TMCnet News
SCANSOURCE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview ScanSource, Inc. is a leading international wholesale distributor of specialty technology products. ScanSource, Inc. and its subsidiaries (the "Company") provide value-added distribution services for approximately 300 technology manufacturers and sell to approximately 28,000 resellers in the following specialty technology markets: POS and Barcode, Security and Communications. The Company operates in the United States, Canada, Latin America and Europe. The Company distributes to the United States and Canada from its Southaven, Mississippi distribution center; to Latin America principally from distribution centers located in Florida, Mexico and Brazil; and to Europe principally from its distribution center in Belgium, France, Germany and the United Kingdom. The Company distributes products for many of its key vendors in all of its geographic markets; however certain vendors only allow distribution to specific geographies. The Company's key vendors in barcode technologies include Bematech, Cisco, Datalogic, Datamax-O'Neil, Elo, Epson, Honeywell, Intermec by Honeywell, Motorola, NCR, Toshiba Global Commerce Solutions and Zebra Technologies. The Company's key vendors for security technologies include Arecont, Axis, Bosch, Cisco, Datacard, Exacq Technologies, Fargo, HID, March Networks, Panasonic, Ruckus Wireless, Samsung, Sony and Zebra Card. The Company's key vendors in communications technologies include Aruba, Avaya, AudioCodes, Cisco, Dialogic, Extreme Networks, Meru Networks, Plantronics, Polycom, Shoretel and Sonus. On August 14, 2014, the Company, entered into a binding letter of intent, pursuant to which the Company agreed to purchase all of the shares of Network1from its shareholders. The Company expects to close the Network1 acquisition on or before December 31, 2014. On September 19, 2014 the Company acquired 100% of the shares of Imago Group plc, a European value-added distributor of video and voice communications equipment and services. Subsequent to the acquisition, the Company formally changed the name of Imago Group plc to ScanSource Video Communications Europe Ltd. Imago ScanSource is an addition to the Company's Worldwide Communications and Services operating segment. This acquisition supports the Company's strategy to be the leading value-added distributor of video, voice, and data solutions for resellers in Europe. During fiscal year 2014, the Barcode & Security distribution segment added 3D printing solutions as a product offering targeting the manufacturing, healthcare, aerospace, and automotive markets. 3D printing solutions replace and complement traditional methods and reduce the time and cost of designing new products by printing real parts directly from digital input. In the first quarter of fiscal 2015, Zebra Technologies and Motorola Solutions represented key vendors in our barcode technologies business. On October 27, 2014, Zebra Technologies purchased Motorola Solutions' enterprise business. The Company operates under two segments: Worldwide Barcode & Security and Worldwide Communications & Services. The management structure for our reporting segments allows each worldwide segment to have its own president and globally leverages the Company's leadership in specific technology markets. Our objective is to continue to grow profitable sales in the technologies we distribute. We continue to evaluate strategic acquisitions to enhance our technological and geographic portfolios, as well as introduce new product lines to our line card. In doing so, we face numerous challenges that require attention and resources. Certain business units and geographies continue to experience increased competition for the products we distribute. This competition may come in the form of pricing, credit terms, service levels and product availability. As this competition could affect both our market share and pricing of our products, we may change our strategy in order to effectively compete in the marketplace. The Company is in the process of designing and developing a new Enterprise Resource Planning ("ERP") system. In December 2013, the Company retained SAP for software platform and implementation consulting services on the new ERP system. 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"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating income, non-GAAP net income, non-GAAP EPS, return on invested capital ("ROIC") and "constant currency," a measure that excludes 20-------------------------------------------------------------------------------- Table of Contents 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. Non-GAAP operating income, non-GAAP net income and non-GAAP EPS To evaluate current period performance on a clearer and more consistent basis with prior periods, the Company discloses non-GAAP operating income, non-GAAP net income and non-GAAP diluted earnings per share. The Company completed an acquisition on September 19, 2014 and has a planned acquisition that it expects to close on or before December 31, 2014. Both of these acquisitions are structured with earnout payments. Given the size of the acquisitions and potential variability of fair value adjustments on operating results, non-GAAP results exclude amortization of intangible assets related to acquisitions and change in fair value of contingent consideration. Results for the quarter ended September 30, 2014 also exclude acquisition costs. Non-GAAP operating income, non-GAAP net income and non-GAAP EPS are useful in better assessing and understanding the Company's operating performance, especially when comparing results with previous periods or forecasting performance for future periods. Below we are providing a non-GAAP reconciliation of operating income, net income and earnings per share adjusted for the costs and charges mentioned above: Quarter ended September 30, 2014 Quarter ended September 30, 2013 Pre-Tax Net Income Pre-Tax Net Income Operating Income Income (Loss) Diluted EPS Operating Income Income (Loss) Diluted EPS (in thousands) GAAP Measures $ 28,977 $ 29,236 $ 19,208 $ 0.67 $ 28,221 $ 28,439 $ 19,437 $ 0.69 Adjustments: Amortization of intangible assets 992 992 660 0.02 924 924 605 0.02 Change in fair value of contingent consideration 513 513 341 0.01 738 738 487 0.02 Acquisition costs 1,350 1,350 1,350 0.05 - - - - Non-GAAP measures $ 31,832 $ 32,091 $ 21,559 $ 0.75 $ 29,883 $ 30,101 $ 20,529 $ 0.73 Return on Invested Capital Management uses ROIC as a performance measurement to assess efficiency at allocating capital under the Company's control to generate returns. Management believes this metric balances the Company's operating results with asset and liability management, is not impacted by capitalization decisions and is considered to have a strong correlation with shareholder value creation. In addition, it is easily computed, communicated and understood. ROIC also provides management a measure of the Company's profitability on a basis more comparable to historical or future periods. ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. Adjusted EBITDA excludes acquisition costs for the quarter ended September 30, 2014 and also excludes changes in fair value of contingent consideration. We believe the calculation of ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year. In addition, the Company's Board of Directors uses ROIC in evaluating business and management performance. Certain management incentive compensation targets are set and measured relative to ROIC. 21-------------------------------------------------------------------------------- Table of Contents We calculate ROIC as earnings before interest expense, income taxes, depreciation and amortization, plus change in fair value of contingent consideration and other non-GAAP adjustments ("adjusted EBITDA") divided by invested capital. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. The following table summarizes annualized return on invested capital ratio for the quarters ended September 30, 2014 and 2013, respectively: Quarter ended September 30, 2014 2013 Return on invested capital ratio, annualized(a) 16.2 % 17.4 % (a) The annualized EBITDA amount is divided by days in the quarter times 365 days per year (366 during leap years). There were 92 days in the current and prior year quarter, respectively. The components of this calculation and reconciliation to our financial statements are shown on the following schedule: Quarter ended September 30, 2014 2013 (in thousands) Reconciliation of net income to EBITDA: Net income (GAAP) $ 19,208 $ 19,437 Plus: income taxes 10,028 9,002 Plus: interest expense 190 247 Plus: depreciation and amortization 1,897 1,869 EBITDA (non-GAAP) 31,323 30,555 Plus: Change in fair value of contingent consideration 513 738 Plus: Acquisition costs $ 1,350 $ - Adjusted EBITDA (numerator for ROIC) (non-GAAP) (a) $ 33,186 $ 31,293 Quarter ended September 30, 2014 2013 (in thousands) Invested capital calculations: Equity - beginning of the quarter $ 802,643 $ 695,956 Equity - end of the quarter 810,265 723,748 Add: Change in fair value of contingent consideration, net of tax 341 487 Add: Acquisition costs, net of tax (b) 1,350 - Average equity 807,300 710,096 Average funded debt (c) 6,205 5,429Invested capital (denominator for ROIC) (non-GAAP) $ 813,505 $ 715,525 (a) Adjusted EBITDA removes the impact of change in fair value of contingent consideration for the quarters ended September 30, 2014 and 2013 and acquisition costs for the quarter ended September 30, 2014. Adjusted EBITDA and the resulting change in ROIC is shown retrospectively. (b) Acquisitions costs are nondeductible for tax purposes. (c) Average funded debt is calculated as the average daily amounts outstanding on our short-term and long-term interest-bearing debt. 22-------------------------------------------------------------------------------- Table of Contents Results of Operations Currency We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the weighted average foreign exchange rates between reporting periods. Constant currency is calculated by translating current period results from currencies other than the U.S. dollar using the comparable weighted average foreign exchange rates from the prior year period. This information is provided to view financial results without the impact of fluctuations in foreign currency rates, thereby enhancing comparability between reporting periods. Net Sales The Company has two reportable segments, which are based on technologies. The following tables summarize the Company's net sales results by technology segment and by geographic location for the quarters ended September 30, 2014 and 2013, respectively: Quarter ended September 30, Net Sales by Segment: 2014 2013 $ Change % Change (in thousands) Worldwide Barcode & Security $ 500,960 $ 450,644 $ 50,316 11.2 % Worldwide Communications & Services 290,760 281,260 9,500 3.4 % Total net sales $ 791,720 $ 731,904 $ 59,816 8.2 % Worldwide Barcode & Security The Barcode & Security distribution segment consists of sales to technology resellers in our ScanSource POS & Barcode business units in North America, Europe, Brazil and Latin America and our ScanSource Security business unit in North America. Sales for the Barcode & Security distribution segment increased $50.3 million, compared to the prior year quarter. On a constant currency basis, net sales for the Barcode & Security distribution segment increased $50.2 million, which represents a 11.1% increase compared to the prior year quarter. The increase in Barcode & Security sales for the current quarter as compared to the prior year quarter is primarily due to an increase in big deals and run rate business in the POS & Barcode business units. Our Security business also had growth driven by an increase in sales of its wireless networking products. Worldwide Communications & Services The Communications & Services distribution segment consists of sales to technology resellers in our ScanSource Communications business units in North America and Europe, ScanSource Catalyst in North America, and ScanSource Services Group. Sales for the Communications & Services segment increased $9.5 million compared to the prior year quarter. On a constant currency basis, net sales for the Communications & Services distribution segment increased $9.6 million, which represents a 3.4% increase compared to the prior year quarter. The increase in Communications & Services sales for the current quarter compared to the prior year quarter is primarily due to growth in all North America Communications businesses, which included a strong sales quarter for the resale of vendor service contracts. Sales for the newly-acquired Imago ScanSource business contributed $4.7 million for the quarter. Quarter ended September 30, Net Sales by Geography: 2014 2013 $ Change % Change (in thousands) North American (U.S. and Canada) $ 595,791 $ 558,340 $ 37,451 6.7 % International 195,929 173,564 22,365 12.9 % Total net sales $ 791,720 $ 731,904 $ 59,816 8.2 % 23-------------------------------------------------------------------------------- Table of Contents Gross Profit The following table summarizes the Company's gross profit for the quarters ended September 30, 2014 and 2013, respectively: Quarter ended September 30, % of Net Sales September 30, 2014 2013 $ Change % Change 2014 2013 (in thousands) Worldwide Barcode & Security $ 43,021 $ 40,731 $ 2,290 5.6 % 8.6 % 9.0 % Worldwide Communications & Services 34,624 35,768 (1,144 ) (3.2 )% 11.9 % 12.7 % Gross profit $ 77,645 $ 76,499 $ 1,146 1.5 % 9.8 % 10.5 % Worldwide Barcode & Security Gross profit dollars increased for the Barcode & Security distribution segment, however, as a percentage of net sales, gross profit margin decreased for the quarter ended September 30, 2014 compared to the prior year quarter.The decrease in gross margin is primarily due to a less favorable sales mix, including a higher volume of big deals at lower gross margins. Worldwide Communications & Services In the Communications & Services distribution segment, gross profit dollars and gross profit margin decreased for the quarter ended September 30, 2014, compared to the prior year quarter. The decreases in gross profit margin are primarily due to less favorable sales mix in the current quarter, combined with prior year benefits from timing of vendor program recognition that did not recur in the current quarter. Operating Expenses The following table summarizes our operating expenses for the quarters ended September 30, 2014 and 2013, respectively: Quarter ended September 30, % of Net Sales September 30, 2014 2013 $ Change % Change 2014 2013 (in thousands) Selling, general and administrative expenses $ 48,155 $ 47,540 $ 615 1.3 % 6.1 % 6.5 % Change in fair value of contingent consideration 513 738 (225 ) (30.5 )% 0.1 % 0.1 % Operating expenses $ 48,668 $ 48,278 $ 390 0.8 % 6.1 % 6.6 % Selling, general and administrative expenses ("SG&A") increased $0.6 million for the quarter ended September 30, 2014, compared to the prior period primarily due to acquisitions costs incurred during the period and increased employee-related expenses, partially offset by a reduction in bad debt expenses. The Company had a credit in bad debt expense this quarter due to improved collections and accounts receivable agings. We present changes in fair value of the contingent consideration owed to the former shareholders of CDC and Imago ScanSource as a separate line item in operating expenses. In the current quarter, we have recorded fair value adjustment losses of $0.5 million. These losses are primarily the result of the recurring amortization of the unrecognized fair value discount and changes in actual results. Operating Income The following table summarizes our operating income for the quarters ended September 30, 2014 and 2013, respectively: 24-------------------------------------------------------------------------------- Table of Contents Quarter ended September 30, % of Net Sales September 30, 2014 2013 $ Change % Change 2014 2013 (in thousands) Worldwide Barcode & Security $ 12,541 $ 11,959 $ 582 4.9 % 2.5 % 2.7 % Worldwide Communications & Services 17,786 16,262 1,524 9.4 % 6.1 % 5.8 % Corporate (1,350 ) - (1,350 ) nm* nm* - % Operating income $ 28,977 $ 28,221 $ 756 2.7 % 3.7 % 3.9 % *nm - percentages are not meaningful Worldwide Barcode & Security For the Barcode & Security distribution segment, operating income increased, however as a percentage of sales, operating margin for the quarter ended September 30, 2014 compared to the prior year quarter, primarily from a decrease in gross profit margin. Worldwide Communications & Services For the Communications & Services distribution segment, operating income and operating margin increased for the quarter ended September 30, 2014 primarily due a credit for bad debt expense, as mentioned above, partially offset by a decrease in gross profit margin. Corporate Corporate incurred a $1.4 million expense relating to acquisition costs incurred during the quarter ended September 30, 2014 primarily related to the acquisition of Imago. Total Other Expense (Income) The following table summarizes our total other (income) expense for the quarters ended September 30, 2014 and 2013, respectively: Quarter ended September 30, % of Net Sales September 30, 2014 2013 $ Change % Change 2014 2013 (in thousands) Interest expense $ 190 $ 247 $ (57 ) (23.1 )% 0.0 % 0.0 % Interest income (835 ) (574 ) (261 ) 45.5 % (0.1 )% (0.1 )% Net foreign exchange (gains) losses 448 159 289 181.8 % 0.1 % 0.0 % Other, net (62 ) (50 ) (12 ) 24.0 % (0.0 )% (0.0 )% Total other (income) expense, net $ (259 ) $ (218 ) $ (41 ) 18.8 % (0.0 )% (0.1 )% Interest expense reflects interest incurred on long-term debt, non-utilization fees from the Company's revolving credit facility and the amortization of debt issuance costs in the quarter ended September 30, 2014. Interest income for the quarter ended September 30, 2014 was $0.8 million, and includes interest income generated on longer-term interest bearing receivables and interest earned on cash and cash equivalents. Net foreign exchange 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 from fluctuations in the value of the British pound versus the euro, the British pound versus the U.S. dollar, the U.S. dollar versus the euro, the U.S. dollar versus the Brazilian real, 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. During the quarter, the Company's net foreign exchange losses increased over the prior year primarily due to settlement of a European vendor receivable exposure that was less than anticipated. 25-------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes For the quarter ended September 30, 2014, income tax expense was $10.0 million reflecting an effective tax rate of 34.3%. The effective tax rate for the quarter ended September 30, 2013 was 31.7%. The increase in the effective tax rate from the prior year quarter is primarily due to the recognition of a discrete item in the quarter ended September 30, 2013 and the impact of non-deductible acquisition costs in the current quarter. Our estimated annual effective tax rate range for the full fiscal year is 34% to 34.5%. 26-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our primary sources of liquidity are cash flows from operations and borrowings under the $300 million revolving credit facility. As a distribution company, our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit. In general, as our sales volumes increase, our net investment in working capital typically increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities. Our cash and cash equivalents balance totaled $139.9 million at September 30, 2014, compared to $194.9 million at June 30, 2014, including $32.2 million and $39.7 million held outside of the United States at September 30, 2014 and June 30, 2014, respectively. The decrease in cash and cash equivalents is primarily from cash used in the purchase of Imago ScanSource and an earnout payment made to former shareholders of CDC. Checks released but not yet cleared in the amounts of $66.1 million and $84.1 million are included in accounts payable as of September 30, 2014 and June 30, 2014, respectively. We conduct business in many locations throughout the world where we generate and use cash. The Company provides for U.S. income taxes for the earnings of its Canadian subsidiary. Earnings from all other geographies are considered retained indefinitely for reinvestment. If these funds were needed in the operations of the United States, we would be required to record and pay significant income taxes upon repatriation of these funds. Our net investment in working capital has decreased to $683.3 million at September 30, 2014 from $715.9 million at June 30, 2014 and increased compared to the September 30, 2013 balance of $637.4 million. Net working capital has decreased $32.5 million since June 30, 2014, principally from a decrease in cash used to acquire Imago ScanSource and make an earnout payment to former shareholders of CDC, partially offset by higher accounts receivable. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels, payments to vendors, as well as cash generated or used by other financing and investing activities. Net cash provided by operating activities was $0.7 million for the three months ended September 30, 2014, compared to $45.7 million provided by operating activities in the prior year period. The decrease in cash provided by operating activities for the three months ended September 30, 2014 is largely attributable to higher sales growth, which led to increases in accounts receivable. The number of days sales outstanding ("DSO") was 55 days at September 30, 2014, excluding the impact of Imago ScanSource, unchanged from DSO at June 30, 2014 and September 30, 2013. Inventory turned 5.7 times during the first quarter of fiscal year 2015 versus 5.6 and 6.3 times in the sequential and prior year quarters, respectively. Cash used in investing activities for the three months ended September 30, 2014 was $42.8 million, compared to $0.2 million used in the prior year period. The increase in cash used in investing activities is due to the acquisition of the Imago ScanSource business and capital expenditures on the Company's new Enterprise Resource Planning ("ERP") system. In December 2013, we retained SAP for the software platform and implementation consulting services for a new ERP system. The Company is currently working on the development and implementation of the new ERP platform. Management expects capital spending for fiscal 2015 to range from $17 million to $22 million, primarily related to the ERP system. For the three months ended September 30, 2014, cash used in financing activities totaled to $9.9 million compared to $0.6 million in the prior year period. The increase in cash provided by financing activities was primarily from increases in the contingent consideration payment balance to former shareholders of CDC, repayments on short-term borrowings of Imago ScanSource, and fewer stock options exercised than in the prior year. In August 2014, our Board of Directors authorized a three-year $120 million share repurchase program. No purchases were made during the three months ended September 30, 2014. The Company has a $300 million multi-currency senior secured revolving credit facility that was scheduled to mature on October 11, 2016. On November 6, 2013, the Company entered into an amendment of this credit facility ("Amended Credit Agreement") with JP Morgan Chase Bank, N.A, as administrative agent, and a syndicate of banks to extend its maturity to November 6, 2018. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit and has a $150 million accordion feature that allows the Company to increase the availability to $450 million, subject to obtaining additional credit commitments for the lenders participating in the increase. 27-------------------------------------------------------------------------------- Table of Contents At our option, loans denominated in U.S. dollars under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon the Company's ratio of total debt (excluding accounts payable and accrued liabilities) to EBITDA, measured as of the end of the most recent year or quarter, as applicable, for which financial statements have been delivered to the Lenders (the "Leverage Ratio"). This spread ranges from 1.00% to 2.25% for LIBOR-based loans and 0.00% to 1.25% for alternate base rate loans. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company as well as certain foreign subsidiaries determined to be material under the Amended Credit Agreement and a pledge of up to 65% of capital stock or other equity interest in each Guarantor (as defined in the Amended Credit Agreement). We were in compliance with all covenants under the credit facility as of September 30, 2014. There were no outstanding borrowings on our $300 million revolving credit facility as of September 30, 2014 and June 30, 2014. On a gross basis, we made zero borrowings and repayments on our Revolving Credit Facility in the three months ended September 30, 2014 and 2013. There were no standby letters of credits issued and outstanding as of September 30, 2014 on the revolving credit facility, leaving $300 million available for additional borrowings. Imago ScanSource, a new subsidiary of the Company has multi-currency invoice discounting credit facilities secured by the subsidiary's accounts receivable for its operations based in the United Kingdom and France. The invoice discounting facilities allow for the issuance of funds up to 85% of the amount of each invoice processed, subject to limits by currency of £4.1 million, €4.1 million, and $0.7 million. Borrowings under the invoice discounting facilities bear interest at a base rate determined by currency, plus a spread of 1.85%. The base rate is the United Kingdom base rate published by the Bank of England for GBP-based borrowings, 30-day EUROLIBOR for Euro-based borrowings, and the Lloyds Bank daily USD published rate for the USD-based borrowings. Additionally, the Company is assessed an annual commitment fee of less than £0.1 million. There were no outstanding balances at September 30, 2014. On April 15, 2011, the Company, through its wholly-owned subsidiary, ScanSource do Brasil Participações LTDA, completed its acquisition of all of the shares of CDC, pursuant to a Share Purchase and Sale Agreement dated April 7, 2011. The purchase price was paid with an initial payment of $36.2 million, net of cash acquired, assumption of working capital payables and debt, and variable annual payments through October 2015 based on CDC's annual financial results. The Company has made four payments to the former shareholders. As of September 30, 2014, we have $5.2 million recorded for the continuing earnout obligation, all of which is classified as current. The future earnout payment will be funded by cash on hand and our existing revolving credit facility. On September 19, 2014, the Company, through a wholly-owned subsidiary, completed its acquisition of 100% of the shares of Imago ScanSource, pursuant to a Share Purchase Agreement. The purchase price was structured with an initial payment of $37.4, plus two additional annual cash installments for the twelve months ending September 30, 2015 and 2016, based on the financial performance of Imago ScanSource. The Company acquired $1.9 million of cash during the acquisition, resulting in net $35.5 million cash paid for Imago ScanSource. As of September 30, 2014, we have $5.0 million recorded for the earnout obligation, of which $2.6 million is classified as current. Future earnout payments will be funded by cash on hand and our existing revolving credit facility. We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet the present and future working capital and cash requirements for at least the next twelve months. 28-------------------------------------------------------------------------------- Table of Contents Contractual Obligations In addition to the contractual obligations and commitments disclosed in our Annual Report on the Form 10-K, as of August 28, 2014, the Company entered into a binding letter of intent with Network1 as disclosed in Note 10 of the Company's Notes to Consolidated Financial Statements herein. Accounting Standards Recently Issued In May 2014, the FASB issued a comprehensive new revenue recognition standard for contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of this standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early application is prohibited. The standard permits the use of either the retrospective or cumulative effect transition method. This guidance will be applicable to the Company at the beginning of its first quarter of fiscal year 2018. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this new standard. Critical Accounting Policies and Estimates Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. We have evaluated the accounting policies used in the preparation of the consolidated financial statements and related notes and believe those policies to be reasonable and appropriate. See Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended June 30, 2014 for a complete listing of our significant accounting policies. Goodwill Goodwill is not amortized but is tested annually for impairment at a reporting unit level. Additionally, goodwill is tested for impairment on an interim basis if at any time facts and circumstances indicate that an impairment may have occurred. As discussed in Item 7 of the Company's 2014 Annual Report on Form 10-K under Critical Accounting Policies, we performed our annual goodwill impairment test as of April 30, 2014 and found that the estimated fair value of the Latin America reporting unit exceeded its carrying values by 10.2%, a smaller margin than the Company's other goodwill reporting units. As of September 30, 2014 the Company has goodwill associated with ScanSource Latin America of $4.0 million. We monitor results of these reporting units on a quarterly basis, as not meeting estimated expectations or changes to the projected future results of their operations could result in a future impairment of goodwill for these reporting entities. Based on current projected future results, we do not believe there is a more likely than not expectation that a goodwill impairment exists. |