UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
FORM 10-K
_______________________________________________
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2018
Commission File Number: 000-26926
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ScanSource, Inc.
South Carolina
(State of incorporation)
57-0965380
(I.R.S. Employer
Identification No.)
6 Logue Court
Greenville, South Carolina 29615
(864) 288-2432
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, no par value | NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act:
None.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý No
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. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ |
Non-accelerated filer (Do not check if a smaller reporting company) | ¨ | Smaller reporting company | ¨ |
Emerging growth company | ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes ý No
The aggregate market value of the voting common stock of the Registrant held by non-affiliates of the Registrant at December 31, 2017 was $910,611,127, as computed by reference to the closing price of such stock on such date.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at August 24, 2018 | |
Common Stock, no par value per share | 25,593,917 shares | |
The registrant has incorporated by reference into Part III of this report certain portions of its proxy statement for its 2018 Annual Meeting of Shareholders, which is expected to be filed pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended June 30, 2018.
FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business," "Risk Factors," "Legal Proceedings," "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures About Market Risk" sections and elsewhere herein. Words such as "expects," "anticipates," "believes," "intends," "plans," "hopes," "forecasts," "seeks," "estimates," "goals," "projects," "strategy," "future," "likely," "may," "should," and variations of such words and similar expressions generally identify such forward-looking statements. Any forward-looking statement made by us in this Form 10-K is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K, except as required by law. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, changes in interest and exchange rates and regulatory regimes impacting our overseas operations, the failure of acquisitions to meet our expectations, the failure to manage and implement our organic growth strategy, credit risks involving our larger customers and suppliers, termination of our relationship with key suppliers or a significant modification of the terms under which we operate with a key supplier, the decline in demand for the products and services that we provide, reduced prices for the products and services that we provide due both to competitor and customer actions and the other factors set forth in "Risk Factors" contained herein.
TABLE OF CONTENTS
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Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | Mine Safety Disclosures | |
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
Item 10. | ||
Item 11. | ||
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Item 13. | ||
Item 14. | ||
Item 15. | ||
Item 16. | Form 10-K Summary | |
PART I
ITEM 1. Business.
ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “ScanSource” or “we”) is at the center of the technology solution delivery channel, connecting businesses and providing solutions for their complex needs. Using a channel sales model, we provide technology solutions and services from the world’s leading suppliers of point-of-sale (POS), payments, barcode, physical security, unified communications and collaboration, cloud and telecom services to market.
Our customers are businesses of all sizes that sell to end-users across many industries. Our customer channels include value-added resellers (“VARs”), sales partners or agents, independent sales organizations (“ISOs”) and independent software vendors (“ISVs”). These customer channels provide us with multiple routes-to-market. We align our teams, tools and processes around our customers to help them grow through reducing their costs, creating efficiencies and generating end-user demand for business solutions. We enable our customers to create, deliver and manage solutions for end-users across almost every vertical market in the United States, Canada, Latin America and Europe.
ScanSource was incorporated in South Carolina in 1992 and serves approximately 45,000 customers globally. Net sales for fiscal year ending June 30, 2018 totaled $3.8 billion. As a percentage of fiscal year 2018 net sales, approximately 75% of our business was in the United States and Canada, and approximately 14% in Latin America and 11% in Europe. Our common stock trades on the NASDAQ Global Select Market under the symbol “SCSC.”
Strategy
We rely on a channel sales model to offer hardware, software, services and connectivity from technology suppliers to our customers (resellers, agents, ISOs, ISVs) to solve end-user needs. While we do not manufacture products, we are a leading channel sales partner for many of our technology suppliers and offer the industry leading technology solutions and services for our customers. Our solutions may include a combination of offerings from multiple suppliers or access to additional services, such as custom configuration, key injection, deployment, provisioning and integration support. We also offer our customers the flexibility of on-premise, cloud or hybrid solutions for their end-users.
As a trusted adviser to our customers, we understand end-users' needs and provide our customers with hardware, software, service and connectivity solutions. In addition, we drive growth for our customers through enhancing their capabilities with value-added support programs and services, including education and training, network assessments, implementation and marketing, designed to help our customers develop new technology practices and reach new end-users.
Part of our strategy is to expand in higher margin and adjacent markets to help our customers offer more products and services while building recurring revenue opportunities. In fiscal 2018, we acquired POS Portal, a leading provider of payments devices and services primarily to the small and medium-sized (“SMB”) business segment. POS Portal added to our offerings industry-leading services and capabilities in serving the U.S. payments channel. In fiscal 2017, we acquired Intelisys, an industry-leading technology services provider (also called a master agent) of business telecommunications and cloud services. Using a master agent business model, Intelisys acts as an intermediary connecting sales partners with service providers and suppliers who offer services to end-users. Intelisys’ sales partners earn commission payments from those service providers or suppliers on end-user sales, typically multi-year contracts. Intelisys earns a percentage of the commission streams, building more predictable, recurring revenues. Since our Intelisys business is a services model, the working capital requirements are very low and require no inventories.
Value Proposition
Our customer channels and supplier relationships serve as competitive advantages. From our position in the center of the solution delivery channel, we provide robust value to both our customers and our suppliers. We make it easier for our customers and suppliers to deliver leading technology solutions that drive business outcomes for end-users.
Value proposition for our customers:
• | Understand end-user needs |
• | Provide more complete technology solutions |
• | Offer market and technology solution expertise |
• | Offer training, education and marketing services |
• | Provide custom configuration, platforms and digital tools |
• | Deliver technical support |
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• | Enable opportunities in emerging technologies |
• | Reduce working capital requirements |
• | Offer flexible financing solutions |
• | Help provide navigation and understanding of supplier programs |
Value proposition for our supplier:
• | Provide access to emerging, diverse and established customer channels |
• | Create scale and efficiency |
• | Serve small- and medium-sized businesses more efficiently |
• | Deliver more complete technology solutions |
• | Provide market insights |
• | Offer expertise and technical support |
• | Manage channel credit |
• | Create demand |
Financial Strength
Our consolidated balance sheet reflects financial strength. Our strong balance sheet and cash generated from our business provide us with the ability to execute our capital allocation plan, which includes organic growth, strategic acquisitions and share repurchases. We have the financial flexibility to invest in our business and in future growth.
Business Segments
We segment our business into two technology-focused areas that each operate in the U.S., Canada, Latin America, and Europe:
• | Worldwide Barcode, Networking & Security (“WW Barcode, Networking & Security”); and |
• | Worldwide Communications & Services (“WW Communications & Services”). |
Worldwide Barcode, Networking & Security Segment
The WW Barcode, Networking & Security portfolio of solutions includes enterprise mobile computing, data capture, barcode printing, POS, payments, networking, electronic physical security, cyber security and other technologies. There are adjacencies among these technologies to develop and deliver solutions for our customers. These solutions include data capture and POS solutions that interface with computer systems to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling, warehouse management and health care applications. Electronic physical security products include identification, access control, video surveillance, intrusion-related and wireless and networking infrastructure products.
The WW Barcode, Networking & Security segment includes the 2015 acquisition of KBZ, which specializes in video conferencing, services, and cloud, and the 2017 acquisition of POS Portal.
Worldwide Communications & Services Segment
The WW Communications & Services portfolio of solutions includes communications technologies and services for voice, video conferencing, wireless, data networking, cyber security, cable, unified communications and collaboration, cloud and technology services. As these solutions come together on IP networks, new opportunities are created to move into adjacent solutions for all vertical markets, such as education, healthcare and government.
The WW Communications & Services segment includes the 2015 acquisition of Network1, a leading value-added distributor of communications technologies, infrastructure solutions, digital networks and cyber security in Latin America, and the 2016 acquisition of Intelisys.
See Note 14 - Segment Information in the Notes to the Consolidated Financial Statements for disclosures of financial statement metrics, including revenue by each technology-focused segment.
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Customers
Our customers are businesses of all sizes that sell to end-users across industries ranging from manufacturing, warehouse and distribution, retail and e-commerce, hospitality, transportation and logistics, government, education and health care, among others. Our customers provide us with multiple routes-to-market through various channels, including: VARs, agents, ISOs, and ISVs. No single customer accounted for more than 6% of our total net sales for the fiscal year ended June 30, 2018.
VARs
Within VARs, our customers include specialty technology VARs, direct marketers, IT system integrators and service providers. Specialty technology VARs focus on one or more technologies, providing specialized knowledge and expertise for technology solutions, such as tailored software or integrated hardware. Direct marketers provide a very broad range of technology brands to business, government, education and healthcare markets. IT system integrators develop computer and networking solutions for end-user customers’ IT needs. Service providers deliver advanced multi-discipline services with customized solutions that bundle data, collaboration, cloud, network and digital telecommunication services for end-users' needs.
Sales Partner or Agents
Sales partners or agents focus on selling telecommunications and cloud services to end-users, advising about various services, technologies and cost alternatives to help them make informed choices. Sales partners or agents typically earn monthly commissions on multi-year contract sales as they build their recurring revenue business.
Independent Sales Organizations
ISOs focus on selling credit card processing and finding new merchant customers for credit card member banks. They offer on-going customer service and support and look to bundle hardware, software and processing services.
Independent Software Vendors
ISVs develop software, apps and integrated solutions. They generally focus on cloud solutions and sell bundled hardware, software and service solutions.
Suppliers
We provide products and services from more than 500 suppliers, including Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, Brocade/Ruckus, CenturyLink/Level 3, Cisco, Comcast Business, Datalogic, Dell, Dialogic, Elo, Epson, F5, Fortinet, Hanwha, Honeywell, HID, Ingenico, Jabra, March Networks, Mitel, NCR, Oracle, Panasonic, Plantronics/Polycom, RingCentral, Samsung, Sony, Spectralink, Toshiba Global Commerce Solutions, Ubiquiti, Unify, Verifone, Verizon, Windstream, XO and Zebra Technologies. We also offer customers significant choices in cloud services through our Intelisys business, including offerings in contact center, infrastructure and unified communications.
We provide products and services from many of our key suppliers in all of our geographic markets; however, certain suppliers only allow distribution to specific geographies. We typically purchase products directly from the supplier and our supplier agreements generally do not restrict us from selling similar or competitive products or services. We have the flexibility to terminate or curtail sales of one product line in favor of another due to technological change, pricing considerations, product availability, customer demand or supplier distribution policies.
Products from three suppliers, Avaya, Cisco and Zebra, each constituted more than 10% of our net sales for the fiscal year ended June 30, 2018.
• | We have two non-exclusive agreements with Avaya. One agreement covers the distribution of Avaya products in the United States and Latin America, and the other agreement covers distribution of Avaya products in the United Kingdom and portions of continental Europe. Our Avaya agreements each have a one year term that automatically renews for additional one year terms. Either party may terminate upon 180 days' notice for the United States and Latin America agreement and upon 90 days' notice for the European agreement. |
• | We have three non-exclusive agreements with Cisco. One agreement covers the distribution of Cisco products in the United States for our KBZ business and has a three year term; one agreement covers distribution of Cisco products in the Unites States for the rest of our business and has a two year term; and one agreement covers distribution of products in |
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Brazil and has a two year term. Each of these agreements must be renewed by written agreement. Either party may terminate the agreement upon 30 days' notice to the other party.
• | We have two non-exclusive agreements with Zebra. One agreement covers sales of Zebra products in North and South America, and the other agreement covers sales of Zebra products in Europe, the Middle East and Africa ("EMEA"). The Zebra agreements each have a one year term that automatically renews for additional one year terms, and either party may terminate the agreement upon 30 days' notice to the other party. |
In addition to the agreements mentioned above, we have written agreements with almost all of our other suppliers. These agreements generally include the following terms:
• | Non-exclusive distribution rights to resell products and related services in geographical areas (vendor agreements often include territorial restrictions that limit the countries in which we can sell their products and services). |
• | Short-term periods, subject to periodic renewal, and provide for termination by either party without cause upon 30 to 120 days' notice. |
• | Stock rotation rights, which give us the ability, subject to limitations, to return for credit or exchange a portion of the items purchased. |
• | Price protection provisions, which enables us to take a credit for declines in inventory value resulting from the vendor's price reductions. |
Along with our inventory management policies and practices, these stock rotation rights and price protection provisions are designed to reduce our risk of loss due to slow-moving inventory, vendor price reductions, product updates and obsolescence.
We participate in various rebate, cash discount and cooperative marketing programs offered by our suppliers to support expenses associated with selling and marketing the suppliers' products and services. These rebates and purchase discounts are largely influenced by sales volumes and are subject to change.
Our suppliers generally warrant their products we sell and allow returns of defective products, including those returned to us by our customers. For three of our product offerings, we offer a self-branded warranty program. We purchase contracts from unrelated third parties, generally the original equipment manufacturers, to fulfill our obligations to service or replace defective product claimed on these warranty programs. To maintain customer relations, we also facilitate returns of defective products from our customers by accepting for exchange, with our prior approval, most defective products within 30 days of invoicing. In addition, local laws may in some cases impose warranty obligations on the Company.
Offerings and Markets
We currently market over 100,000 products from over 500 hardware, software and service suppliers to approximately 45,000 customers. We sell products and services to the U.S. and Canada from our facilities located in Mississippi, California and Kentucky; into Latin America principally from facilities located in Florida, Mexico, Brazil, Colombia and Chile; and into Europe principally from facilities located in Belgium, France and the United Kingdom. See "Risk Factors," for a discussion of the risks related to our foreign operations. We also have drop-shipment arrangements with some of our suppliers, which allow us to offer products to customers without taking physical delivery at our facilities. These drop-shipment arrangements represent approximately 25% of fiscal year 2018 net sales.
Our offerings to our customers include hardware, software, services and connectivity from leading technology suppliers, including the flexibility of on-premise, cloud and hybrid solutions. We believe that customers want to offer end-users complete technology solutions that solve real business needs and drive business outcomes. We align our teams, tools, and processes to help our customers grow by providing more complete solutions through a better understanding of end-users’ need. We may provide a combination of offerings from multiple suppliers or give our customers access to additional services, such as configuration, key injection, integration support and others to deliver solutions.
We provide our customers and suppliers an array of pre-sale business tools and value-added services, including market and technology solution expertise, education and training, product configuration tools, technical support, logistics and channel financial services. These services allow our customers to gain knowledge and experience on marketing, negotiation and selling, to improve customer service, to profitably grow their business and be more cost effective. Our business is enhanced by our ability and our willingness to provide the extra level of services that keeps both our customers and our suppliers satisfied.
We bring technology solutions and services that include the following offerings:
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• | POS: We provide POS solutions for retail, grocery and hospitality environments to efficiently manage in-store sales and operations. POS solutions include computer-based terminals, tablets, monitors, payment processing solutions, receipt printers, pole displays, cash drawers, keyboards, peripheral equipment and fully integrated processing units. These solutions may include self-service checkout, kiosks and products that attach to the POS network in the store, including network access points, routers and digital signage. |
• | Payments: We offer payment terminals, comprehensive key injection services, reseller partner branding, extensive key libraries, ability to provide point-to-point encryption (“P2PE”), and redundant key injection facilities. We have the resources to deliver secure payment devices that are preconfigured and ready for use. In addition, we partner with ISVs to deliver to merchants integrated tablet POS solution hardware that a merchant may purchase outright or “as a service,” and which includes merchant hardware support and next-day replacement of tablets, terminals and peripherals. |
• | Barcode: We offer automatic identification and data capture (“AIDC”) technology that incorporates the capabilities for electronic identification and data processing without the need for manual input. These solutions consists of a wide range of products that include portable data collection terminals, wireless products, bar code label printers and scanners. As AIDC technology has become more pervasive, applications have evolved from traditional uses, such as inventory control, materials handling, distribution, shipping and warehouse management, to more advanced applications, such as health care. |
• | Physical Security: We provide electronic physical security solutions that include identification, access control, video surveillance and intrusion-related products and networking infrastructure. Physical security products are used every day across every vertical market to protect lives, property and information. These technology solutions require specialized knowledge to deploy effectively, and we offer in-depth training and education to our customers to enable them to maintain the appropriate skill levels. |
• | Unified Communications and Collaboration: We provide unified communications and collaboration capabilities, such as voice, video, audio conferencing, web conferencing and messaging. These offerings combine voice, data, fax and speech technologies with computers, telecommunications and the internet to deliver communications solutions on-premise, from the cloud and as a hybrid. Software and hardware products include IP-based telephony platforms, Voice over Internet Protocol ("VoIP") systems, private branch exchanges (“PBXs”), call center applications, video conferencing, desk phones and other endpoints. Cloud-delivered services, such as unified communications, contact center and video conferencing, enable end-user customers to consume and pay for communications services typically on a monthly subscription basis. |
• | Cloud and Telecom Services: We offer business communications services, including voice, data, access, cable collaboration, wireless and cloud. We focus on empowering and educating customers so they can advise end-users in making informed choices about services, technology and cost savings. We have contracts with more than 150 of the world’s leading telecom carriers and cloud services providers. |
See Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," below for a discussion of the amount of our net sales contributed by business segment.
Our People
The strength of our Company is our people, working together to help our customers grow their businesses. As of June 30, 2018, we had more than 2,600 employees, of which approximately 1,500 are in the United States and 1,100 are located internationally in Canada, Latin America and Europe. We have no organized labor or trade unions in the United States. We consider our relations with our employees to be good.
Competition
We believe we are a leader in the specialty markets we serve. The market for technology products and solutions is highly competitive, both in the United States and internationally. Competitive factors include price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information.
Our competitors include local, regional, national and international distributors, as well as suppliers that sell directly to resellers and to end-users. In addition, our competitors include master resellers that sell to franchisees, third-party dealers and end-users.
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Certain current and potential competitors have greater financial, technical, marketing and other resources than we have and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Certain smaller, regional competitors, who are specialty two-tier or mixed model master resellers, may also be able to respond more quickly to new or emerging technologies and local or regional changes in customer requirements from the specialized market focus. Competition has increased over the last several years as broad line and other value-added distributors have entered into the specialty technology markets. Such competition could also result in price reductions, reduced margins and loss of market share.
In our WW Barcode, Networking & Security segment, we compete with broad-line distributors, such as Ingram Micro, Synnex and Tech Data in most geographic areas, and more specialized security distributors, such as ADI and Anixter. Additionally, we also compete against other smaller, more specialized AIDC and POS distributors, such as Azerty, BlueStar, Jarltech and Nimax. In our WW Communications & Services segment, we compete against broad-line distributors, such as Ingram Micro, Synnex and Tech Data, and more specialized distributors, such as Jenne and Westcon. Additionally, for Intelisys' technology services, we also compete against other smaller, master agents, such as Avant and Telarus. As we seek to expand our business into other areas closely related to our offerings, we may encounter increased competition from current competitors and/or from new competitors, some of which may be our current customers.
Sales
Our sales department consists of inside and field sales representatives located in the United States, Canada, Brazil, Chile, Colombia, Mexico, Peru, Belgium, France, Germany, the United Kingdom, the Netherlands, Poland and Spain. The majority of our customers are assigned to a dedicated sales representative or team whose main focus is developing customer relationships and providing the customer with the solutions to meet their end-user’s needs. Our sales teams are advocates for and trusted advisers to our customers. Sales teams are often responsible for developing technical expertise within broad product markets, recruiting customers, creating demand, negotiating pricing and reviewing overall product and service requirements of our customers. Our sales representatives receive comprehensive training with respect to the technical characteristics of suppliers’ products, supplemented by frequent product and service seminars conducted by vendor representatives and bi-weekly meetings among product, marketing and sales managers.
Our sales teams also provide customers with online ordering, API, EDI and other information systems, allowing customers to easily gain access to product specifications, availability, and customized pricing, as well as the ability to place and follow the status of orders.
Marketing
We market our technology solutions and services through a range of digital and print channels, including online product catalogs customized for our North American, Latin American and European markets; social media; search engine optimization and marketing; content marketing; content automation; e-commerce; email direct marketing, among others. Our marketing practices are tailored to fit the specific needs of our customers and suppliers - ensuring we help our partners create, deliver and manage solutions for end-users across our vertical markets. Our comprehensive marketing efforts include sales promotions, advertisements, management of sales leads, trade show design and event management, advertorials, content creation, partner events, and training and certification courses with leading suppliers in an effort to recruit prospective customers.
Operations
Information Technology Systems
Starting in 2015, we rolled-out a new, global SAP information system designed to replace the current existing systems. This new system is currently operating in the U.S. and Canada, excluding Intelisys and POS Portal; in Europe; and in Latin America, excluding Brazil. Our information systems are scalable and capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management and accounting. Our customers and employees rely on our information systems for on-line, real-time information on pricing, inventory availability and reservation and order status. Our warehouse operations use bar code technology for receiving and shipping and automated systems for freight processing and shipment tracking, each of which is integrated with our multiple information systems. The customer service and technical support departments employ systems for documentation and faster processing of customer inquiries. To ensure that adequate inventory levels are maintained, our buyers depend on the system’s purchasing and receiving functions to track inventory on a perpetual basis.
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Warehouse and Shipping Strategy
We operate a 741,000 square foot distribution center in Southaven, Mississippi, which is located near the FedEx hub facility in Memphis, Tennessee, and serves primarily all of North America. We also acquired warehouses in California and Kentucky through our POS Portal acquisition. Our European operations utilize a limited number of distribution centers located in Belgium, France and the United Kingdom. Warehouses for our Latin American operations are located in Florida, Mexico, Brazil, Colombia and Chile. Our objective is to ship all orders on the same day, using technology to expedite shipments and minimize shipping errors. We offer reduced freight rates and flexible delivery options to minimize a customer’s need for inventory.
Financial Services
Our sales terms compete within our specific geographic areas to facilitate various third-party financing options, which include leasing, flooring and other secured financing for qualified customers. We believe this policy reduces the customer’s need to establish multiple credit relationships.
Trade and Service Marks
We conduct our business under the trade names "ScanSource POS and Barcode," "ScanSource Catalyst," "ScanSource Communications," "ScanSource Services," "ScanSource Networking and Security," "ScanSource KBZ," "ScanSource Europe," "ScanSource Europe Communications," "ScanSource Latin America," "ScanSource de Mexico," "ScanSource Brasil," "ScanSource Imago," "Network1, a ScanSource company," "Intelisys" and "POS Portal."
Certain of our tradenames, trademarks and service marks are registered, or are in the process of being registered, in the United States or various other countries. We have been issued registrations for the marks including, among others, "ScanSource," "Catalyst Telecom," and "Network1" in countries in our principal markets. Even though our marks are not registered in every country where we conduct business, in many cases we have acquired rights in those marks because of our continued use of them. These marks do not have value assigned to them and have a designated indefinite life. We do not believe that our operations are dependent upon any of our marks. We also sell products and provide services under various third-party tradenames, trademarks and service marks, some of which we reference in this report, and these tradenames, trademarks, and service marks are the property of their respective owners.
Additional Information
Our principal internet address is www.scansource.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this annual report. We provide our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to those reports, free of charge on www.scansource.com, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC").
ITEM 1A. | Risk Factors. |
The following are certain risks that could affect our business, financial position and results of operations. These risks should be considered in connection with evaluating an investment in our company and, in particular, the forward-looking statements contained in this Report because these risks could cause the actual results to differ materially from those suggested by the forward-looking statements. Additionally, there are other risks which could impact us that we may not describe, because we currently do not perceive them to be material or because they are presently unknown. If any of these risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock could decline and you may lose all or part of your investment in our common stock. We expressly disclaim any obligation to update or revise any risk factors, whether as a result of new information, future events or otherwise, except as required by law.
Acquisitions - Our growth strategy includes acquisitions of companies that complement or expand our existing business. Acquisitions involve unique risks and uncertainties.
We have acquired, and expect to continue to acquire, companies that complement or expand our existing business in the United States and internationally, and some of these acquisitions may be in business lines where we have little, if any, experience. Acquisitions entail a number of risks, including that the acquired company will not perform as expected and that we will be responsible for unexpected costs or liabilities. In addition, increases in the size and complexity of our business may place a significant strain on our management, operations, technical performance, financial resources and internal financial control and reporting functions, and there are no assurances that we will be able to manage the acquisition process or newly acquired companies
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effectively. It is not always possible to conduct an assessment of an acquired business’s internal control over financial reporting in the period between the consummation date and the date of management’s assessment. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations under Section 404 of the Sarbanes-Oxley Act of 2002.
Our personnel, systems, procedures and controls may not be adequate to effectively manage our future operations, especially as we employ personnel in multiple domestic and international locations. We may not be able to hire, train, retain and manage the personnel required to address our growth. Failure to effectively manage our acquisition opportunities could damage our reputation, limit our future growth, and adversely affect our business, financial condition and operating results.
International operations - Our international operations expose us to risks that are different from, and possibly greater than, the risks we are exposed to domestically.
We currently have significant facilities outside the United States, and a substantial portion of our revenue is derived from our international operations. These operations are subject to a variety of risks that are different from the risks that we face domestically or are similar risks but with potentially greater exposure. These risks include:
• | Fluctuations of foreign currency and exchange rates, which can impact sales, costs of the goods we sell and the reporting of our results and assets on our financial statements; |
• | Changes in international trade laws, trade agreements, or trading relationships affecting our import and export activities, including export license requirements, restrictions on the export of certain technology and tariff changes, or the imposition of new or increased trade sanctions; |
• | Difficulties in collecting accounts receivable and longer collection periods; |
• | Changes in, or expiration of, various foreign incentives that provide economic benefits to us; |
• | Labor laws or practices that impact our ability and costs to hire, retain and discharge employees; |
• | Difficulties in staffing and managing operations in foreign countries; |
• | Changes in the interpretation and enforcement of laws (in particular related to items such as duty and taxation), and laws related to data privacy such as GDPR and other similar privacy laws that impact our IT systems and processes; |
• | Global economic and financial market instability related to the U.K.’s referendum withdrawal from the E.U., as well as instability from the possibility of withdrawal of other E.U. member states: |
• | Potential political and economic instability and changes in governments; |
• | Compliance with foreign and domestic import and export regulations and anti-corruption laws, including the Iran Threat Reduction and Syria Human Rights Act of 2012, U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, and similar laws of other jurisdictions, governing our business activities outside the United States, the violation of which could result in severe penalties, including monetary fines, criminal proceedings and suspension of export or import privileges; and |
• | Terrorist or military actions that result in destruction or seizure of our assets or suspension or disruption of our operations or those of our customers, suppliers or service providers. |
We currently transact business in the U.K., where we also have offices and a distribution center, and in key E.U. markets. A majority of U.K. voters voted for the U.K. to exit the E.U. (“Brexit”). Negotiations have commenced to determine the future terms of the U.K.’s relationship with the E.U., including the terms of trade between the U.K. and the E.U. and the rest of the world. The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers, suppliers and employees.
We have substantial operations in Brazil and other Latin American countries and face risks related to these countries' complex tax, labor, trade compliance and consumer protection laws and regulations. Additionally, developing markets such as Brazil, Chile, Colombia, Mexico and Peru have greater political volatility and vulnerability to infrastructure and labor disruptions, are more likely to experience market and interest rate fluctuations and may have higher inflation. In addition, doing business in these countries poses additional challenges, such as finding and retaining qualified employees, particularly management-level employees, navigating underdeveloped infrastructure and identifying and retaining qualified suppliers, resellers, agents and service providers, among other risks. Furthermore, in developing markets it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, or similar local anti-bribery laws. Our commitment to legal compliance could put us at a competitive disadvantage, and any lapses in our compliance could subject us to civil and criminal penalties that could materially and adversely affect our financial condition and results of operations.
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In addition, competition in developing markets is increasing. Our success in integrating our Brazilian and additional Latin American operations is important to our growth strategy. If we cannot successfully increase our business in these countries, our product sales, financial condition and results of operations could be adversely affected.
Credit exposure - We have credit exposure to our customers. Any adverse trends or significant adverse incident in their businesses could cause us to suffer credit losses.
As is customary in our industry, we extend credit to our customers, and most of our sales are on open accounts. As we grow and compete for business, our typical payment terms tend to be longer, and therefore may increase our credit risk.
While we evaluate our customers' qualifications for credit and monitor our extensions of credit, and in some instances purchase credit insurance, these efforts cannot prevent all credit losses and any credit losses negatively impact our performance. In addition, for financial reporting purposes, we estimate future credit losses and establish reserves. To the extent that our credit losses exceed those reserves, our financial performance will be negatively impacted beyond what is expected. If there is deterioration in the collectability of our receivables, or if we are unable to collect under credit insurance policies, or if we fail to take other actions to adequately mitigate such credit risk, our earnings, cash flows and our ability to utilize receivable-based financing could deteriorate.
In addition, extending credit to international customers involves additional risks. It is often more difficult to evaluate credit risk with a customer or obtain credit protections in our international operations. Also, credit cycles and collection periods are typically longer in our international operations. As a result of these factors and other challenges in extending credit to international customers, we generally face greater credit risk from international sales compared to domestic sales.
Organic growth strategies - If we fail to effectively manage and implement our organic growth strategies, we may experience a negative effect on our business and financial results.
A significant component of our growth strategy is to expand our channels. Expansion of our existing products and services in our existing channels and entry into new channels may divert our resources and systems, require additional resources that might not be available (or available on acceptable terms), result in new or more intense competition, require longer implementation times or greater expenditures than anticipated and otherwise fail to achieve timely desired results, if at all. If we are unable to increase our sales and earnings by expanding our product and service offerings in a cost effective manner, our results may suffer.
Our ability to successfully manage our organic growth will require continued enhancement of our operational, managerial and financial resources, controls, and model. Our failure to effectively manage our organic growth could have an adverse effect on our business, financial condition and results of operations.
Suppliers - Changes to supply agreement terms or lack of product availability from our suppliers could adversely affect our operating margins, revenues or the level of capital required to fund our operations.
A significant percentage of our net sales relates to products we purchase from relatively few suppliers. As a result of such concentration risk, terminations of supply or services agreements or a change in terms or conditions of sale from one or more of our key suppliers could adversely affect our operating margins, revenues or the level of capital required to fund our operations. Our suppliers have the ability to make adverse changes in their sales terms and conditions, such as reducing the level of purchase discounts and rebates they make available to us. We have no guaranteed price or delivery agreements with our suppliers. In certain product categories, limited price protection or return rights offered by our suppliers may have a bearing on the amount of product we are willing to stock. Our inability to pass through to our customers the impact of these changes, as well as if we fail to develop or maintain systems to manage ongoing supplier programs, could cause us to record inventory write-downs or other losses and could have significant negative impact on our gross margins.
We receive purchase discounts and rebates from some suppliers based on various factors, including goals for quantitative and qualitative sales or purchase volume and customer related metrics. Certain purchase discounts and rebates may affect gross margins. Many purchase discounts from suppliers are based on percentage increases in sales of products. Our operating results could be adversely impacted if these rebates or discounts are reduced or eliminated or if our suppliers significantly increase the complexity of their refund procedures and thus increase costs for us to obtain such rebates.
Our ability to obtain particular products or product lines in the required quantities and our ability to fulfill customer orders on a timely basis is critical to our success. Our suppliers have experienced product supply shortages from time to time due to the inability of certain of their suppliers to supply products on a timely basis. In addition, our dependence on a limited number of suppliers leaves us vulnerable to having an inadequate supply of required products, price increases, late deliveries and poor product quality. As a result, we have experienced, and may in the future continue to experience, short-term shortages of specific products or be unable to purchase our desired volume of products. Suppliers that currently distribute their products through us, may decide to shift to or substantially increase their existing distribution with other distributors, their own dealer networks, or directly to resellers
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or end-users. Suppliers have, from time to time, made efforts to reduce the number of distributors with which they do business. This could result in more intense competition as distributors strive to secure distribution rights with these suppliers, which could have an adverse impact on our operating results. We cannot provide any assurances that suppliers will maintain an adequate supply of products to fulfill all of our customer orders on a timely basis. Our reputation, sales and profitability may suffer if suppliers are not able to provide us with an adequate supply of products to fulfill our customer orders on a timely basis or if we cannot otherwise obtain particular products or a product lines.
Increasingly, our suppliers are combining and merging, leaving us with fewer alternative sources. Supplier consolidation may also lead to changes in the nature and terms of relationships with our suppliers. Any loss or deterioration of a major supplier relationship could adversely affect our business, financial condition and results of operations.
As of December 15, 2017, Avaya completed a restructuring and emerged from Chapter 11 of the U.S. Bankruptcy Code. Avaya is one of our largest suppliers, and while we expect Avaya to operate successfully following this reorganization, the bankruptcy may result in a loss of customer confidence that will negatively impact sales. Any such adverse outcome could have an adverse effect on our business, financial condition and results of operations.
Competition - We experience intense competition in all of our markets. This competition could result in reduced margins and loss of our market share.
Our markets are fiercely competitive. We compete on the basis of price, product and service availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability and terms, ability to tailor solutions to the needs of our customers, quality and breadth of product line and services, and availability of technical and product information. Our competitors include local, regional, national and international distributors as well as hardware and service suppliers that sell directly to resellers and to end-users. In addition, we compete with master resellers that sell to franchisees, third party dealers and end-users. Certain of our current and potential competitors have greater financial, technical, marketing and other resources than we have and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Certain smaller, regional competitors, that are specialty two-tier or mixed model master resellers, may be able to respond more quickly to new or emerging technologies and changes in customer requirements in their regions. Competition has increased for our sales units as broad line and other value-added distributors have entered into the specialty technology markets. Such competition could result in price reductions, reduced margins and loss of our market share.
As a result of intense price competition in our industry, our gross margins and our operating profit margins historically have been narrow, and we expect them to continue to be narrow in the future. To remain competitive, we may be forced to offer more credit or extended payment terms to our customers. This could result in an increase in our need for capital, increase our financing costs, increase our bad debt expenses and have an adverse impact on our results of operations. We do not offer any assurance that we will not lose market share, or that we will not reduce our prices in response to the action of our competitors and thereby experience a reduction in our gross margins. We expect continued intense competition as current competitors expand their operations and new competitors enter the market. Our inability to compete successfully against current and future competitors could cause our revenue and earnings to decline.
Customers - We operate in a highly competitive environment and good customer relations are critical to our success. There can be no assurance that we will be able to retain and expand our customer relationships or acquire new customers.
Meeting our customers' needs quickly and fairly is critical to our business success. Transactions with our customers generally are performed on a purchase order basis rather than under long term supply agreements. Therefore, our customers readily can choose to purchase from other sources. From time to time, we experience shortages in availability of some products from suppliers, and this impacts customers' decisions regarding whether to make purchases from us. Anything that negatively influences customer relations also can negatively impact our operating results.
Customer consolidation also may lead to changes in the nature and terms of relationships with our customers. The loss or deterioration of a major customer relationship could adversely affect our business, financial condition and results of operations.
People - If we cannot continue to hire and retain high quality employees, our business and financial results may be negatively affected.
Our operating results could be adversely affected by increased competition for employees, higher employee turnover or increased salary and benefit costs. Our employees are important to our success and we are dependent in part on our ability to retain the services of our key management, sales, IT, operational, finance and administrative personnel. We have built our business on a set of core values, and we attempt to hire and retain employees who are committed to these values and our culture of providing exceptional service to our customers and suppliers. In order to compete and to continue to grow, we must attract, retain and motivate
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employees, including those in executive, senior management, sales, marketing, logistics, technical support and other operating positions.
Many of our employees work in small teams to provide specific services to customers and suppliers. They are trained to develop their knowledge of products, services, programs and practices and customer business needs, as well as to enhance the skills required to provide exceptional service and to manage our business. As they gain experience and develop their knowledge and skills, our employees become highly desired by other businesses. Therefore, to retain our employees, we have to provide a satisfying work environment and competitive compensation and benefits. If our costs to retain our skilled employees increase, then our business, financial condition and operating results could be adversely affected.
IT Systems - Our ability to manage our business and monitor results is highly dependent upon information and communication systems. A failure of these systems could disrupt our business.
We are highly dependent upon a variety of internal computer and telecommunication systems to operate our business, including our enterprise resource planning ("ERP") systems. In order to continue support of our growth, we are making significant technological upgrades to our information systems. This is a lengthy and expensive process that has resulted, and will continue to result in resource diversion from other operations.
Our new global ERP system is currently operating in Europe, Latin America, excluding Brazil, and North America, excluding Intelisys and POS Portal. As we continue to implement our new ERP system in locations, any disruptions, delays or deficiencies in the implementation of the system, or in the performance of our legacy systems, could adversely affect our ability to effectively run and manage our business and potentially our customers' ability to access our price and product availability information or place orders. Further, as we are dependent upon our ability to gather and promptly transmit accurate information to key decision makers, our business, results of operations and financial condition may be adversely affected if our information systems do not allow us to transmit accurate information, even for a short period of time. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could adversely affect our reputation, competitive position, business, financial condition and results of operations.
In addition, the information systems of companies we acquire may not meet our standards or we may not be able to successfully convert them to provide acceptable information on a timely and cost-effective basis. Furthermore, we must attract and retain qualified people to operate our systems, expand and improve them, integrate new programs effectively with our existing programs and convert to new systems efficiently when required. Any disruption to our business due to such issues, or an increase in our costs to cover these issues that is greater than what we have anticipated, could have an adverse effect on our financial results and operations.
Our customers rely on our electronic ordering and information systems as a source for product information, including availability and pricing. There can be no assurance that our systems will not fail or experience disruptions, and any significant failure or disruption of these systems could prevent us from making sales, ordering and delivering products and otherwise conducting our business. Many of our customers use our website to check real-time product availability, see their customized pricing and place orders. While our website has not experienced any material disruptions or security breakdowns, it may in the future and any disruptions could harm our relationship with our suppliers, customers and other business partners. Any material disruption of our website or the Internet in general could impair our order processing or prevent our suppliers and customers from accessing information and cause us to lose business.
Cyber security risk - Our reputation and business may be harmed from cyber security risk and we may be subject to legal claims if there is loss, disclosure or misappropriation of or access to our customers' or our business partners' or our own information or other breaches of our information security.
We make extensive use of online services and centralized data processing, including through third-party service providers. The secure maintenance and transmission of customer information is a critical element of our operations. Our information technology and other systems that maintain and transmit customer or employee information or those of service providers or business partners may be compromised by a malicious third-party penetration of our network security, or that of a third-party service provider or business partner, or impacted by advertent or inadvertent actions or inactions by our employees, or those of a third-party service provider or business partner. With constant changes in the security landscape, experienced computer programmers and hackers may be able to penetrate our network security, or that of our third-party service providers, and misappropriate or compromise our confidential information, create system disruptions, or cause shutdowns. As a result, our customers' information may be lost, disclosed, accessed or taken without our customers' consent.
We are subject to laws and regulations relating to customer privacy and the protection of personal information. Any such loss, disclosure or misappropriation of, or access to, customers' or business partners' information or our information or other breach of
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such information security can result in legal claims or legal proceedings, including regulatory investigations and actions, may have a serious impact on our reputation and may adversely affect our businesses, operating results and financial condition.
Economic weakness - Economic weakness and geopolitical uncertainty could adversely affect our results and prospects.
Our financial results, operations and prospects depend significantly on worldwide economic and geopolitical conditions, the demand for our products and services, and the financial condition of our customers and suppliers. Economic weakness and geopolitical uncertainty have in the past resulted, and may result in the future, in reduced demand for products resulting in decreased sales, margins and earnings. Economic weakness and geopolitical uncertainty may also lead us to impair assets, including goodwill, intangible assets and other long-lived assets, take restructuring actions and reduce expenses in response to decreased sales or margins. We may not be able to adequately adjust our cost structure in a timely fashion, which may adversely impact our profitability. Uncertainty about economic conditions may increase foreign currency volatility in markets in which we transact business, which may negatively impact our results. Economic weakness and geopolitical uncertainty also make it more difficult for us to manage inventory levels and/or collect customer receivables, which may result in provisions to create reserves, write-offs, reduced access to liquidity and higher financing costs.
Disruptive technology - We may not be able to respond and adapt to rapid technological changes, evolving industry standards or changing customer needs or requirements, and thus may become less competitive.
The market for our products and services is subject to rapid technological change, evolving industry standards and changes in customer demand, which can contribute to the decline in value or obsolescence of inventory. Although most of our suppliers provide us with certain protections from the loss in value of inventory (such as price protection and certain rights of return), we cannot be sure that such protections will fully compensate for any loss in value, or that the suppliers will choose to, or be able to, honor such agreements.
Our ability and our supplier's ability to anticipate and react quickly to new technology trends and customer requirements is crucial to our overall success, financial condition and results of operations. If our suppliers fail to evolve their product and service offerings, or if we fail to evolve our product and service offerings or engage with desirable suppliers in time to respond to, and remain ahead of, new technological developments, it would adversely affect our ability to retain or increase market share and revenues. New technologies may emerge that quickly surpass the capabilities of the products we currently hold in inventory or have access to sell through our existing supplier network, and our customers may no longer view our product offerings as desirable or necessary, which could result in a reduction in our market share and ability to obtain sufficient profit margins. Some of our competitors and our suppliers’ competitors may be better at adapting to disruptive technology or entering new markets. Our future success depends, in part, on our ability to adapt and manage our product offerings to meet customer needs at prices that our customers are willing to pay.
Foreign currency - Our international operations expose us to fluctuations in foreign currency exchange rates that could adversely affect our results of operations.
We transact sales, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar. Volatility in foreign exchange rates increase our risk of loss related to products and services purchased in a currency other than the currency in which those products and services are sold. We maintain policies to reduce our net exposure to foreign currency exchange rate fluctuations through the use of derivative financial instruments, however there can be no assurance that fluctuations in foreign currency exchange rates will not materially affect our financial results. Because our consolidated financial statements are presented in U.S. dollars, we must translate our financial statements into U.S. dollars at exchange rates in effect during each reporting period. Therefore, increases or decreases in the exchanges rates between the U.S. dollar and other currencies we transact in may positively or negatively affect our results of operations. In addition, unexpected and dramatic changes in foreign currency exchange rates may negatively affect our earnings from those markets.
Centralized functions - We have centralized a number of functions to provide efficient support to our business. As a result, a loss or reduction of use of one of our locations would have an adverse effect on our business operations and financial results.
In order to be as efficient as possible, we centralize a number of critical functions. For instance, we currently distribute products to the majority of North America from a single warehouse. Similarly, for the primary business operations, we utilize a single information system based in the United States for the majority of our North American, Latin American and European operations, while our Brazilian operations have separate systems. While we have backup systems and business continuity plans, any significant or lengthy interruption of our ability to provide these centralized functions would significantly impair our ability to continue normal business operations. In addition, the centralization of these functions increases our exposure to local risks, such as the availability of qualified employees and the lessening of competition for critical services, such as freight and communications.
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Inventory - The value of our inventory may be adversely affected by market and other factors.
Our business, like that of other distributors, is subject to the risk that the value of our inventory will be adversely affected by price reductions by manufacturers, by technological changes affecting the usefulness or desirability of our products or by foreign currency fluctuations. Most of our supplier agreements and most manufacturers’ policies have some price protection and stock rotation opportunities with respect to slow-moving or obsolete inventory items. However, these protections are limited in scope and do not protect against all declines in inventory value, excess inventory, or product obsolescence, and in some instances we may not be able to fulfill all necessary conditions or successfully manage such price protection or stock rotation opportunities. In addition, these protections are not always reflected in supplier agreements and their application in a particular situation is dependent upon negotiations with our suppliers. As a result, occasionally we are required to write down the value of excess and obsolete inventory, and should any of these write-downs occur at a significant level, they could have an adverse effect on our business, financial condition or results of operations.
Liquidity and capital resources - Market factors may increase the cost and availability of capital. Additional capital may not be available to us on acceptable terms to fund our working capital needs and growth.
Our business requires significant levels of capital to finance accounts receivable and product inventory that is not financed by trade creditors. We have an increased demand for capital when our business is expanding, including through acquisitions and organic growth. Changes in payment terms with either suppliers or customers could also increase our capital requirements. We have historically relied upon cash generated from operations, borrowings under our revolving credit facility, secured and unsecured borrowings to satisfy our capital needs and to finance growth. While we believe our existing sources of liquidity will provide sufficient resources to meet our current working capital and cash requirements, if we require an increase in capital to meet our future business needs, such capital may not be available to us on terms acceptable to us, or at all. Changes in how lenders rate our credit worthiness, as well as macroeconomic factors such as an economic downturn and global economic instability may restrict our ability to raise capital in adequate amounts or on terms acceptable to us, and the failure to do so could harm our ability to operate our business.
In addition, our cash and cash equivalents are deposited with various financial institutions located in the various countries in which we operate. We endeavor to monitor these financial institutions regularly for credit quality; however, we are exposed to risk of loss on such funds or we may experience significant disruptions in our liquidity needs if one or more of these financial institutions were to suffer bankruptcy or similar restructuring.
Reliance on third parties - We are dependent on third parties for some services, including the delivery of a majority of our products, logistics and warehousing. Changes in shipping terms or the failure or inability of our third-party shippers to perform could have an adverse impact on our business and results of operations.
We rely on third parties to perform certain services for our business and for our customers, which, if not performed by these third parties in accordance with the terms of the arrangement, could result in significant disruptions or costs to our organization, including monetary damages and an adverse effect on our customer relationships.
In particular, we are dependent upon major shipping companies, including FedEx and UPS, for the shipment of our products to and from our centralized warehouses. Changes in shipping terms, or the inability of these third-party shippers to perform effectively, could affect our responsiveness to our customers. From time to time, we have experienced significant increases in shipping costs due to increases in fuel costs. Increases in our shipping costs may adversely affect our financial results if we are unable to pass on these higher costs to our customers.
In Europe, Brazil and other Latin American countries, we use third parties to provide warehousing and logistics services in order to provide cost-effective operations and scale in certain regions. The failure or inability of one or more of these third parties to deliver products from suppliers to us, or products from us to our customers, for any reason could disrupt our business and harm our reputation and operating results. We work closely with our third-party logistics and warehousing providers to anticipate issues, and also review public information regarding their financial health. However, issues may not be identified timely, which may lead to lack of or poor execution of services, loss or litigation. Additionally, deterioration of the financial condition of our logistical and warehousing providers could result in delayed responsiveness or delivery failure, which would ultimately affect our responsiveness to our customers and thus may adversely affect our business, operations and financial performance.
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Increased government regulation - We may be subject to additional costs and subject to fines and penalties because certain governmental entities are end-users of products that we sell.
Certain of our customers sell our products to government entities, which requires us to comply with additional laws, regulations and contractual requirements relating to how we conduct business. In complying with such laws, regulations, and other requirements, we may incur additional costs. In addition, non-compliance with such laws, regulations, and other requirements also may expose us to fines and penalties, including contractual damages or the loss of certain contracts or business. We also may be subject to increased scrutiny and investigation into our business practices, which may increase operating costs and increase legal liability, as well as expose us to additional reputational risk.
Fair value measurement of contingent consideration, goodwill and other intangible assets - Changes in the fair value of the assets and liabilities measured at fair value could have a significant effect on our reported earnings.
We have structured several of our acquisitions with upfront payments and additional earnout payments. In accordance with ASC 805, Business Combinations, a liability for the contingent consideration driven by an earn-out must be recorded at the onset of the purchase and must be revalued at every reporting period. Changes in the fair value of the liability are recorded as an adjustment to operating income. These changes can occur due to changes in estimated future financial results, the probabilities of achieving these results, the discount rate reflective of our creditworthiness and the market risk premium associated with the relevant market. Both gains and losses can occur due to changes in these fair value estimates, thus increasing volatility of our earnings.
We have substantial goodwill. On at least an annual basis, we are required to assess our goodwill and other intangible assets, including but not limited to customer relationships, trademarks, and trade names, for impairment. This includes continuously monitoring events and circumstances that could trigger an impairment test outside of our annual impairment testing date in the fourth quarter of each year. Testing goodwill and other intangibles for impairment requires the use of significant estimates and other inputs outside of our control. If the carrying value of goodwill in any of our goodwill reporting units or other intangible assets is determined to exceed their respective fair values, we may be required to record significant impairment charges. Any declines resulting in a goodwill impairment or long-lived asset impairment may result in material non-cash charges to our earnings. Impairment charges would also reduce our consolidated shareholders' equity and increase our debt-to-total-capitalization ratio, which could negatively impact our credit rating and access to the public debt and equity markets.
Failure to comply with environmental regulations - We are subject to various environmental regulations, and failing to comply with any requirements may adversely affect our business operations or financial results.
We are subject to various federal, state, local and foreign laws and regulations addressing environmental and other impacts from product disposal, use of hazardous materials in products, recycling of products at the end of their useful life and other related matters. Compliance with these environmental laws may have a material adverse effect on our business. These laws include the Restriction of Hazardous Substances Directive, ("RoHS"), RoHS Directive 2011/65/EU ("RoHS 2") and the European Union Waste Electrical and Electronic Equipment Directive ("WEEE") as enacted by individual European Union countries and other similar legislation adopted in North America. These directives can make companies involved in the production or distribution of electrical goods, including computers and printers, responsible for collection, recycling, treatment and disposal of recovered products. In addition, these directives and similar legislation can have an impact on the types and design of products we are able to sell in jurisdictions that have adopted such restrictions. While we strive to ensure we are in compliance with all applicable regulations, certain of these regulations impose strict liability. Additionally, we may be held responsible for the prior activities of entities that we have acquired or will acquire in the future. Failure to comply with these regulations could result in substantial costs, fines and civil or criminal sanctions, as well as third party claims for property damage or personal injury. Further, environmental laws may become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation, which could adversely affect our business, financial condition and results of operations.
Quarterly fluctuations - Our net sales and operating results are dependent on a number of factors. Our net sales will fluctuate from quarter to quarter, and these fluctuations may cause volatility in our stock price.
Our net sales and operating results may fluctuate quarterly and, as a result our performance in one period may vary significantly from our performance in the preceding quarter, and may differ significantly from our forecast of performance from quarter to quarter. The impact of these variances may cause volatility in our stock price. Additionally, any past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate results or trends in the future as our operating results may fluctuate significantly quarter to quarter. The results of any quarterly period are not indicative of results to be expected for a full fiscal year.
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Volatility of Stock Price - The trading price of our common stock fluctuates.
The stock market as a whole and the trading prices of companies in the wholesale electronics industry have been volatile. This broad market and industry volatility could significantly reduce the price of our common stock at any time, without regard to our own operating performance. This volatility may affect the price at which you could sell your common stock. Our stock price is likely to continue to be volatile and subject to price and volume fluctuations in response to market and other factors; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcement by us or our competitors of significant acquisitions, transactions, partnerships, joint ventures or capital commitments.
A material decline in the price of our common stock may result in the assertion of certain claims against us, and/or the commencement of inquiries and/or investigations against us. A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital, if needed, and the inability for you to obtain a favorable price at which you could sell your shares.
Litigation - We routinely are involved in litigation that can be costly and lead to adverse results.
In the ordinary course of our business, we are involved in a wide range of disputes, some of which result in litigation. We are routinely involved in litigation related to commercial disputes surrounding our business activities, intellectual property disputes, employment disputes and accounts receivable collection activity. In addition, as a public company with a large shareholder base, we are susceptible to class-action lawsuits and other litigation resulting from disclosures that we make (or do not make) and our other activities. Litigation is expensive to bring and defend, and the outcome of litigation can be adverse and significant. Not all adverse outcomes can be anticipated, and applicable accounting rules do not always require or permit the establishment of a reserve until a final result has occurred or becomes probable and estimable. In some instances we are insured or indemnified for the potential losses; in other instances we are not. An uninsured, under insured or non-indemnified adverse outcome in significant litigation could have an adverse effect on our business, financial condition and results of operations. We can make no assurances that we will ultimately be successful in our defense of any of these disputes. See Item 3. "Legal Proceedings" for further discussion of our material legal matters.
ITEM 1B. Unresolved Staff Comments.
Not applicable.
ITEM 2. | Properties. |
Our fixed assets include office space and warehouses. Our principal locations and/or properties as of June 30, 2018, were as follows:
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Location | Approximate Square Footage | Type of Interest | Description of Use |
United States | |||
Greenville, SC | 180,000 | Owned | Headquarters - Principal Executive and Sales Offices |
Southaven, MS | 741,000 | Leased | Warehouse |
Miami, FL | 29,000 | Leased | Sales Office and Warehouse |
Sacramento, CA | 41,000 | Leased | Sales and Administration Offices and Warehouse |
Louisville, KY | 22,000 | Leased | Warehouse |
Petaluma, CA | 17,000 | Leased | Sales and Administration Offices |
International | |||
Mexico City, Mexico | 25,000 | Leased | Warehouse |
Coignieres, France | 15,000 | Leased | Sales Office and Warehouse |
Mainz, Germany | 16,000 | Leased | Sales Office and Warehouse |
Brussels, Belgium | 28,000 | Leased | Sales and Administration Offices |
Sao Jose does Pinhais, Brazil | 24,000 | Leased | Sales Office and Warehouse |
Serra, Espírito Santo, Brazil | 31,000 | Leased | Sales Office and Warehouse |
Itajai, Santa Catarina, Brazil | 164,000 | Leased | Sales Office and Warehouse |
Of the 180,000 owned square footage in Greenville, South Carolina approximately 40,000 square feet is subleased to an unrelated third party. Our primary North American distribution operations are located in Southaven, Mississippi. We utilize the logistical services of various third party warehouses in the United States and internationally. We also lease various sales offices and warehouse spaces, each approximately 15,000 square feet or less throughout the United States and international locations.
Management believes our office and warehouse facilities are adequate to support our operations at their current levels and for the foreseeable future.
ITEM 3. Legal Proceedings.
The Company and our subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to us, we believe that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on our financial condition or results of operations.
ITEM 4. Mine Safety Disclosures.
Not applicable.
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PART II
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock is quoted on the NASDAQ Global Select Market under the symbol "SCSC." We have never declared or paid a cash dividend since inception. Under the terms of our revolving credit facility, the payment of cash dividends is restricted. As of August 28, 2018, there were approximately 550 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on the NASDAQ Global Select Market.
High | Low | ||||||
Fiscal Year 2018 | |||||||
First quarter | $ | 44.35 | $ | 36.20 | |||
Second quarter | 45.35 | 33.55 | |||||
Third quarter | 36.90 | 31.40 | |||||
Fourth quarter | 41.95 | 33.30 | |||||
Fiscal Year 2017 | |||||||
First quarter | $ | 43.49 | $ | 33.89 | |||
Second quarter | 41.70 | 29.05 | |||||
Third quarter | 44.95 | 38.35 | |||||
Fourth quarter | 41.95 | 37.05 | |||||
Stock Performance Chart
The following stock performance graph compares cumulative total shareholder return on our common stock over a five-year period with the Nasdaq Market Index and with the Standard Industrial Classification ("SIC") Code Index (SIC Code 5045 – Wholesale Computers and Peripheral Equipment and Software) for the same period. Total shareholder return represents stock price changes and assumes the reinvestment of dividends. The graph assumes the investment of $100 on June 30, 2013.
2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||
ScanSource, Inc. | $ | 100 | $ | 119 | $ | 119 | $ | 116 | $ | 126 | $ | 126 | |||||||||||
NASDAQ Composite | $ | 100 | $ | 132 | $ | 151 | $ | 149 | $ | 190 | $ | 233 | |||||||||||
SIC Code 5045 – Computers & Peripheral Equipment | $ | 100 | $ | 138 | $ | 132 | $ | 159 | $ | 212 | $ | 185 | |||||||||||
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Unregistered Sales of Equity Securities and Use of Proceeds
On August 29, 2016, we announced our Board of Directors' ("BOD") authorization to repurchase shares up to $120 million of our common stock for up to three years. During the year ended June 30, 2017, we repurchased 544,643 shares for $20.3 million under the program. No share repurchases occurred under the BOD authorization for the year ended June 30, 2018. The following information describes the Company's stock repurchases as relates to shares withheld for employees stock-based awards in order to satisfy required tax withholding obligations during the fourth quarter of the fiscal year ended June 30, 2018:
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of the publicly announced plan or program | Approximate dollar value of shares that may yet be purchased under the plan or program | ||||||
April 1, 2018 through April 30, 2018 | — | $ | — | — | $ | 99,664,707 | ||||
May 1, 2018 through May 31, 2018 | 232 | $ | 34.30 | — | $ | 99,664,707 | ||||
June 1, 2018 through June 30, 2018 | 159 | $ | 40.90 | — | 99,664,707 | |||||
Total | 391 | $ | 36.98 | — | $ | 99,664,707 | ||||
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ITEM 6. Selected Financial Data.
The selected financial data below should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. The following statement of income data and balance sheet data were derived from our Consolidated Financial Statements.
FIVE YEAR FINANCIAL SUMMARY
Fiscal Year Ended June 30, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Statement of income data: | |||||||||||||||||||
Net sales | $ | 3,846,260 | $ | 3,568,186 | $ | 3,540,226 | $ | 3,218,626 | $ | 2,913,634 | |||||||||
Cost of goods sold | 3,410,135 | 3,184,590 | 3,184,786 | 2,891,536 | 2,612,535 | ||||||||||||||
Gross profit | 436,125 | 383,596 | 355,440 | 327,090 | 301,099 | ||||||||||||||
Selling, general and administrative expenses | 297,475 | 265,178 | 240,115 | 210,985 | 185,116 | ||||||||||||||
Depreciation expense | 13,311 | 9,444 | 7,326 | 5,356 | 3,496 | ||||||||||||||
Intangible amortization expense | 20,657 | 15,524 | 9,828 | 6,641 | 3,880 | ||||||||||||||
Impairment charges (legal recovery) | — | — | — | — | (15,490 | ) | |||||||||||||
Change in fair value of contingent consideration | 37,043 | 5,211 | 1,294 | 2,667 | 2,311 | ||||||||||||||
Operating income | 67,639 | 88,239 | 96,877 | 101,441 | 121,786 | ||||||||||||||
Interest expense | 9,149 | 3,215 | 2,124 | 1,797 | 731 | ||||||||||||||
Interest income | (3,713 | ) | (5,329 | ) | (3,448 | ) | (2,638 | ) | (2,364 | ) | |||||||||
Other (income) expense, net | 1,278 | (11,142 | ) | 2,191 | 2,376 | 312 | |||||||||||||
Income before income taxes | 60,925 | 101,495 | 96,010 | 99,906 | 123,107 | ||||||||||||||
Provision for income taxes | 27,772 | 32,249 | 32,391 | 34,487 | 41,318 | ||||||||||||||
Net income | $ | 33,153 | $ | 69,246 | $ | 63,619 | $ | 65,419 | $ | 81,789 | |||||||||
Net income per common share, basic | $ | 1.30 | $ | 2.74 | $ | 2.40 | $ | 2.29 | $ | 2.89 | |||||||||
Weighted-average shares outstanding, basic | 25,522 | 25,318 | 26,472 | 28,558 | 28,337 | ||||||||||||||
Net income per common share, diluted | $ | 1.29 | $ | 2.71 | $ | 2.38 | $ | 2.27 | $ | 2.86 | |||||||||
Weighted-average shares outstanding, diluted | 25,624 | 25,515 | 26,687 | 28,799 | 28,602 | ||||||||||||||
As of June 30, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(in thousands) | |||||||||||||||||||
Balance sheet data: | |||||||||||||||||||
Working capital | $ | 651,851 | $ | 624,748 | $ | 643,793 | $ | 645,398 | $ | 715,850 | |||||||||
Total assets | 1,945,295 | 1,718,303 | 1,491,185 | 1,476,941 | 1,335,124 | ||||||||||||||
Total debt (including current debt) | 249,429 | 97,300 | 76,856 | 8,826 | 5,429 | ||||||||||||||
Total shareholders’ equity | $ | 866,376 | $ | 837,145 | $ | 774,496 | $ | 808,985 | $ | 802,643 | |||||||||
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ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
ScanSource is at the center of the technological solution delivery channel, connecting businesses and providing solutions. We provide technology solutions and services from the world’s leading suppliers of point-of-sale (POS), payments, barcode, physical security, unified communications and collaboration, cloud and telecom services to our customers. We serve approximately 45,000 customers located in the United States, Canada, Latin America and Europe and provide solutions and services from over 500 technology suppliers.
We operate our business under a management structure that enhances our worldwide technology market focus and growth strategy. We segment our business into two technology-focused areas that each operate in the U.S., Canada, Latin America and Europe:
• | Worldwide Barcode, Networking & Security |
• | Worldwide Communications & Services |
We sell products to the United States and Canada from our facilities located in Mississippi, California and Kentucky; into Latin America principally from facilities located in Florida, Mexico, Brazil, Colombia and Chile; and into Europe principally from facilities in Belgium, France and the United Kingdom. We also have drop-shipment arrangements with some of our suppliers, which allow us to offer products to customers without taking physical delivery at our facilities.
Our key suppliers include Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, Brocade/Ruckus, CenturyLink/Level 3, Cisco, Comcast Business, Datalogic, Dell, Dialogic, Elo, F5, Fortinet, Epson, Hanwha, Honeywell, HID, Ingenico, Jabra, March Networks, Mitel, NCR, Oracle, Panasonic, Plantronics/Polycom, RingCentral, Samsung, Sony, Spectralink, Toshiba Global Commerce Solutions, Ubiquiti, Unify, Verifone, Verizon, Windstream, XO and Zebra Technologies. We also offer customers significant choices in cloud services through our Intelisys business, including offerings in contact center, infrastructure and unified communications.
Recent Developments
On August 20, 2018, the Company acquired Canpango, a global Salesforce implementation and consulting partner with deep knowledge of customer relationship management ("CRM") and integration with telecom systems. Canpango’s professional services are complementary to our cloud services offerings. Canpango joins the Company's Worldwide Communications & Services operating segment.
The Tax Cuts and Jobs Act (the "Tax Act") was enacted in the United States on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and implements a territorial tax system. The Tax Act also requires companies to pay a one-time transition tax on the deemed repatriation of undistributed foreign earnings and remeasure deferred tax assets and liabilities. See Note 12 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.
Our Strategy
We sell hardware, software, services, and connectivity solutions from technology suppliers to customers that serve end-users. We are a leading channel sales partner for many of our technology suppliers and sell technology solutions that solve end-user's business needs. While we do not manufacture products, we offer the industry leading technology solutions and services from leading technology suppliers. We have the ability to provide a combination of offerings from multiple suppliers or give our customers access to additional services, such as custom configuration, key injection, integration support and other services, to deliver solutions. We also offer the flexibility of on-premise, cloud and hybrid solutions.
As a trusted adviser to our customers, we provide more complete solutions through a better understanding of end-user needs. We drive growth through enhancing our customers' capabilities to provide hardware, software, services and connectivity solutions to meet these needs. Our teams deliver value-added support programs and services, including education and training, network assessments, implementation and marketing to help our customers extend their capabilities, develop new technology practices or reach new end-users.
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Our objective is to continue to grow profitable sales in the technologies we offer and expand in higher margin and adjacent markets to help our customers offer more products and services and increase recurring revenue opportunities. We continue to evaluate strategic acquisitions to enhance our technology offerings and service capabilities.
Cost Control/Profitability
Our operating income is driven by gross profits and by a disciplined control of operating expenses. For our fiscal year 2018, the change in fair value of contingent consideration for amounts owed to former shareholders of businesses we acquired increased significantly. Our operations feature scalable information systems, streamlined management and centralized distribution, enabling us to achieve the economies of scale necessary for cost-effective solution selling. From inception, we have managed our selling, general and administrative expenses by maintaining strong cost controls. However, in order to continue to grow in our markets, we have continued to invest in new technologies and increased marketing efforts to recruit new customers.
Results of Operations
The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales:
Fiscal Year Ended June 30, | ||||||||
2018 | 2017 | 2016 | ||||||
Statement of income data: | ||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of goods sold | 88.7 | 89.2 | 90.0 | |||||
Gross profit | 11.3 | 10.8 | 10.0 | |||||
Selling, general and administrative expenses, net of amortization expense | 7.7 | 7.4 | 6.8 | |||||
Depreciation expense | 0.3 | 0.3 | 0.2 | |||||
Intangible amortization expense | 0.5 | 0.4 | 0.3 | |||||
Change in fair value of contingent consideration | 1.0 | 0.1 | 0.0 | |||||
Operating income | 1.8 | 2.5 | 2.7 | |||||
Interest expense (income), net | 0.1 | (0.1 | ) | 0.0 | ||||
Other expense (income), net | 0.0 | (0.3 | ) | 0.1 | ||||
Income before income taxes and minority interest | 1.6 | 2.8 | 2.7 | |||||
Provision for income taxes | 0.7 | 0.9 | 0.9 | |||||
Net income | 0.9 | % | 1.9 | % | 1.8 | % | ||
Comparison of Fiscal Years Ended June 30, 2018, 2017 and 2016
Net Sales
We have two reportable segments, which are based on the technologies provided to customers. The following tables summarize our net sales results by business segment and by geographic location for the comparable fiscal years ending June 30, 2018, 2017 and 2016.
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Fiscal year 2018 compared to fiscal year 2017
2018 | 2017 | $ Change | % Change | % Change Constant Currency, Excluding Acquisitions (a) | |||||||||||||
(in thousands) | |||||||||||||||||
Sales by Segment: | |||||||||||||||||
Worldwide Barcode, Networking & Security | $ | 2,628,988 | $ | 2,389,256 | $ | 239,732 | 10.0 | % | 5.0 | % | |||||||
Worldwide Communications & Services | 1,217,272 | 1,178,930 | 38,342 | 3.3 | % | 2.2 | % | ||||||||||
Total net sales | $ | 3,846,260 | $ | 3,568,186 | $ | 278,074 | 7.8 | % | 4.1 | % | |||||||
Sales by Geography Category: | |||||||||||||||||
North American | $ | 2,847,197 | $ | 2,685,820 | $ | 161,377 | 6.0 | % | 2.5 | % | |||||||
International | 999,063 | 882,366 | 116,697 | 13.2 | % | 9.0 | % | ||||||||||
Total net sales | $ | 3,846,260 | $ | 3,568,186 | $ | 278,074 | 7.8 | % | 4.1 | % | |||||||
(a) A reconciliation of non-GAAP net sales in constant currency, excluding acquisitions is presented at the end of Results of Operations, under Non-GAAP Financial Information. | |||||||||||||||||
Worldwide Barcode, Networking & Security
The Worldwide Barcode, Networking & Security segment consists of sales to technology customers in North America, Europe and Latin America. During fiscal year 2018, net sales for this segment increased $239.7 million, or 10.0%, compared to fiscal year 2017. Excluding the foreign exchange positive impact of $32.6 million and sales from the POS Portal acquisition, adjusted net sales for fiscal year 2018 increased $119.7 million, or 5.0%, compared to fiscal year 2017. The increase in net sales and adjusted net sales is primarily due to sales growth in our Europe and North America businesses.
Worldwide Communications & Services
The Worldwide Communications & Services segment consists of sales to technology customers in North America, Europe and Latin America. During fiscal year 2018, net sales for this segment increased $38.3 million or 3.3% compared to fiscal year 2017, primarily due to volume sales growth in our Brazilian business. Excluding the foreign exchange positive impact of $5.1 million and sales from the Intelisys acquisition for the first quarter of fiscal years 2018 and 2017, adjusted net sales for fiscal year 2018 increased $26.4 million, or 2.2%, compared to fiscal year 2017. The increase in net sales and adjusted net sales is primarily due to sales growth in our Brazilian business, partially offset by lower sales volume in our consolidated North America businesses.
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Fiscal year 2017 compared to fiscal year 2016
2017 | 2016 | $ Change | % Change | % Change Constant Currency, Excluding Acquisitions (a) | |||||||||||||
(in thousands) | |||||||||||||||||
Sales by Segment: | |||||||||||||||||
Worldwide Barcode, Networking & Security | $ | 2,389,256 | $ | 2,361,670 | $ | 27,586 | 1.2 | % | (2.0 | )% | |||||||
Communications & Services | 1,178,930 | 1,178,556 | 374 | — | % | (3.2 | )% | ||||||||||
Total net sales | $ | 3,568,186 | $ | 3,540,226 | $ | 27,960 | 0.8 | % | (2.4 | )% | |||||||
Sales by Geography Category: | |||||||||||||||||
North American | $ | 2,685,820 | $ | 2,620,184 | $ | 65,636 | 2.5 | % | (1.1 | )% | |||||||
International | 882,366 | 920,042 | (37,676 | ) | (4.1 | )% | (6.1 | )% | |||||||||
Total net sales | $ | 3,568,186 | $ | 3,540,226 | $ | 27,960 | 0.8 | % | (2.4 | )% | |||||||
(a) A reconciliation of non-GAAP net sales in constant currency, excluding acquisitions is presented at the end of Results of Operations, under Non-GAAP Financial Information. | |||||||||||||||||
Worldwide Barcode, Networking & Security
During fiscal year 2017 net sales for this segment increased $27.6 million, or 1.2%, compared to fiscal year 2016, primarily resulting from sales growth in North America. Excluding the foreign exchange positive impact of $10.2 million and sales from the KBZ acquisition for the first quarter of fiscal years 2017 and 2016, adjusted net sales fiscal year 2017 decreased $47.3 million, or 2.0%, compared to fiscal 2016. The decrease in adjusted net sales is primarily due to lower sales volume in our international business and a large transaction with our KBZ business in the December 2015 quarter that did not recur, nor did we expect it to recur.
Worldwide Communications & Services
During fiscal year 2017, net sales for this segment increased $0.4 million compared to fiscal year 2016, primarily due to the Intelisys acquisition, partially offset by lower net sales in all geographies. Excluding the foreign exchange positive impact of $8.6 million and sales from the Intelisys acquisition, adjusted net sales for fiscal year 2017 decreased $37.6 million, or 3.2%, compared to fiscal year 2016. The decrease in adjusted net sales is due to overall lower sales volume in all geographies.
Gross Profit
The following tables summarize our gross profit for the fiscal years ended June 30, 2018, 2017 and 2016:
Fiscal year 2018 compared to fiscal year 2017
% of Sales June 30, | ||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2018 | 2017 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Worldwide Barcode, Networking & Security | $ | 238,318 | $ | 195,743 | $ | 42,575 | 21.8 | % | 9.1 | % | 8.2 | % | ||||||||
Worldwide Communications & Services | 197,807 | 187,853 | 9,954 | 5.3 | % | 16.3 | % | 15.9 | % | |||||||||||
Total gross profit | $ | 436,125 | $ | 383,596 | $ | 52,529 | 13.7 | % | 11.3 | % | 10.8 | % | ||||||||
Worldwide Barcode, Networking & Security
Gross profit dollars increased $42.6 million and gross profit margin increased to 9.1% for the Worldwide Barcode, Networking & Security segment for fiscal 2018 as compared to the prior year largely due to the addition of POS Portal results.
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Worldwide Communications & Services
Gross profit dollars increased $10.0 million and gross profit margin increased to 16.3% for the Worldwide Communications & Services segment for fiscal year 2018 as compared to the prior year, primarily due to the sales growth contributed by Intelisys.
Fiscal year 2017 compared to fiscal year 2016
% of Sales June 30, | ||||||||||||||||||||
2017 | 2016 | $ Change | % Change | 2017 | 2016 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Worldwide Barcode, Networking & Security | $ | 195,743 | $ | 196,831 | $ | (1,088 | ) | (0.6 | )% | 8.2 | % | 8.3 | % | |||||||
Worldwide Communications & Services | 187,853 | 158,609 | 29,244 | 18.4 | % | 15.9 | % | 13.5 | % | |||||||||||
Total gross profit | $ | 383,596 | $ | 355,440 | $ | 28,156 | 7.9 | % | 10.8 | % | 10.0 | % | ||||||||
Worldwide Barcode, Networking & Security
Gross profit dollars for the Worldwide Barcode, Networking & Security segment decreased for fiscal year 2017 as compared to fiscal year 2016. Gross profit margin decreased slightly to 8.2%, compared to 8.3% in fiscal year 2016, primarily due to supplier program changes from the prior year.
Worldwide Communications & Services
Gross profit dollars and gross profit margin for the Worldwide Communications & Services segment increased in fiscal year 2017 as compared to fiscal year 2016, primarily due to the inclusion of results from the Intelisys acquisition.
Operating expenses
The following tables summarize our operating expenses for the periods ended June 30, 2018, 2017 and 2016:
Fiscal year 2018 compared to fiscal year 2017
% of Sales June 30, | ||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2018 | 2017 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Selling, general and administrative expenses | $ | 297,475 | $ | 265,178 | $ | 32,297 | 12.2 | % | 7.7 | % | 7.4 | % | ||||||||
Depreciation expense | 13,311 | 9,444 | 3,867 | 40.9 | % | 0.3 | % | 0.3 | % | |||||||||||
Intangible amortization expense | 20,657 | 15,524 | 5,133 | 33.1 | % | 0.5 | % | 0.4 | % | |||||||||||
Change in fair value of contingent consideration | 37,043 | 5,211 | 31,832 | 610.9 | % | 1.0 | % | 0.1 | % | |||||||||||
Operating expenses | 368,486 | 295,357 | 73,129 | 24.8 | % | 9.6 | % | 8.3 | % | |||||||||||
Selling, general and administrative expenses ("SG&A") increased $32.3 million for the fiscal year ending June 30, 2018. The increase in SG&A expenses is primarily due to increased employee-related expenses, largely due to recent acquisitions. This was partially offset by a favorable Brazilian sales tax settlement recorded in the current fiscal year.
The increase in depreciation expense and intangible amortization expense for the fiscal year ending June 30, 2018 of $3.9 million and $5.1 million, respectively, is largely due to additional depreciation and amortization recognized on assets acquired in our POS Portal acquisition.
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We have elected to present changes in fair value of the contingent consideration owed to former shareholders of businesses we acquire separately from other SG&A expenses. In fiscal 2018, we have recorded a $37.0 million loss, largely driven by recurring amortization of the unrecognized fair value discount, better-than-expected results from both Network1 and Intelisys and changes in the estimate of the current year payment made to the former owners of Network1 in September 2017.
Fiscal year 2017 compared to fiscal year 2016
% of Sales June 30, | ||||||||||||||||||||
2017 | 2016 | $ Change | % Change | 2017 | 2016 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Selling, general and administrative expense | $ | 265,178 | $ | 240,115 | $ | 25,063 | 10.4 | % | 7.4 | % | 6.8 | % | ||||||||
Depreciation expense | 9,444 | 7,326 | 2,118 | 28.9 | % | 0.3 | % | 0.2 | % | |||||||||||
Intangible amortization expense | 15,524 | 9,828 | 5,696 | 58.0 | % | 0.4 | % | 0.3 | % | |||||||||||
Change in fair value of contingent consideration | 5,211 | 1,294 | 3,917 | 302.7 | % | 0.1 | % | — | % | |||||||||||
Operating expenses | $ | 295,357 | $ | 258,563 | $ | 36,794 | 14.2 | % | 8.3 | % | 7.3 | % | ||||||||
SG&A increased $25.1 million for the fiscal year ending June 30, 2017. The increase in SG&A expenses is primarily due to increased employee-related expenses from recent acquisitions and bad debt expense.
The increase of depreciation expense and intangible amortization expense for the fiscal year ending June 30, 2017 of $2.1 million and $5.7 million, respectively, is largely due to assets acquired through our Intelisys acquisition and additional depreciation on our ERP system.
During fiscal year 2017, with respect to the change in fair value of contingent consideration we recorded a $5.2 million expense, largely driven by recurring amortization of the unrecognized fair value discount and improved projections for Intelisys, partially offset by less-than-expected actual results and reduced projected results for Network1.
Operating Income
The following tables summarize our operating income for the periods ended June 30, 2018, 2017 and 2016:
Fiscal year 2018 compared to fiscal year 2017
% of Sales June 30, | ||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2018 | 2017 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Worldwide Barcode, Networking & Security | $ | 56,911 | $ | 49,727 | $ | 7,184 | 14.4 | % | 2.2 | % | 2.1 | % | ||||||||
Worldwide Communications & Services | 10,900 | 39,768 | (28,868 | ) | (72.6 | )% | 0.9 | % | 3.4 | % | ||||||||||
Corporate | (172 | ) | (1,256 | ) | 1,084 | (86.3 | )% | — | % | — | % | |||||||||
Total operating income | $ | 67,639 | $ | 88,239 | $ | (20,600 | ) | (23.3 | )% | 1.8 | % | 2.5 | % | |||||||
Worldwide Barcode, Networking & Security
For the Worldwide Barcode, Networking & Security segment, operating income increased $7.2 million for the fiscal year ended June 30, 2018 as compared to the prior year. Operating income as a percentage of sales increased slightly to 2.2%, compared to 2.1% in the prior year. The increase in operating income and operating margin is primarily attributable to results contributed by POS Portal, including higher gross profit margins.
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Worldwide Communications & Services
For the Worldwide Communications & Services segment, operating income and operating margin decreased for the fiscal year ended June 30, 2018 as compared to the prior year primarily due to the expense recognized from the change in fair value of contingent consideration largely due to better-than-expected results and changes in estimate of the current year payment to the former shareholders of Network1.
Corporate
Corporate incurred $0.2 million and $1.3 million in acquisition costs for the years ended June 30, 2018 and 2017, respectively.
Fiscal year 2017 compared to fiscal year 2016
% of Sales June 30, | ||||||||||||||||||||
2017 | 2016 | $ Change | % Change | 2017 | 2016 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Worldwide Barcode, Networking & Security | $ | 49,727 | $ | 52,227 | $ | (2,500 | ) | (4.8 | )% | 2.1 | % | 2.2 | % | |||||||
Worldwide Communications & Services | 39,768 | 45,513 | (5,745 | ) | (12.6 | )% | 3.4 | % | 3.9 | % | ||||||||||
Corporate | (1,256 | ) | (863 | ) | (393 | ) | 45.5 | % | — | % | — | % | ||||||||
Total operating income | $ | 88,239 | $ | 96,877 | $ | (8,638 | ) | (8.9 | )% | 2.5 | % | 2.7 | % | |||||||
Worldwide Barcode, Networking & Security
For the Worldwide Barcode, Networking & Security segment, operating income decreased $2.5 million for the fiscal year ended June 30, 2017 as compared to the prior year. Operating income as a percentage of sales remained fairly consistent year-to-year. The decrease in operating income is largely due to lower gross profit margins and increased employee-related costs, partially offset in improvements in bad debt expense recognized.
Worldwide Communications & Services
For the Worldwide Communications & Services segment, operating income decreased $5.7 million for the fiscal year ended June 30, 2017 as compared to the prior year. Operating income as a percentage of sales decreased to 3.4% from 3.9%. The decrease in operating income and margin is largely due to increased amortization expense on intangible assets acquired through our Intelisys acquisition, a higher loss for change in fair value of contingent consideration and higher bad debt expense.
Corporate
Corporate incurred $1.3 million and $0.9 million in acquisition costs for the year ended June 30, 2017 and 2016, respectively.
Total Other (Income) Expense
The following tables summarize our total other (income) expense for the fiscal years ended June 30, 2018, 2017 and 2016:
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Fiscal year 2018 compared to fiscal year 2017
% of Sales June 30, | ||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2018 | 2017 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Interest expense | $ | 9,149 | $ | 3,215 | $ | 5,934 | 184.6 | % | 0.2 | % | 0.1 | % | ||||||||
Interest income | (3,713 | ) | (5,329 | ) | 1,616 | (30.3 | )% | (0.1 | )% | (0.1 | )% | |||||||||
Net foreign exchange losses (gains) | 2,096 | 1,919 | 177 | 9.2 | % | 0.1 | % | 0.1 | % | |||||||||||
Other, net | (818 | ) | (13,061 | ) | 12,243 | (93.7 | )% | — | % | (0.4 | )% | |||||||||
Total other (income) expense | $ | 6,714 | $ | (13,256 | ) | $ | 19,970 | (150.6 | )% | 0.2 | % | (0.4 | )% | |||||||
Interest expense reflects interest incurred on borrowings, non-utilization fees from our revolving credit facility and amortization of debt issuance costs. Interest expense increased in fiscal 2018 as compared to 2017 principally from additional borrowings on our multi-currency revolving credit facility.
Interest income for the year ended June 30, 2018 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents, principally in Brazil. In fiscal 2018 and 2017 we recognized accrued interest income related to two separate legal tax settlements in Brazil of $0.7 million and $1.4 million, respectively.
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 gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, the British pound versus the euro, the Canadian dollar versus the U.S. dollar and other currencies versus the U.S. dollar. While we utilize foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure, our foreign exchange policy prohibits the use of derivative financial instruments for speculative transactions. We partially offset foreign currency exposure with the use of foreign exchange forward contracts to hedge against these exposures. The costs associated with foreign exchange forward contracts are included in the net foreign exchange loss.
Other income for the fiscal year ended 2017 included $12.7 million from the recognition of a legal settlement in the US, net of attorney fees that did not recur in fiscal 2018.
Fiscal year 2017 compared to fiscal year 2016
% of Sales June 30, | ||||||||||||||||||||
2017 | 2016 | $ Change | % Change | 2017 | 2016 | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Interest expense | $ | 3,215 | $ | 2,124 | $ | 1,091 | 51.4 | % | 0.1 | % | 0.1 | % | ||||||||
Interest income | (5,329 | ) | (3,448 | ) | (1,881 | ) | 54.6 | % | (0.1 | )% | (0.1 | )% | ||||||||
Net foreign exchange (gains) losses | 1,919 | 2,571 | (652 | ) | (25.4 | )% | 0.1 | % | 0.1 | % | ||||||||||
Other, net | (13,061 | ) | (380 | ) | (12,681 | ) | 3,337.1 | % | (0.4 | )% | — | % | ||||||||
Total other (income) expense | $ | (13,256 | ) | $ | 867 | $ | (14,123 | ) | (1,629.0 | )% | (0.4 | )% | — | % | ||||||
Interest expense increased in fiscal 2017 over 2016 principally from additional borrowings on our multi-currency revolving credit facility.
Interest income for the year ended June 30, 2017 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents, principally in Brazil. The increase in interest income is primarily due to approximately $1.4 million of interest accrued on a tax settlement in Brazil.
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We experienced foreign exchange losses as foreign currency exchange rates weakened against the U.S. dollar during fiscal 2017. Losses were partially offset by the use of foreign exchange forward contracts to hedge against currency exposures.
Other income for the fiscal year ended 2017 increased $12.7 million primarily due to the recognition of a legal settlement in the US, net of attorney fees compared to the prior year.
Provision for Income Taxes
Income tax expense was $27.8 million, $32.2 million and $32.4 million for the fiscal years ended June 30, 2018, 2017 and 2016 respectively, reflecting an effective tax rate of 45.6%, 31.8%, and 33.7%, respectively. The increase in the effective tax rate for fiscal year 2018 as compared to fiscal year 2017 is primarily due to discrete tax items recognized associated with U.S. tax reform, including a one-time transition tax expense of $9.6 million and a tax benefit of $1.6 million to remeasure deferred taxes. The decrease in the effective tax rate for fiscal year 2017 as compared to fiscal year 2016 is primarily due a favorable tax recovery recognized by the Brazilian Supreme Court during the quarter ending June 30, 2017.
We expect the fiscal year 2019 effective tax rate to be approximately 26% to 27%. See Note 12 - Income Taxes in the Notes to Consolidated Financial Statements for further discussion including an effective tax rate reconciliation.
Quarterly Results
The following tables set forth certain unaudited quarterly financial data. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments.
Three Months Ended | |||||||||||||||||||||||||||||||
Fiscal 2018 | Fiscal 2017 | ||||||||||||||||||||||||||||||
Jun. 30 2018 | Mar. 31 2018 | Dec. 31 2017 | Sept. 30 2017 | Jun. 30 2017 | Mar. 31 2017 | Dec. 31 2016 | Sept. 30 2016 | ||||||||||||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||||||||||||||
Net sales | $ | 993,852 | $ | 895,637 | $ | 1,032,212 | $ | 924,559 | $ | 917,291 | $ | 813,538 | $ | 904,792 | $ | 932,566 | |||||||||||||||
Cost of goods sold | 880,503 | 791,749 | 919,241 | 818,642 | 816,435 | 720,867 | 806,258 | 841,032 | |||||||||||||||||||||||
Gross profit | $ | 113,349 | $ | 103,888 | $ | 112,971 | $ | 105,917 | $ | 100,856 | $ | 92,671 | $ | 98,534 | $ | 91,534 | |||||||||||||||
Change in Fair Value of Contingent Consideration | $ | 8,448 | $ | 4,801 | $ | 6,913 | $ | 16,881 | $ | 1,290 | $ | 1,960 | $ | 1,791 | $ | 169 | |||||||||||||||
Net income | $ | 10,388 | $ | 10,649 | $ | 7,969 | $ | 4,147 | $ | 18,970 | $ | 12,424 | $ | 23,036 | $ | 14,816 | |||||||||||||||
Net income per common share, basic | $ | 0.41 | $ | 0.42 | $ | 0.31 | $ | 0.16 | $ | 0.75 | $ | 0.49 | $ | 0.92 | $ | 0.58 | |||||||||||||||
Weighted-average shares outstanding, basic | 25,577 | 25,572 | 25,506 | 25,434 | 25,341 | 25,262 | 25,146 | 25,523 | |||||||||||||||||||||||
Net income per common share, diluted | $ | 0.40 | $ | 0.42 | $ | 0.31 | $ | 0.16 | $ | 0.74 | $ | 0.49 | $ | 0.91 | $ | 0.58 | |||||||||||||||
Weighted-average shares outstanding, diluted | 25,675 | 25,606 | 25,648 | 25,579 | 25,512 | 25,400 | 25,285 | 25,762 | |||||||||||||||||||||||
Non-GAAP Financial Information
Evaluating Financial Condition and Operating Performance
In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating
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income, non-GAAP pre-tax income, non-GAAP net income, non-GAAP EPS, return on invested capital ("ROIC") and "constant currency." Constant currency is a measure that excludes the translation exchange impact from changes in foreign currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.
These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP.
Net Sales in Constant Currency, Excluding Acquisitions
We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the average foreign exchange rates between reporting periods. Constant currency is calculated by translating current period results from currencies other than the U.S. dollar into U.S. dollars using the comparable average foreign exchange rates from the prior year period. We also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date in order to show net sales results on an organic basis. This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and the impact of acquisitions. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding acquisition:
Net Sales by Segment: | ||||||||||||||
Fiscal Year Ended June 30, | ||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||
Worldwide Barcode, Networking & Security: | (in thousands) | |||||||||||||
Net sales, as reported | $ | 2,628,988 | $ | 2,389,256 | $ | 239,732 | 10.0 | % | ||||||
Foreign exchange impact (a) | (32,561 | ) | — | |||||||||||
Net sales, constant currency | 2,596,427 | 2,389,256 | 207,171 | 8.7 | % | |||||||||
Less: Acquisitions | (87,461 | ) | — | |||||||||||
Net sales, constant currency excluding acquisitions | $ | 2,508,966 | $ | 2,389,256 | $ | 119,710 | 5.0 | % | ||||||
Worldwide Communications & Services: | ||||||||||||||
Net sales, as reported | $ | 1,217,272 | $ | 1,178,930 | $ | 38,342 | 3.3 | % | ||||||
Foreign exchange impact (a) | (5,055 | ) | — | |||||||||||
Net sales, constant currency | 1,212,217 | 1,178,930 | 33,287 | 2.8 | % | |||||||||
Less: Acquisitions | (9,750 | ) | (2,863 | ) | ||||||||||
Net sales, constant currency excluding acquisitions | $ | 1,202,467 | $ | 1,176,067 | $ | 26,400 | 2.2 | % | ||||||
Consolidated: | ||||||||||||||
Net sales, as reported | $ | 3,846,260 | $ | 3,568,186 | $ | 278,074 | 7.8 | % | ||||||
Foreign exchange impact (a) | (37,616 | ) | — | |||||||||||
Net sales, constant currency | 3,808,644 | 3,568,186 | 240,458 | 6.7 | % | |||||||||
Less: Acquisitions | (97,211 | ) | (2,863 | ) | ||||||||||
Net sales, constant currency excluding acquisitions | $ | 3,711,433 | $ | 3,565,323 | $ | 146,110 | 4.1 | % | ||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2018 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2017. | ||||||||||||||
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Fiscal Year Ended June 30, | ||||||||||||||
Worldwide Barcode, Networking & Security: | 2017 | 2016 | $ Change | % Change | ||||||||||
(in thousands) | ||||||||||||||
Net sales, as reported | $ | 2,389,256 | $ | 2,361,670 | $ | 27,586 | 1.2 | % | ||||||
Foreign exchange impact (b) | (10,229 | ) | — | |||||||||||
Net sales, constant currency | 2,379,027 | 2,361,670 | 17,357 | 0.7 | % | |||||||||
Less: Acquisitions | (99,332 | ) | (34,628 | ) | ||||||||||
Net sales, constant currency excluding acquisitions | $ | 2,279,695 | $ | 2,327,042 | $ | (47,347 | ) | (2.0 | )% | |||||
Worldwide Communications & Services: | ||||||||||||||
Net sales, as reported | $ | 1,178,930 | $ | 1,178,556 | $ | 374 | — | % | ||||||
Foreign exchange impact (b) | (8,599 | ) | — | |||||||||||
Net sales, constant currency | 1,170,331 | 1,178,556 | (8,225 | ) | (0.7 | )% | ||||||||
Less: Acquisitions | (29,421 | ) | — | (29,421 | ) | |||||||||
Net sales, constant currency excluding acquisitions | $ | 1,140,910 | $ | 1,178,556 | $ | (37,646 | ) | (3.2 | )% | |||||
Consolidated: | ||||||||||||||
Net sales, as reported | $ | 3,568,186 | $ | 3,540,226 | $ | 27,960 | 0.8 | % | ||||||
Foreign exchange impact (b) | (18,828 | ) | — | |||||||||||
Net sales, constant currency | 3,549,358 | 3,540,226 | 9,132 | 0.3 | % | |||||||||
Less: Acquisitions | (128,753 | ) | (34,628 | ) | ||||||||||
Net sales, constant currency excluding acquisitions | $ | 3,420,605 | $ | 3,505,598 | $ | (84,993 | ) | (2.4 | )% | |||||
(b) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2017 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2016. | ||||||||||||||
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Net Sales by Geography: | ||||||||||||||
Fiscal Year Ended June 30, | ||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||
United States and Canada: | (in thousands) | |||||||||||||
Net sales, as reported | $ | 2,847,197 | $ | 2,685,820 | $ | 161,377 | 6.0 | % | ||||||
Less: Acquisitions | (97,211 | ) | (2,863 | ) | ||||||||||
Net sales, excluding acquisitions | $ | 2,749,986 | $ | 2,682,957 | $ | 67,029 | 2.5 | % | ||||||
International: | ||||||||||||||
Net sales, as reported | $ | 999,063 | $ | 882,366 | $ | 116,697 | 13.2 | % | ||||||
Foreign exchange impact (a) | (37,616 | ) | — | |||||||||||
Net sales, constant currency | 961,447 | 882,366 | 79,081 | 9.0 | % | |||||||||
Less: Acquisitions | — | — | ||||||||||||
Net sales, constant currency excluding acquisitions | $ | 961,447 | $ | 882,366 | $ | 79,081 | 9.0 | % | ||||||
Consolidated: | ||||||||||||||
Net sales, as reported | $ | 3,846,260 | $ | 3,568,186 | $ | 278,074 | 7.8 | % | ||||||
Foreign exchange impact (a) | (37,616 | ) | — | |||||||||||
Net sales, constant currency | 3,808,644 | 3,568,186 | 240,458 | 6.7 | % | |||||||||
Less: Acquisitions | (97,211 | ) | (2,863 | ) | ||||||||||
Net sales, constant currency excluding acquisitions | $ | 3,711,433 | $ | 3,565,323 | $ | 146,110 | 4.1 | % | ||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2018 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2017. | ||||||||||||||
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Fiscal Year Ended June 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
United States: | (in thousands) | |||||||||||||
Net sales, as reported | $ | 2,685,820 | $ | 2,620,184 | $ | 65,636 | 2.5 | % | ||||||
Less: Acquisitions | (128,753 | ) | (34,628 | ) | ||||||||||
Net sales, constant currency excluding acquisitions | $ | 2,557,067 | $ | 2,585,556 | $ | (28,489 | ) | (1.1 | )% | |||||
International: | ||||||||||||||
Net sales, as reported | $ | 882,366 | $ | 920,042 | $ | (37,676 | ) | (4.1 | )% | |||||
Foreign exchange impact (a) | (18,828 | ) | ||||||||||||
Net sales, constant currency | 863,538 | 920,042 | (56,504 | ) | (6.1</ | |||||||||