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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., together with its subsidiaries (the "Company"), is a leading wholesale distributor of specialty technology products, providing value-added distribution services to resellers in specialty technology markets. The Company distributes approximately 95,000 products worldwide. The Company has two geographic distribution segments: the North American distribution segment serving the United States and Canada from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America and Europe from distribution centers located in Florida, Mexico and Brazil, and in Belgium, respectively. Each segment is managed around its geographic customer and vendor bases and is supported by its centralized infrastructure, such as warehousing and back office operations as appropriate. The North American distribution segment markets automatic identification and data capture ("AIDC") and point-of-sale ("POS") products through its ScanSource POS and Barcode sales unit; voice, data, video and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony and communications products through its ScanSource Communications sales unit; and electronic security products and wireless infrastructure products through its ScanSource Security sales unit. The international distribution segment markets AIDC, POS, communications and security products through its ScanSource Latin America sales unit; AIDC and POS products through its ScanSource Europe sales unit; and communication products through its ScanSource Communications sales unit in Europe. The Company was incorporated in South Carolina in December 1992 and is headquartered in Greenville, South Carolina. The Company serves North America from a single, centrally-located distribution center located in Southaven, Mississippi, near the FedEx hub. The single warehouse and management information system form the cornerstone of the Company's cost-driven operational strategy. 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 its worldwide POS and Barcode sales units include Bematech, Cisco, Datalogic, Datamax-O'Neil, Elo, Epson, Honeywell, Intermec, Motorola, NCR, Toshiba and Zebra Technologies. The Company's key vendors in its worldwide communications sales units, including Catalyst Telecom, include Aruba, Avaya, Audiocodes, Dialogic, Extreme Networks, Meru Networks, Plantronics, Polycom and ShoreTel. The Company's key vendors in its security sales units include Arecont, Axis, Bosch, Cisco, Datacard, Exacq Technologies, Fargo, HID, March Networks, Panasonic, Ruckus Wireless, Samsung, Sony and Zebra Card. Our distribution agreement with Juniper Networks ended in the first quarter of this fiscal year. Accordingly, sales of Juniper products, which were primarily distributed by our Catalyst Telecom sales unit in North America and to a lesser extent by ScanSource Communications Europe, have significantly declined in the the six months ended December 31, 2012 compared to prior periods. We continue to develop an Enterprise Resource Planning system ("ERP") that is intended to be used globally and standardize our processes throughout the world. Through our wholly-owned subsidiary Partner Services, Inc. ("PSI"), we filed a lawsuit in the U.S. District Court in Atlanta, Georgia on January 2, 2013 against our former ERP software systems integration partner, Avanade, Inc. ("Avanade"). The lawsuit alleges, among other things, fraud, tortious misrepresentation and breach of contract on the part of Avanade in connection with its performance on the ERP project. PSI is seeking recovery of damages that it has incurred and will continue to incur, as a result of Avanade's misconduct. Recently, we have also engaged a new implementation partner to replace Avanade. ScanSource, Inc. and Tata America International Corporation, the U.S. arm of Tata Consultancy Services ("TCS"), have entered into an agreement to complete the implementation of the Company's Microsoft Dynamics AX ERP project. The initial phase of the TCS engagement is underway. As the project continues, we expect to recognize more ERP expenses in selling, general and administrative expenses ("SG&A"). In the current quarter, we have incurred $1.3 million of SG&A expense related to activities that are not capitalized. One of management's key focuses is generating Return on Invested Capital ("ROIC") through the sales of the various technologies that we distribute. In doing so, our management team faces numerous challenges that require attention and resources. Certain business units and geographies are experiencing increased competition for the products we distribute. This competition may come in the form of pricing, credit terms, service levels, product availability and in some cases, changes from a closed distribution sales model, in which resellers must purchase exclusively from one distributor, to an open distribution sales model, in which resellers may choose to purchase from multiple distributors. 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. 18-------------------------------------------------------------------------------- Table of Contents Evaluating Financial Condition and Operating Performance We place a significant emphasis on operating income and ROIC in evaluating and monitoring financial condition and operating performance. We use ROIC, a non-GAAP measure, to assess efficiency at allocating capital under our control to generate returns. ROIC is computed by the Company as net income plus interest expense, income taxes, depreciation and amortization ("EBITDA") annualized by calendar days and divided by invested capital. Invested capital is defined as average equity plus daily average funded debt for the period. The following table summarizes annualized return on invested capital ratio for the quarters ended December 31, 2012 and 2011, respectively: Quarter ended December 31, 2012 2011 Return on invested capital ratio, annualized 15.2 % 19.3 % The discussion that follows this overview explains the change in ROIC from the comparative period. Management uses ROIC as a performance measurement because we believe this metric best balances our operating results with asset and liability management, excludes the results of capitalization decisions, is easily computed and understood, and drives changes in shareholder value. The components of this calculation and reconciliation to our financial statements are shown on the following schedule: Quarter ended December 31, 2012 2011 (in thousands) Reconciliation of EBITDA to net income: Net income $ 16,357 $ 21,367 Plus: income taxes 8,417 11,347 Plus: interest expense 130 749 Plus: depreciation & amortization 2,275 2,258 EBITDA (numerator) $ 27,179 $ 35,721 Quarter ended December 31, 2012 2011 (in thousands)Invested capital calculations: Equity - beginning of the quarter $ 676,136 $ 597,658 Equity - end of the quarter 696,960 616,103 Average equity 686,548 606,881 Average funded debt (a) 23,850 128,805 Invested capital (denominator) $ 710,398 $ 735,686 Return on invested capital (annualized)(b) 15.2 % 19.3 % (a) Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt. (b) 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 quarters. Our annualized return on invested capital was 15.2% for the quarter, down from 19.3% in the same quarter of the prior year. The decrease in EBITDA is largely the result of lower sales volumes, gross margin percentage and the costs associated with Belgian tax compliance and personnel replacement costs discussed below. 19-------------------------------------------------------------------------------- Table of Contents In assessing and evaluating our performance, we consider the impact of unusual or infrequent events. During the current quarter, we incurred $2.1 million in one-time costs associated with Belgian tax compliance and costs related to the replacement of certain personnel in our Belgian office. These costs include severance benefits, as well as tax accruals and professional fees. We are providing a non-GAAP reconciliation of net income and earnings per share adjusted for these costs below: Quarter ended December 31, 2012 Pre-Tax After-Tax Diluted EPS Net income (GAAP) $ 24,774 $ 16,357 $ 0.59 Adjustments: Costs associated with Belgian tax compliance and personnel replacement costs, including related professional fees 2,121 1,400 0.05 Adjusted net income (non-GAAP) $ 26,895 $ 17,757 $ 0.64 Results of Operations Currency In this Management Discussion and Analysis, 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. Certain financial results are adjusted by a simple mathematical model that translates current period results from currencies other than the U.S. dollar with 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 following table summarizes our net sales results (net of inter-segment sales) for the quarters and six months ended December 31, 2012 and 2011, respectively: Quarter ended December 31, 2012 2011 $ Change % Change (in thousands) North American distribution $ 547,987 $ 562,923 $ (14,936 ) (2.7 )% International distribution 199,729 219,761 (20,032 ) (9.1 )% Net sales $ 747,716 $ 782,684 $ (34,968 ) (4.5 )% Six months ended December 31, 2012 2011 $ Change % Change (in thousands) North American distribution $ 1,093,799 $ 1,136,395 $ (42,596 ) (3.7 )% International distribution 387,521 416,548 (29,027 ) (7.0 )% Net sales $ 1,481,320 $ 1,552,943 $ (71,623 ) (4.6 )% 20-------------------------------------------------------------------------------- Table of Contents North American Distribution The North American distribution segment consists of net sales to technology resellers in the United States and Canada. For the quarter ended December 31, 2012, net sales decreased $14.9 million or 2.7%. For the six months ended December 31, 2012, net sales decreased $42.6 million or 3.7%. We experienced modest growth in the North American distribution segment's POS, barcoding and security product lines in both the current three and six month periods compared to the prior year. Our ScanSource Security sales unit had another quarter of double-digit sales growth. ScanSource Security experienced strong gains attributable to vendors such as Ruckus Wireless, Cisco Systems and Axis Communications. The Company has two North American sales units that sell communications products to our customers - Catalyst Telecom and ScanSource Communications. The combined net sales of these units decreased by 13.0% from the prior year quarter and 11.4% from the prior year six month period. These decreases are largely attributable to fewer deals related to Avaya resellers and the end of our distribution agreement with Juniper Networks at the end of the quarter ended September 30, 2012; however, these declines were partially offset by increased volumes with Polycom and Plantronics resellers. International Distribution The international distribution segment markets POS, AIDC, communications and security products in Latin America and POS, AIDC and communications products in Europe. For the quarter ended December 31, 2012, net sales for this segment decreased by $20.0 million or 9.1%. On a constant currency basis, net sales decreased by $9.6 million or 4.4%. Net sales were down in Europe for the quarter primarily due to weaker demand and fewer big deals. For the six months ended December 31, 2012, net sales decreased by $29.0 million or 7.0%. On a constant currency basis, net sales increased $5.1 million or 1.2% over the prior year six month period, due to increases in Latin America and Brazil, partially offset by lower sales in Europe. Gross Profit The following tables summarize the Company's gross profit for the quarters and six months ended December 31, 2012 and 2011, respectively: % of Net Sales Quarter ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands)North American distribution $ 52,031 $ 57,136 $ (5,105 ) (8.9 )% 9.5 % 10.1 % International distribution 22,320 22,703 (383 ) (1.7 )% 11.2 % 10.3 % Gross profit $ 74,351 $ 79,839 $ (5,488 ) (6.9 )% 9.9 % 10.2 % % of Net Sales Six months ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands) North American distribution $ 106,839 $ 113,990 $ (7,151 ) (6.3 )% 9.8 % 10.0 % International distribution 41,551 44,940 (3,389 ) (7.5 )% 10.7 % 10.8 % Gross profit $ 148,390 $ 158,930 $ (10,540 ) (6.6 )% 10.0 % 10.2 % 21-------------------------------------------------------------------------------- Table of Contents North American Distribution Gross profit for the North American distribution segment decreased 8.9% or $5.1 million and 6.3% or $7.2 million for the quarter and six months ended December 31, 2012, respectively. As a percentage of net sales for the North American distribution segment, our gross profit decreased to 9.5% from 10.1% in the prior quarter and to 9.8% from 10.0% in the prior six month period. The decrease in margin percentage is mainly due to changes in product and customer mix as well as lower vendor programs than the prior year quarter. International Distribution In our international distribution segment, gross profit decreased 1.7% or $0.4 million and 7.5% or $3.4 million for the quarter and six months ended December 31, 2012, respectively. As a percentage of net sales for the international distribution segment, our gross profit increased to 11.2% from 10.3% in the prior quarter and decreased slightly to 10.7% from 10.8% in the prior six month period. The increase in the current quarter is primarily due to timing of vendor rebates that were earned during the current quarter. The slight decline in the prior year-to-date period is due to higher inventory reserve expense incurred in the quarter ended September 30, 2012, partially offset by vendor rebates recognized during the current quarter. Operating Expenses The following table summarizes our operating expenses for the quarters and six months ended December 31, 2012 and 2011, respectively: % of Net Sales Quarter ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands) Selling, general and administrative expense $ 49,393 $ 48,474 $ 919 1.9 % 6.6 % 6.2 % Change in fair value of contingent consideration 533 (722 ) 1,255 (173.8 )% 0.1 % -0.0 % Operating expense $ 49,926 $ 47,752 $ 2,174 4.6 % 6.7 % 6.1 % % of Net Sales Six months ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands) Selling, general and administrative expense $ 96,454 $ 95,043 $ 1,411 1.5 % 6.5 % 6.1 % Change in fair value of contingent consideration 1,296 172 1,124 653.5 % 0.1 % 0.0 % Operating expense $ 97,750 $ 95,215 $ 2,535 2.7 % 6.6 % 6.1 % Selling, general and administrative expense ("SG&A") increased 1.9% or $0.9 million and 1.5% or $1.4 million for the quarter and six months ended December 31, 2012, respectively. As a percentage of net sales, SG&A totaled 6.6% and 6.5% for the quarter and six months ended December 31, 2012, respectively, up from the prior year periods. The SG&A percentage increase is primarily the result of $2.1 million in costs associated with the tax compliance and personnel replacement costs in our Belgian office. These costs include severance benefits, as well as tax accruals and professional fees. Additionally, higher bad debt expense, principally in Europe, has contributed to the increase in SG&A percentage, partially offset by decreased employee costs. We have elected to present changes in fair value of the contingent consideration owed to the former shareholders of CDC separately from other selling, general and administrative expenses. In the current quarter and six month periods, we have recorded fair value adjustment losses of $0.5 million and $1.3 million, respectively. These losses are primarily the result of the recurring amortization of the unrecognized fair value discount. 22-------------------------------------------------------------------------------- Table of Contents Operating Income The following table summarizes our operating income for the quarters and six months ended December 31, 2012 and 2011, respectively: % of Net Sales Quarter ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands) North American distribution $ 23,259 $ 26,756 $ (3,497 ) (13.1 )% 4.2 % 4.8 % International distribution 1,166 5,331 (4,165 ) (78.1 )% 0.6 % 2.4 % $ 24,425 $ 32,087 $ (7,662 ) (23.9 )% 3.3 % 4.1 % % of Net Sales Six months ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands) North American distribution $ 48,243 $ 56,030 $ (7,787 ) (13.9 )% 4.4 % 4.9 % International distribution 2,397 7,685 (5,288 ) (68.8 )% 0.6 % 1.8 % $ 50,640 $ 63,715 $ (13,075 ) (20.5 )% 3.4 % 4.1 % For the North American distribution segment, operating income decreased 13.1% or $3.5 million and 13.9% or $7.8 million from the prior year quarter and six months, respectively. Operating income as a percentage of net sales decreased to 4.2% and 4.4% for the quarter and six months ended December 31, 2012, respectively. The decrease in operating income percentage in North America is primarily due to lower sales volumes, in addition to lower gross margins from changes in product and customer mix. For the international distribution segment, operating income decreased 78.1% or $4.2 million and 68.8% or $5.3 million from the prior year quarter and six months, respectively. Operating income as a percentage of net sales decreased to 0.6% for both the quarter and six months ended December 31, 2012. The decrease internationally is primarily due to a significant portion of the aforementioned $2.1 million associated with Belgian tax compliance and personnel replacement costs and higher bad debt expense in Europe. Total Other Expense (Income) The following table summarizes our total other expense (income) for the quarters and six months ended December 31, 2012 and 2011, respectively: % of Net Sales Quarter ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands) Interest expense $ 130 $ 749 $ (619 ) (82.6 )% 0.0 % 0.1 % Interest income (532 ) (1,002 ) 470 (46.9 )% (0.1 )% (0.1 )% Net foreign exchange (gains) losses 111 (282 ) 393 (139.4 )% 0.0 % (0.0 )% Other, net (58 ) (92 ) 34 (37.0 )% (0.0 )% (0.0 )% Total other (income) expense, net $ (349 ) $ (627 ) $ 278 (44.3 )% (0.0 )% (0.1 )% 23-------------------------------------------------------------------------------- Table of Contents % of Net Sales Six months ended December 31, December 31, 2012 2011 $ Change % Change 2012 2011 (in thousands) Interest expense $ 254 $ 1,236 $ (982 ) (79.4 )% 0.0 % 0.1 % Interest income (1,166 ) (1,452 ) 286 (19.7 )% (0.1 )% (0.1 )% Net foreign exchange (gains) losses 183 3,291 (3,108 ) (94.4 )% 0.0 % 0.2 % Other, net (144 ) (134 ) (10 ) 7.5 % (0.0 )% (0.0 )% Total other (income) expense, net $ (873 ) $ 2,941 $ (3,814 ) (129.7 )% (0.1 )% 0.2 % Interest expense reflects interest incurred on borrowings from the Company's revolving credit facility and other long-term debt borrowings, as well as non-utilization fees. Interest expense for the quarter and six months ended December 31, 2012 was $0.1 million and $0.3 million, respectively. Interest expense is down 82.6% and 79.4% from the prior year quarter and six months, respectively, largely from decreased borrowings on our $300 million revolving credit facility. Interest income for the quarter and six months ended December 31, 2012 was $0.5 million and $1.2 million, respectively, and includes interest income generated on longer-term interest bearing receivables and interest earned on cash and cash-equivalents. Interest income decreased 46.9% and 19.7% from the prior year quarter and six months, respectively. In September 2011, we transferred $22 million to our Brazilian subsidiary to prefund a portion of the future earn-out payments and finance current operations. With the use of this cash for our annual earn-out payments for the purchase of CDC and short-term working capital needs in Brazil, interest income has declined. Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange losses and gains are generated as the result of fluctuations in the value of the British pound versus the euro, 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 for speculative transactions. Net foreign exchange losses for the quarter and six months ended December 31, 2012 totaled $0.1 million and $0.2 million, respectively. Compared to the prior year six months, net foreign exchange loss decreased $3.1 million. In the prior year, we incurred a $2.5 million loss in conjunction with an unfavorable forward exchange contract to purchase Brazilian reais. In August 2011, we decided to pre-fund a portion of the estimated earnout payments associated with the CDC acquisition and finance current operations as mentioned above. This contract was designed to preserve the currency exchange for the few weeks required to transfer the cash to Brazil. From the time we entered into the contract through settlement, the real devalued from the contractual rate by 11.8%, ultimately resulting in a $2.5 million loss. Further contributing to the prior year quarter foreign exchange loss, our Brazilian business incurred significant losses on the remeasurement of U.S. dollar denominated transactions that were not hedged at the time. Subsequently, the Company has been including these exposures in its ongoing hedging activities. Provision for Income Taxes For the quarter and six months ended December 31, 2012, income tax expense was $8.4 million and $17.5 million, respectively. The effective tax rate for the same two periods was 34.0%. The effective tax rates in the quarter and six months ended December 31, 2011 were 34.7% and 34.6%, respectively. The decrease in the effective tax rate from the prior year periods is due primarily to a reduction in non-deductible expenses, an increase in non-taxable income as a percentage of total income, and lower expenses from uncertain tax positions. Liquidity and Capital Resources Our primary sources of liquidity are cash flow from operations, borrowings under our $300 million revolving credit facility (the "Revolving Credit Facility"), borrowings under our industrial development revenue bond, and borrowings under our European subsidiary's €6 million line of credit. 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 and revolving lines of credit. Overall, as our sales volume increases, our working capital needs typically increase, which, in general, results in decreased cash flow from operating activities. Conversely, when sales volume decreases, our working capital needs typically decrease, which, in general, results in increased cash flow from operating activities. 24-------------------------------------------------------------------------------- Table of Contents The Company's cash and cash equivalent balance totaled $31.5 million at December 31, 2012, compared to $29.2 million at June 30, 2012, of which $17.7 million and $18.7 million were held outside of the United States as of December 31, 2012 and June 30, 2012, respectively. Cash balances are generated and used in many locations throughout the world. Management's intent is to permanently reinvest these funds in our businesses outside the United States to continue to fund growth in our international operations. Furthermore, our current plans do not require repatriation of funds from our international operations to fund operations in the United States. 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. As mentioned above, our business model typically yields an inverse relationship between cash flows from operating activities and our sales volumes. Net sales are down $71.6 million from the prior year six month period. On a constant currency basis, net sales are down $37.5 million. As such, cash used in operating activities decreased to an outflow of $10.0 million versus an outflow of $22.7 million in the prior year six months. Our net investment in working capital has increased to $597.7 million at December 31, 2012 from $533.5 million at June 30, 2012 and remained flat compared to December 31, 2011 at $599.8 million. Net working capital has increased $64.2 million since the prior year end. The increase is largely attributable to decreased accounts payable from the timing of vendor payments funded by our Revolving Credit Facility. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income before non-cash charges, timing of collections from customers, movement of inventory, payments to vendors as well as cash generated or used by other financing and investing activities. The number of days sales in receivables (DSO) was 56 at December 31, 2012, compared to 56 and 57 days at June 30, 2012 and December 31, 2011, respectively. Inventory turned 5.7 times during the second quarter of fiscal year 2013 versus 5.6 times in the sequential and prior year quarters. We are in the process of designing and developing a new ERP system with a new global implementation partner. We have incurred approximately $38.0 million on the project from inception through December 31, 2012. Of the total amount incurred, $27.8 million has been capitalized. We believe that the total spend will range from $58 million to $72 million inclusive of litigation costs and expenses. We expect to incur costs and expenses in connection with the implementation beyond 2013. Capital expenditures for this project for the remainder of fiscal 2013 are expected to range from $4 million to $6 million. Through our wholly-owned subsidiary Partner Services, Inc. ("PSI") we filed a lawsuit in the U.S. District Court in Atlanta, Georgia on January 2, 2013 against our former ERP software systems integration partner, Avanade, Inc. ("Avanade"). The lawsuit alleges, among other things, fraud, tortious misrepresentation and breach of contract on the part of Avanade in connection with its performance on the ERP project, and PSI is seeking recovery of damages that it has incurred and will continue to incur, as a result of Avanade's misconduct. Recently, the Company has also engaged a new implementation partner, TCS, to replace Avanade, and the initial phase of the TCS engagement is underway. Cash used in investing activities for the six months ended December 31, 2012 was $3.2 million, compared to $5.5 million used in the prior year period. Current and prior year investing cash flows are primarily attributable to the investment in our new ERP system. On October 11, 2011, we entered into a five-year, $300 million multi-currency senior secured revolving credit facility pursuant to the terms of an Amended and Restated Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as administrative agent and a syndicate of lenders named therein. The 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 commitments for the incremental capacity from existing or new lenders. 25-------------------------------------------------------------------------------- Table of Contents At our option, loans denominated in U.S. dollars under the Revolving Credit Facility, other than swingline loans, shall bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or prime rate depending upon our ratio of total debt (excluding accounts payable and accrued liabilities), measured as of the end of the most recent quarter, to adjusted earnings before interest expense, taxes, depreciation and amortization ("EBITDA"), for the most recently completed four quarters (the "Leverage Ratio"). The Leverage Ratio excludes the Company's subsidiary in Brazil. This spread ranges from 1.00% to 2.25% for LIBOR-based loans and 0.00% to 1.25% for prime rate-based loans. The spread in effect as of December 31, 2012 was 1.00% for LIBOR-based loans and 0.00% for Prime rate-based loans. Additionally, we are assessed commitment fees ranging from 0.175% to 0.40%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. Borrowings under the Revolving Credit Facility are guaranteed by substantially all of our domestic assets as well as certain foreign subsidiaries determined to be material under the Revolving Credit Facility and a pledge of up to 65% of capital stock or other equity interest in each Guarantor. We were in compliance with all covenants under the Revolving Credit Facility as of December 31, 2012. For the six months ended December 31, 2012, cash provided by financing activities amounted to $15.0 million, in comparison to $45.3 million in the prior year period. The change in cash provided by financing activities is primarily attributable to less borrowing activity on our Revolving Credit Facility as a result of lower sales volumes. There was $21.8 million outstanding on our $300 million revolving credit facility as of December 31, 2012. There were no borrowings outstanding as of June 30, 2012. On a gross basis, we borrowed $435.1 million and repaid $413.8 million on our Revolving Credit Facility in the current year-to-date period. In the prior year-to-date period, we borrowed $824.9 million and repaid $754.5 million and additionally paid $1.4 million of debt issuance costs. The average daily balance on the revolving credit facility was $14.1 million and $86.4 million for the six months ended December 31, 2012 and 2011, respectively. There were no standby letters of credits issued and outstanding as of December 31, 2012, leaving $278.2 million available for additional borrowings. In addition to our Revolving Credit Facility, a subsidiary of the Company has a €6.0 million line of credit, which is secured by the assets of our European operations and is guaranteed by ScanSource, Inc. Our subsidiary line of credit bears interest at the 30-day Euro Interbank Offered Rate ("EURIBOR") plus a spread ranging from 1.25% to 2.00% per annum. The spread in effect as of December 31, 2012 was 1.25%. Additionally, we are assessed commitment fees ranging from 0.10% to 0.275% on non-utilized borrowing availability if outstanding balances are below €3.0 million. The interest rate spread and commitment fee rates related to the €6.0 million line of credit refer to the Leverage Ratio as defined by our $300 million multi-currency senior secured revolving credit facility. There was $0.5 million outstanding balance at December 31, 2012 and $4.3 million at June 30, 2012. In fiscal year 2011, we acquired all of the shares of CDC Brasil, S.A. 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. As of December 31, 2012, we have $13.1 million recorded for the contingent earnout obligation, of which $5.0 million is classified as current. Future contingent earnout payments will be funded by cash on hand and our Revolving Credit Facility. On August 1, 2007, we entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at our Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The outstanding balance on this bond was $5.4 million as of December 31, 2012, and the effective interest rate was 1.06%. The Company was in compliance with all covenants associated with this agreement as of December 31, 2012. 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. 26-------------------------------------------------------------------------------- Table of Contents Contractual Obligations There have been no material changes in our contractual obligations and commitments as disclosed in our Annual Report on Form 10-K as of August 24, 2012. Accounting Standards Recently Issued Effective for interim and annual reporting periods for fiscal 2013, we have implemented ASU 2011-05, Presentation of Comprehensive Income. The objective of this update is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity or in a separate footnote and requires companies to present all nonowner changes in shareholders' equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We are presenting a separate condensed consolidated statement of comprehensive income. There are currently no new accounting standards that have been issued that are expected to have a significant impact on the Company's financial position, results of operations and cash flows upon adoption. 27-------------------------------------------------------------------------------- Table of Contents |