908
======== ========
Assets:
Value-added distribution......................................... $190,992 $207,082
E-logistics...................................................... 28,866 55,264
Corporate........................................................ 26,269 36,816
-------- --------
$246,127 $299,162
======== ========
(7) Acquisitions
On July 27 2001, the Company's distribution segment purchased the operating
assets of a distributor of automatic data capture products for approximately $15
million in cash. The acquisition will allow the Company to reach additional
customers and has added sales and technical support employees in a new Buffalo,
New York sales office. The acquisition was accounted for by the purchase method
of accounting and accordingly, the operating results have been included in the
Company's consolidated results of operations from the date of acquisition. The
purchase price was allocated to the fair value of net assets acquired,
principally accounts receivable and inventories, and approximately $4 million of
goodwill is expected to result from the acquisition. The fair value of the
accounts receivable and inventories acquired was based on preliminary estimates
of amounts to be realized and may be revised if realization is different from
the preliminary estimates. However, any adjustments resulting from the ultimate
determination of the fair value of the net assets acquired is not expected to
have a significant effect on the Company's financial position or future results
of operations.
13
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma financial information shows the results of
operations of the Company as though the acquisition had occurred as of July 1,
2000 and 2001. The unaudited pro forma financial information presented below
does not purport to be indicative of the results of operations had the
acquisition been consummated as of July 1, 2000 or July 1, 2001 or of the future
results of operations of the combined businesses.
July 1, 2000 to July 1, 2001 to
Sept. 30, 2000 Sept. 30, 2001
----------------------- ---------------------
Amounts in thousands, except per share data
Net sales $169,068 $193,381
Net income $ 4,144 $ 4,607
Basic earnings per share $ 0.73 $ 0.81
Diluted earnings per share $ 0.68 $ 0.75
On September 28, 2001 the Company purchased 52% of the stock of a provider of
services to the phone reseller market for approximately $1.5 million in cash,
plus certain assumed liabilities. The Company also has a commitment to purchase
the remaining 48% of the stock at a pre-determined multiple of pre-tax earnings
over the next four years. The acquisition was accounted for on the purchase
method of accounting. The purchase price was allocated to the fair value of the
net assets acquired. The allocation was based on preliminary estimates. The
finalization of the purchase accounting is not expected to have a significant
effect on the Company's financial position or future results of operations.
(8) Subsequent Events
On November 9, 2001, the Company's distribution segment purchased 52% of the
stock of a Miami-based distributor of ADC and POS equipment to the Latin America
marketplace. The acquisition will add new employees to and provide geographic
expansion for the Company's business. The Company paid approximately $2.8
million in cash and assumed certain liabilities. The acquisition will be
accounted for by the purchase method of accounting. Operating results will be
included in the Company's consolidated results of operations from the date of
acquisition. The allocation of purchase price to the fair value of net assets
acquired has not been determined. The Company has a commitment to purchase the
remaining 48% of the stock at a predetermined multiple of pre-tax earnings over
the next six years.
14
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Results of Operations
Net Sales. Net sales for the quarter ended September 30, 2001 increased
20.8% to $188.8 million from $156.3 million for the comparable prior year
quarter. The Company is organized into two business segments. Sales through
value-added distribution increased 18.8% to $164.1 million for the quarter ended
September 30, 2001 from $138.1 million for the comparable prior year quarter. E-
logistics sales (net of intersegment sales) increased 36.0% to $27.4 million for
the quarter ended September 30, 2001 from $20.1 million for the comparable prior
year quarter. Sales in Canada were less than 5.0% of the Company's total sales.
Growth of net sales resulted primarily from additions to the Company's sales
force, competitive product pricing, selective expansion of its product line,
increased marketing efforts to specialty technology resellers, and the
acquisitions of a phone distributor in May 2001 and a bar code distributor in
July 2001.
Gross Profit. Gross profit for the quarter ended September 30, 2001
increased 23.6% to $20.9 million from $16.9 million for the comparable prior
year quarter. Gross profit as a percentage of net sales was 11.1% for the
quarter ended September 30, 2001, compared to 10.8% for the comparable prior
year quarter. The increase in gross profit as a percentage of net sales was a
result of a change in the mix of sales to higher-margin products.
Operating Expenses. Operating expenses for the quarter ended September 30,
2001 increased 26.5% to $13.0 million compared to $10.3 million for the
comparable prior year quarter. Operating expenses as a percentage of net sales
were 6.9% for the quarter ended September 30, 2001, compared to 6.6% for the
comparable prior year quarter. Generally, higher gross margin sales require the
Company to provide greater levels of customer consultation and service causing a
corresponding increase in operating expenses.
Operating Income. Operating income for the quarter ended September 30,
2001 increased by 19.1% to $7.9 million from $6.6 million for the same period in
2000, driven by the improvement in gross profit as described above. Operating
income as a percentage of net sales was 4.2% for both quarters ended September
30, 2001 and 2000.
Total Other Expense (Income). Other expense (income) consists principally
of interest expense and interest income. Interest expense for the quarter ended
September 30, 2001 was $894,000 for borrowings on the Company's line of credit
and long-term debt. Interest income was $340,000, principally collected from
customers, and other expenses of $54,000 consisted of a loss on an equity
investment and minority interest earnings. Interest expense for the quarter
ended September 30, 2000 was $479,000 resulting primarily from interest paid on
the Company's line of credit and long term debt. Interest expense for the
September 2001 period was higher due to higher line of credit borrowings;
interest income was also higher due to the growth in certain customer programs
under which customers reimburse the Company for interest incurred on their
behalf.
15
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Provision For Income Taxes. Income tax expense was $2.8 million and $2.3
million for the quarters ended September 30, 2001 and 2000, respectively,
reflecting an effective tax rate of 38.0% and represents federal and state tax
expected to be due after annualizing income to the fiscal year end.
Net Income. For reasons discussed above, net income increased by 18.4% to
$4.5 million for the quarter ended September 30, 2001 from $3.8 million for the
comparable prior year quarter. Net income as a percentage of net sales was 2.4%
for both quarters ended September 30, 2001 and September 30, 2000.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations,
borrowings under the Company's revolving credit facility, and, to a lesser
extent, proceeds from the exercise of stock options.
In July 2001, the Company put in place a new revolving credit facility with
its bank group extending to September 2003 with a borrowing limit of the lesser
of (i) $80 million or (ii) the total of 85% of eligible accounts receivable plus
the lesser of (a) 50% of eligible inventory or (b) $40 million. The facility
bears interest at the 30 day LIBOR rate of interest plus a rate varying from
1.00% to 2.50% tied to the Company's funded debt to EBITDA ratio ranging from
2.50:1 to 4.25:1 and fixed charge coverage ratio of not less than 2.75. The
revolving credit facility is collateralized by accounts receivable and eligible
inventory. The credit agreement contains certain financial covenants including
minimum net worth requirements, capital expenditure limits, maximum funded debt
to EBITDA ratio and a fixed charge coverage ratio. The effective interest rate
at September 30, 2001 was 4.83% and the outstanding balance was $43.5 million on
a borrowing base that exceeded $80 million, leaving $36.5 million available for
additional borrowings. The Company was in compliance with the various covenants
at September 30, 2001.
Cash used in operating activities was $8.1 million for the quarter ended
September 30, 2001 compared to $9.8 million used in operations in the quarter
ended September 30, 2000. For the quarter ended September 30, 2001, cash was
principally used to pay $26.4 million of trade payables which was partially
offset by cash provided from a $14.0 million decrease in inventory. For the
quarter ended September 30, 2000, cash was principally used to fund a $35.5
million increase in inventory offset by a $25.7 million decrease in trade
payables.
Cash used in investing activities for the quarter ended September 30, 2001
included $15.6 million cash paid primarily for the acquisition of a bar code
distributor in July 2001 and $3.0 million for capital expenditures. For the
quarter ended September 30, 2000, $1.7 million of cash was used in investing
activities primarily for capital expenditures.
16
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Cash provided by financing activities for the quarter ended September 30,
2001 was $26.4 million primarily from advances on the revolving line of credit.
Cash provided by financing activities for the quarter ended September 30, 2000
was $7.8 million primarily from the closing of a real estate loan for $7.5
million.
The Company believes that it has sufficient liquidity to meet its
forecasted cash requirements for at least the next year.
Accounting Standards Recently Adopted - Effective July 1, 2001, the Company
adopted Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These
statements make significant changes to the accounting for business combinations,
goodwill, and intangible assets. SFAS 141 requires that the purchase method of
accounting be used for all business combinations and clarifies the criteria for
recognition of intangible assets acquired in a business combination (including
business combinations recorded in prior periods) separately from goodwill. SFAS
142 discontinues the amortization of goodwill and requires that goodwill be
tested for impairment annually or when events or circumstances occur between
annual tests indicating that goodwill for a reporting unit (as defined) might be
impaired. The Company early-adopted SFAS 142 and has six months from adoption
(December 31, 2001) to complete its initial assessment of goodwill impairment.
The Company has not yet completed its analysis of the potential impact, if any,
of performing this assessment of goodwill impairment.
Accounting Standards Not Yet Adopted - In October 2001, the Financial
Accounting Standards Board issued SFAS No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the impact of the adoption of SFAS
144 and has not yet determined the effect, if any, that adoption of the
standard will have on the Company's financial position and results of
operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company's principal exposure to changes in financial market conditions
in the normal course of its business is a result of its bank borrowings and, to
a much lesser extent, transacting business in Canadian or Mexican currency in
connection with its Canadian and Mexican operations.
The Company is exposed to changes in interest rates primarily as a result
of its borrowing activities, which includes a revolving credit facility with a
bank used to maintain liquidity and fund the Company's business operations. The
nature and amount of the Company's debt may vary as a result of future business
requirements, market conditions and other factors. The definitive extent of the
Company's interest rate risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements, but
the Company does not believe such risk is material. A hypothetical 100 basis
point increase or decrease in interest rates on borrowings on the Company's
revolving line of credit would have resulted in an increase or decrease of
approximately $21,000 in pre-tax income for the quarter ended September 30,
2001. The Company does not currently use derivative instruments to adjust its
interest rate risk profile.
The Company is minimally exposed to changes in foreign exchange rates in
connection with its Canadian and Mexican operations. It is the Company's policy
to enter into foreign currency transactions only to the extent considered
necessary to support these operations. The amount of the Company's cash
deposits denominated in these currencies has not been, and is not expected to
be, material. Furthermore, the Company has no capital expenditure or other
purchase commitments denominated in any foreign currency. The Company does not
utilize forward exchange contracts, currency options or other traditional
hedging vehicles to adjust the Company's foreign exchange rate risk profile.
The Company does not enter into foreign currency transactions for speculative
purposes. Foreign currency gains and losses are included in selling, general and
administrative expenses.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments. On
the basis of the fair value of the Company's market sensitive instruments at
September 30, 2001, the Company does not consider the potential near-term losses
in future earnings, fair values and cash flows from reasonably possible near-
term changes in interest rates and exchange rates to be material.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable
Item 2. Changes in Securities and Use of Proceeds. Not applicable
Item 3. Defaults Upon Senior Securities. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K. None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCANSOURCE, INC.
/s/ Michael L. Baur
-----------------------
MICHAEL L. BAUR
Chief Executive Officer
/s/ Jeffery A. Bryson
-----------------------
JEFFERY A. BRYSON
Chief Financial Officer
Date: November 13, 2001
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