Item 11. Executive Compensation
The forward-looking statements included in the "Business," "Risk Factors," "Legal Proceedings," "Management’sCOMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis of Financial Conditionoutlines our executive compensation program for our named executive officers (NEOs) listed below. The CD&A provides information about our compensation objectives and Results of Operations,"practices for our NEOs 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 asexplains how the Compensation Committee 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 afterBoard of Directors arrived at 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 demandcompensation decisions 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, the impact of the COVID-19 pandemic on our operations and financial condition, the timing and terms of our planned divestitures and the other factors set forth in "Risk Factors" contained herein.fiscal 2020.
TABLE OF CONTENTS
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Item 1A. | | Michael L. Baur | | Chairman, Chief Executive Officer and President |
Item 1B. | | Gerald Lyons | | Senior Executive Vice President and Chief Financial Officer |
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Item 3.Matthew S. Dean | | Senior Executive Vice President and Chief Legal Proceedings | |
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| | Strategy Officer |
PART I
ITEM 1. Business.
establishing 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 leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, telecom and cloud services to our customers.
Our customers are businesses of all sizes that sell to end-customers across many industries. Our customer channels include value-added resellers (“VARs”), sale 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 all of our customers to help them grow through reducing their costs, creating efficiencies and generating end-customer demand for business solutions. We enable our customers to create, deliver and manage solutions for end-customers across almost every vertical market in the United States, Canada, Brazil, additional Latin America countries, the United Kingdom ("UK") and Europe.
On August 20, 2019, the Company announced plans to divest our product distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and our Miami-based export operations (the "Divestitures") as these businesses have been performing below management's expectations. The Company will continue to operate its digital business in these countries. Management determined that the Company did not have sufficient scale to in these markets to maximize our value-added model for physical product distribution, leading us to focus and invest in our higher margin businesses. The Divestitures have been classified as held for sale and reported as discontinued operations within this Form 10-K. Unless otherwise indicated, descriptions of our business and amounts reported in this Form 10-K pertain to continuing operations only.
ScanSource was incorporated in South Carolina in 1992 and serves approximately 30,000 customers. Net sales for fiscal year ending June 30, 2020 totaled $3.0 billion. 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 sales partners (resellers, agents, ISOs, ISVs) to solve end-customer needs. While we do not manufacture products, we provide technology solutions and services from leading technology suppliers. Our solutions may include a combination of offerings from multiple suppliers or access to additional services, such as custom configuration, key injection, integration support, custom development and other services, to deliver solutions. We also offer the flexibility of on-premise, cloud or hybrid solutions for sales partners' end-customers.
As a trusted adviser to our sales partners, we provide more complete solutions through a better understanding of end-customer needs. In addition, we drive growth through enhancing our sales partners' capabilities to provide hardware, software, services recurring revenue, including connectivity, cloud services and software as a service ("SaaS") to meet these needs. Our teams deliver value-added support programs and services, including education and training, assessments, provisioning, implementation, custom development and marketing, designed to help our sales partners' develop new technology practices and reach new end-customers and deliver new solutions to their current customers.
Part of our strategy is to expand in higher margin and adjacent markets to help our sales partners offer more products and services while building recurring revenue opportunities. In fiscal 2020, we acquired intY and its CASCADE cloud services distribution platform. With the CASCADE solution, we are providing our sales partners with another route to market to enable key strategic cloud services. 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-customers. Intelisys’ sales partners earn commission payments from those service providers or suppliers on end-customer sales, typically multi-year contracts. Intelisys earns a percentage of the commission streams, building more predictable, recurring revenues. Net sales reported for Intelisys reflect net commissions, which is the commissions on supplier billings after payment of commission earned to Intelisys’ sales partners. 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 sales partners and our suppliers. We make it easier for our sales partners and suppliers to deliver leading technology solutions that drive business outcomes for end-customers.
Value proposition for our customers/sales partners:
•Understand end-customer needs
•Provide more complete technology solutions
•Offer market and technology solutions expertise
•Offer training, education and marketing services
•Provide custom configuration, services, platforms and digital tools
•Deliver technical support
•Enable opportunities in emerging technologies
•Reduce working capital requirements
•Offer flexible financing solutions
•Increased ability to navigate supplier programs
Value proposition for our suppliers:
•Provide access to emerging, diverse and established customer channels and routes to market
•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 and strategic acquisitions. We have the financial flexibility to invest in our business andmarkets. Due in future growth.
Business Segments
We segment our business into two technology-focused areas that operate in the United States, Canada, Brazil and the UK:
•Worldwide Barcode, Networking & Security; and
•Worldwide Communications & Services.
Worldwide Barcode, Networking & Security Segment
The Worldwide 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 technologiespart 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.
Worldwide Communications & Services Segment
The Worldwide 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.
Customers
Our customers, or sales partners, are businesses of all sizes that sell to end-customers 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, 2020.
VARs
Within VARs, our customers include specialty technology VARs, direct marketers, IT system integrators, network integrators, service providers, managed service providers and cloud 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 and network integrators develop computer and networking solutions for end-customers’ IT needs. Service providers, managed service providers and cloud service providers deliver advanced multi-discipline services with customized solutions that bundle data, collaboration, cloud, network and digital telecommunication services for end-customers' needs.
Agents
Agents focus on selling telecommunications and cloud services to end-customers, advising about various services, technologies and cost alternatives to help them make informed choices. 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 or certify bundled hardware, software and service solutions.
Suppliers
We provide products and services from approximately 500 suppliers, including 8x8, ACC Business, AT&T, Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, CenturyLink, Cisco, Comcast Business, Datalogic, Dell, Dialogic, Elo, Epson, Extreme, Fortinet, Hanwha, Honeywell, HID, Ingenico, Jabra, March Networks, Masergy, Microsoft, Mitel, NCR, NICE inContact, Oracle, Panasonic, Poly, RingCentral, Samsung, Sony, Spectralink, Spectrum, Toshiba Global Commerce Solutions, TPx, Ubiquiti, Verifone, Verizon, Windstream, Zebra Technologies and Zoom. 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 two suppliers, Cisco and Zebra, each constituted more than 10% of our net sales for the fiscal year ended June 30, 2020.
•We have two non-exclusive agreements with Cisco. One agreement covers the distribution of Cisco products in the United States and has a two year term. The other agreement covers distribution of products in 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 three non-exclusive agreements with Zebra for our continuing operations. One agreement covers sales of Zebra Enterprise Visibility & Mobility (“EVM”) products in North America and Brazil, while the other two agreements cover sales of Zebra Asset Intelligence & Tracking (“AIT”) products in North America and Brazil respectively. The Zebra agreements each have a one year term that automatically renews for additional one year terms. Either party may terminate the EVM agreement upon 30 days' notice to the other party. Either party may terminate the AIT agreement for North America upon 60 days’ notice to the other party. Either party may terminate the AIT agreement for Brazil upon 90 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 (supplier 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 supplier'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, supplier 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 bylower sales volumes and are subject to change.
Our suppliers generally warrant their products we sell and allow returnsincreased costs as a result of
defective products, including those returned to us bytheCOVID-19
pandemic, our
customers.results declined in fiscal year 2020. For
certain 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
For our continuing operations, we currently market over 100,000 products from approximately 500 hardware, software and service suppliers to approximately 30,000 customers. We sell products and services to the United States and Canada from our facilities located in Mississippi, California and Kentucky; into Brazil from facilities located within Brazil. We provide digital products and services from our CASCADE platform. 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 19% of fiscal year 2020, net sales.
Our offeringssales decreased 6% to our customers include hardware, software, services$3.0 billion. Excluding the foreign currency translation and connectivity across premise, hybrid and cloud environments. With our CASCADE platform, we also offer customers SaaS and subscription servicesnet sales from leading technology suppliers. We believe thatacquisitions, organic sales partners want to offer end-customers complete technology solutions that solve end-user challenges and deliver positive outcomes. We align our teams, tools, and processes to help our sales partners grow by providing more complete solutions through a better understanding of end-customer needs. We are able to provide a combination of offerings from multiple suppliers or give our sales partners access to a number of additional services, including configuration, key injection, integration support and others to deliver solutions.
We provide our sales partners 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 sales partners 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 sales partners and our suppliers satisfied.
We offer technology solutions and services that include the following:
•Mobility and 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.
•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.
•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 sales partners 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 andfiscal year 2020 decreased 5% year-over-year, largely 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-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 sales partners so they can advise end-customers in making informed choices about services, technology and cost savings. With the CASCADE cloud services distribution platform, we offer sales partners another way to grow their recurring revenue practices. CASCADE takes the friction out of acquiring, provisioning and managing SaaS offerings. We have contracts with more than 150result of the world’s leading telecom carriersnegative impacts of theCOVID-19
pandemic.Non-GAAP
operating income decreased 39% to $78.9 million, driven by lower sales volume and cloud services providers.
Our People
higher SG&A expenses. On a GAAP basis, net income for fiscal year 2020 totaled $(79.2) million, or $(3.12) per diluted share, compared to net income of $64.9 million, or $2.52 per diluted share for the prior year. The
strength of our Company is our people, working togetherfiscal year 2020 results reflectednon-cash
goodwill and asset impairment charges.Non-GAAP
net income totaled $52.0 million, or $2.05 per diluted share, compared to
help our customers grow their businesses. Within our continuing operations, we have approximately 2,200 employees, of which approximately 1,500 are in$87.7 million, or $3.41 per diluted share, for the
United States and 700 are located internationally in Canada, Brazil and the UK. Within our discontinued operations, we have approximately 400 employees. We have no organized labor or trade unions in the United States. We pride ourselves on our strong relationships with our employees. Competitionprior year.
We believe we are a leadersell our products businesses in the specialty markets we serve. The market for technology productsMexico, Colombia, Chile 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,Peru as well as suppliers that sell directlyour Miami-based export operations to resellers andIntcomex. This action continues our strategic portfolio repositioning to end-customers. In addition,align investments with higher-growth, higher-margin businesses.
COVID-19
has impacted our
competitors include master resellers that sell to franchisees, third-party dealers and end-customers. 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 resultsales volumes negatively in
price reductions, reduced margins and loss of market share.Inour wholesale VAR business in both our Worldwide 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 BlueStar. In our Worldwide Communications & Services segment, we compete against broad-line distributors, such as Ingram Micro, Synnex and Tech Data, and more specialized distributors, such as Jenne. Additionally, for Intelisys' technology services, we also compete against other smaller, master agents, such as Avant and Telarus. Forsegments. This includes the acceleration of the decline in our intY business, we compete against other developers of cloud software and services platforms such as CloudBlue and Pax8. 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 sales partners.
Sales
Our sales department consists of inside and field sales representatives located in the United States, Canada and Brazil. The majority of our sales partners are assigned to a dedicated sales representative or team whose main focus is developing customer relationships and providing the sales partners with the solutions to meet their end-customer’s needs. Our sales teams are advocates for and trusted advisers to our sales partners. Sales teams are responsible for developing technical expertise within broad product markets, recruiting sales partners, creating demand, negotiating pricing and reviewing overall product and service requirements of our sales partners. Our sales representatives receive comprehensive training with respect to the technical characteristics of suppliers’ products, supplemented by frequent product and service seminars conducted by supplier representatives and bi-weekly meetings among product, marketing and sales managers.
Our sales teams also provide sales partners with online ordering, API, EDI and other information systems, allowing sales partners 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 and Brazilian 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 sales partners and suppliers - ensuring we help our partners create, deliver and manage solutions for end-customers 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 sales partners.
Operations
Information Technology Systems
Our information systems are scalable and capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management and accounting. Our sales partners 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 sales partner 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.
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 primarily serves North America. We also acquired warehouses in California and Kentucky through our POS Portal acquisition. Our principal warehouses for our Brazil operations are located in the Brazilian states of Paraná, Espírito Santo and Santa Catarina. 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 sales partner’s need for inventory.
Financial Services
Our sales terms include trade credit, various third-party financing options, which include leasing, flooring and other secured financing for qualified sales partners. These sales terms allow us to compete within our specific geographic areas to facilitate our growth plans. We believe these options reduce the sales partner’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 Brasil," "Network1, a ScanSource company," "Intelisys," "POS Portal," "RPM Software, a ScanSource company" and "intY, a ScanSource company."
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.premise-based communications business. We have been issued registrations for many of our 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 include those related to our continuing operations, as well as our discontinued 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.
COVID-19 - COVID-19 is expected to have a significant and adverse impact upon our business.
In early March 2020, the World Health Organization characterized COVID-19 as a pandemic. The rapid spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on our business, suppliers' businesses and sales partners' businesses. We are unable at this time to predict the ultimate impact that COVID-19 will have on our business due to
the inability to predict the duration or magnitude of the virus' impacts. However, we have experienced decreased revenue and increased employee-related healthcare and prevention costs. Our revenues could further decrease significantly if our suppliers are not able to supply us products inIn July 2020, we initiated a timely manner, our distribution centers may not be able to maintain staffing levels and therefore shipments, and our cash flows could suffer. Overall, we expect COVID-19 to adversely impact our results of operations for at least the next two quarters if not longer, while we have had, and will likely continue to make, adjustments to our operating practices as appropriate, it is unlikely that these measures will be sufficient to fully offset the adverse impacts.
To the extent the COVID-19 pandemic continues, the mitigation efforts and the resulting economic impact adversely affect many aspects of our business. COVID-19 may also have the effect of heightening many of the other risk factors disclosed herein, such as those relating to our growth strategies, credit exposure, liquidity and capital resources, people, volatility of stock price and economic weakness.
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 or adjust our operating strategy 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.
The economic weakness brought about by COVID-19 may result in prolonged recession, which has the potential to disproportionately impact our business depending on which sectors of the economy and which geographies are most impacted.
Divestitures - There is no guarantee we will sell our Divestitures on favorable terms or at all.
In August 2019, we announced plans to divest our operations in Latin America, outside of Brazil, and our products distribution operations located in Europe and the UK. The sales process has taken longer than anticipated and there can be no guarantee that we will complete any sale of these businesses, or that the terms of the sale will be favorable. We have agreed to sell the Latin America business, outside of Brazil, to Intcomex. The Latin America transaction is expected to close on or around September 30, 2020 and is subject to customary closing conditions. We have identified potential buyers for our Europe business, however any sale is subject to further negotiation, completion of due diligence, execution of a definitive purchase agreement and certain divestitures are conditioned by regulatory approvals. A failure to complete these transactions in a timely fashion and on favorable terms would negatively impact our financial condition. In addition, our failure to effectively complete a sale transaction could result in significant expenses to wind-down our operations and our business operations and financial condition, including our results of operations, cash flows and stock price may be adversely impacted.
Organic growth strategies - If we fail to effectively manage and implement our operating 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 and expand our existing products and services in our existing channels and entry into new channels. These efforts 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.
We are in the process of divesting our operations in Latin American countries, outside of Brazil, and our distribution operations in Europe, as well as winding down our Canpango business. Reorienting our business and redeploying capital to focus on
higher margin opportunities in our United States, Canadian and Brazilian businesses are designed to lead to longer-term value creation for our shareholders. If we are not successful in exiting our operations in those countries in a cost-effective manner, our revenues, results of operations and financial condition may be adversely impacted. If we fail to effectively reinvest capital in our continuing operations and execute on our anticipated next phase of growth our financial results could be negatively impacted.
Credit exposure - We have credit exposure to our customers. Any adverse trends or significant adverse incidents 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, 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 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.
As we implement our plan to sell our operations in Latin American countries outside of Brazil and in Europe, with the exception of our digital businesses, we may face a heightened risk of credit losses in those geographies that could negatively impact our performance.
As customers continue to face the negative economic impacts of COVID-19, we may face heightened credit losses not otherwise experienced before the pandemic.
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:
•Disproportionate negative impact from COVID-19 in a foreign location;
•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 UK, where we also have offices and a distribution center, and in key E.U. markets. The UK has formally exited the E.U. (“Brexit”) and is in a transition period until the end of 2020. Negotiations are ongoing to determine the future terms of the UK’s relationship with the E.U., including the terms of trade between the UK and the E.U. and the rest of the world. The effects of Brexit will depend on any agreements the UK 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. Changes resulting from these measures, including access to free trade agreements, tariffs and customs and currency fluctuations may cause us to lose customers, suppliers and employees and adversely affect our financial condition.
We have substantial operations in Brazil and face risks related to these countries' complex tax, labor, trade compliance and consumer protection laws and regulations. Additionally, developing markets such as Brazil 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, UK 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.
In addition, competition in developing markets is increasing. If we cannot successfully increase our business, our product sales, financial condition and results of operations could be adversely affected. As we plan to exit our products distribution business in Latin America, outside of Brazil and Europe, our presence in international countries will substantially decrease upon completion of that exit. Before we exit, we are still subject to all risks associated with operating in those countries.
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 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.
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 computer and telecommunication systems to operate our business, including our enterprise resource planning systems. 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, 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 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.
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 compensation 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 employees in key roles. 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 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.
We recently announced actions to address the business impacts of the COVID-19 pandemic and prepare for the next phase of growth. These actions include an approximate $30 million expense reduction plan
which includes a workforce reduction in North America, excluding the Intelisys business. These actions are designed to better align the cost structure for our wholesale distribution business with lower sales volumes as a result of the
COVID-19 pandemic. As part of the plan, we will continue to invest in our higher growth agency business, Intelisys. Customer relationships and operational performance could be negatively impacted by the recent workforce reduction if such reduction was excessive or if roles are eliminated or not replaced.
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 can also 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. COVID-19's widespread negative economic impacts could result in some of our customers shuttering their businesses, thus negatively impacting our revenues.
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, including Cisco and Zebra. 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 or end-customers. 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 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.
Liquidity and capital resources - Market factors and our business performance 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 and 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 or if we are unable to comply with covenants under our borrowings, such capital may not be available to us on terms acceptable to us, or at all. We have a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (the “Amended Credit Agreement”). The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, our Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, our Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00:1.00 as of the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates.
In addition, the cost of borrowings under our existing sources of capital and any potential new sources of capital as a result of variable interest rates and the transition away from LIBOR may increase, which could have an adverse effect on our financial condition. 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.
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-customers. In addition, we compete with resellers and master agents that sell to franchisees, third-party dealers and end-customers. 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 may lose market share, or reduce our prices in response to the action of our competitors and thereby experience a reduction in our gross margins, or that we will remain in any geographical market where we do not believe we can earn appropriate 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.
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. In addition, our decision to dispose of certain of our operations may require us to recognize an impairment to the carrying value of goodwill and other intangible assets attendant to those operations. We recognized significant goodwill and intangible asset impairment in the fiscal year ended June 30, 2020. 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.
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 some of 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 return rights), 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 and service offerings to meet customer needs at prices that our customers are willing to pay.
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 may 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 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.
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.
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.
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.
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 as a result of natural disasters, security breaches or otherwise 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.
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 quickly, 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.
Increased government regulation - We may be subject to additional costs and subject to fines and penalties because certain governmental entities are end-customers 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.
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.
Volatility of Stock Price - The trading price of our common stock fluctuates.
The stock market as a whole and the trading prices of companies with smaller capitalization have been volatile. This 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 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 for our continuing operations as of June 30, 2020, were as follows:
| | | | | | | | | | | |
Location | Approximate Square Footage | Type of Interest | Description of Use |
United States | | | |
Greenville, SC | 180,000 | Owned | Headquarters - Principal Executive and Sales Offices |
Greenville, SC | 45,000 | Leased | Sales and Administration Offices |
Southaven, MS | 741,000 | Leased | Warehouse |
Sacramento, CA | 41,000 | Leased | Sales and Administration Offices and Warehouse |
Louisville, KY | 22,000 | Leased | Warehouse |
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International | | | |
| | | |
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Sao Jose does Pinhais, Paraná, 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 additional sales offices and warehouse spaces, each approximately 20,000 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.
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." As of August 26, 2020, there were approximately 680 holders of record of our common stock.
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, 2015.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| ScanSource, Inc. | $ | 100 | | | $ | 98 | | | $ | 106 | | | $ | 106 | | | $ | 86 | | | $ | 63 | |
| NASDAQ Composite | $ | 100 | | | $ | 98 | | | $ | 126 | | | $ | 156 | | | $ | 168 | | | $ | 213 | |
| SIC Code 5045 – Computers & Peripheral Equipment | $ | 100 | | | $ | 118 | | | $ | 153 | | | $ | 139 | | | $ | 130 | | | $ | 149 | |
Unregistered Sales of Equity Securities and Use of Proceeds
In August 2016, the Board of Directors' ("BOD") authorized a three-year $120 million share repurchase program. The share repurchase program expired in August 2019. No share repurchases occurred under the BOD authorization for the year ended June 30, 2018. During the year ended June 30, 2019, we repurchased 323,832 shares for $10.1 million under the program. During the quarter ended September 30, 2019, we repurchased 168,068 shares for $5.4 million under the program before it expired. There was no share-repurchase activity, including shares withheld from employees for stock based awards, for the quarter ended June 30, 2020.
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, | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (in thousands, except per share data) | | | | | | | | |
| Statement of income data: | | | | | | | | | |
| Net sales | $ | 3,047,734 | | | $ | 3,249,799 | | | $ | 3,164,709 | | | $ | 2,963,366 | | | $ | 2,886,938 | |
| Cost of goods sold | 2,692,165 | | | 2,856,996 | | | 2,795,403 | | | 2,649,364 | | | 2,608,261 | |
| Gross profit | 355,569 | | | 392,803 | | | 369,306 | | | 314,002 | | | 278,677 | |
| Selling, general and administrative expenses | 260,139 | | | 252,948 | | | 232,291 | | | 203,545 | | | 182,133 | |
| Depreciation expense | 13,033 | | | 12,028 | | | 12,286 | | | 8,322 | | | 5,955 | |
| Intangible amortization expense | 19,953 | | | 17,893 | | | 18,680 | | | 13,522 | | | 7,491 | |
| Impairment charges | 120,470 | | | — | | | — | | | — | | | — | |
| Change in fair value of contingent consideration | 6,941 | | | 15,200 | | | 37,043 | | | 6,279 | | | 415 | |
| Operating (loss) income | (64,967) | | | 94,734 | | | 69,006 | | | 82,334 | | | 82,683 | |
| Interest expense | 12,224 | | | 13,162 | | | 9,121 | | | 3,010 | | | 1,912 | |
| Interest income | (5,826) | | | (1,818) | | | (3,710) | | | (5,359) | | | (3,383) | |
| Other (income) expense, net | 411 | | | (247) | | | 546 | | | (11,388) | | | 999 | |
| (Loss) Income before income taxes | (71,776) | | | 83,637 | | | 63,049 | | | 96,071 | | | 83,155 | |
| Provision for income taxes | 7,451 | | | 18,778 | | | 27,593 | | | 31,760 | | | 30,176 | |
| Net (loss) income from continuing operations | (79,227) | | | 64,859 | | | 35,456 | | | 64,311 | | | 52,979 | |
| Net (loss) income from discontinued operations | (113,427) | | | (7,262) | | | (2,303) | | | 4,935 | | | 10,640 | |
| Net (loss) income | $ | (192,654) | | | $ | 57,597 | | | $ | 33,153 | | | $ | 69,246 | | | $ | 63,619 | |
| Per share data: | | | | | | | | | |
| Net (loss) income from continuing operations per common share, basic | (3.12) | | | 2.53 | | | 1.39 | | | 2.55 | | | 2.00 | |
| Net (loss) income from discontinued operations per common share, basic | (4.47) | | | (0.28) | | | (0.09) | | | 0.19 | | | 0.40 | |
| Net (loss) income per common share, basic | $ | (7.59) | | | $ | 2.25 | | | $ | 1.30 | | | $ | 2.74 | | | $ | 2.40 | |
| Weighted-average shares outstanding, basic | 25,378 | | | 25,642 | | | 25,522 | | | 25,318 | | | 26,472 | |
| Net (loss) income from continuing operations per common share, diluted | (3.12) | | | 2.52 | | | 1.38 | | | 2.52 | | | 1.98 | |
| Net (loss) income from discontinued operations per common share, diluted | (4.47) | | | (0.28) | | | (0.09) | | | 0.19 | | | 0.40 | |
| Net (loss) income per common share, diluted | $ | (7.59) | | | $ | 2.24 | | | $ | 1.29 | | | $ | 2.71 | | | $ | 2.38 | |
| Weighted-average shares outstanding, diluted | 25,378 | | | 25,734 | | | 25,624 | | | 25,515 | | | 26,687 | |
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| | As of June 30, | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (in thousands) | | | | | | | | |
| Balance sheet data: | | | | | | | | | |
| Working capital | $ | 484,460 | | | $ | 776,429 | | | $ | 651,851 | | | $ | 624,748 | | | $ | 643,793 | |
| Total assets | 1,692,094 | | | 2,067,261 | | | 1,945,295 | | | 1,718,303 | | | 1,491,185 | |
| Total debt (of continuing operations) | 218,728 | | | 327,489 | | | 249,429 | | | 97,300 | | | 76,856 | |
| Total shareholders’ equity | $ | 678,246 | | | $ | 914,129 | | | $ | 866,376 | | | $ | 837,145 | | | $ | 774,496 | |
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 institutions and providing solutions for their complex needs. We provide technology solutions and services from leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, telecom and cloud services to our customers. We serve approximately 30,000 customers located in the United States, Canada, Brazil, the UK and Europe and provide solutions and services from approximately 500 technology suppliers.
We operate our business under a management structure that enhances our technology market focus and growth strategy. We segment our business into two technology-focused areas that each operate in the United States, Canada, Brazil, and the UK:
•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 Brazil primarily from facilities located in the Brazilian states of Paraná, Espírito Santo and Santa Catarina. Some of our digital products and services are provided from our CASCADE platform. 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 8x8, ACC Business, AT&T, Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, CenturyLink, Cisco, Comcast Business, Datalogic, Dell, Dialogic, Elo, Epson, Extreme, Fortinet, Hanwha, Honeywell, HID, Ingenico, Jabra, March Networks, Masergy, Microsoft, Mitel, NCR, NICE inContact, Oracle, Panasonic, Poly, RingCentral, Samsung, Sony, Spectralink, Spectrum, Toshiba Global Commerce Solutions, TPx, Ubiquiti, Verifone, Verizon, Windstream, Zebra Technologies and Zoom. We also offer customers significant choices in cloud services through our Intelisys business, including offerings in contact center, infrastructure and unified communications.
Recent Developments
Impact of COVID-19 on our Business Environment
In early March 2020, the World Health Organization characterized COVID-19 as a pandemic. The rapid spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on businesses around the world and on global, regional and national economies.
During the COVID-19 pandemic, our top priority is protecting the health and safety of our employees. We moved quickly to transition our employees, where possible, to a fully remote working environment. We have taken a number of measures to ensure our teams feel secure in their jobs and have the flexibility and resources they need to stay safe and healthy.
We have activated our contingency plans. We have deployed teams to monitor the rapidly evolving situation and recommend risk mitigation actions; we have implemented travel restrictions; and we are following social distancing guidelines. We are following global guidance from authorities and health officials including, but not limited to, checking the temperature of associates when entering our facilities, requiring associates to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitation routines. In addition, nearly all office-based employees around the world are working remotely.
We saw a significant impact from COVID-19 pandemic during the fourth quarter of our fiscal year, with a 21.6% decline year-over-year for quarterly GAAP net sales and a 19.3% decline year-over-year for quarterly non-GAAP net sales, excluding the negative impact of foreign currency translation.
In July 2020, we announced actions to address the business impacts of the COVID-19 pandemic and prepare for the next phase of growth. These actions include an approximate $30 million annualized expense reduction plan, partially offset by approximately $8 to $9 million in severance and employee benefits for those employees who left the Company. These actions
are designed to better align the cost structure for our wholesale distribution business with lower sales volumes as a result of the COVID-19 pandemic. As part of the plan, we will continue to invest in our higher growth agency business, Intelisys. Strong growth for the Intelisys business has continued, even with the
COVID-19
pandemic.
See "Risk Factors" The expense reduction plan includes (i) 10% to 25% salary reductions for information on additional impactsthe executive team through December 31, 2020, (ii) elimination of COVID-19 as well as other matters that could havecash retainers for the Board of Directors through December 31, 2020, (iii) cost savings measures related to discretionary SG&A expenses, (iv) a material adverse effect on our results of operationsreduction in workforce in North America, excluding the Intelisys business, and financial condition.
Closure(v) the wind-down of the Canpango Professional Services Businessprofessional services business.
In July 2020, we initiatedThese actions are expected to close Canpango,reduce our salesforce implementation and consulting business.annualized SG&A cost base by approximately $30 million. In August 2018, we acquired Canpango to help partners build out their customer relationship management capabilities as part of a CCaaS solution. There has been limited adoption by our partner community. As a result of closing the Canpango business we recorded a pre-tax non-cash charge of approximately $2 million at June 30, 2020. We expect to complete existing contracts over the next few months.
Divestitures
An agreement was signed on July 23, 2020, subsequent to our fiscal year end, to sell our product distribution business located in Mexico, Colombia, Chile, Peru and our Miami-based export operations to Intcomex. We expect to finalize the sale of Latin America divestitures, outside of Brazil, on or around September 30, 2020. The Company is actively working on sales opportunities for our divestitures in Europe and the UK and expects to finalize a sale within twelve months from the current reporting period.
Our Strategy
We rely on a channel sales model offering hardware, software, services and connectivity from leading technology suppliers to sales partners that solve end customers' challenges. With our CASCADE platform, we also offer customers SaaS and subscription services from leading technology suppliers. While we do not manufacture products, we provide technology solutions and services from leading technology suppliers. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services, such as custom configuration, key injection, integration support, custom development and other services, to deliver solutions. We also offer the flexibility of on-premise, cloud and hybrid solutions.
As a trusted adviser to our sales partners, we provide more complete solutions through a better understanding of end customer needs. We drive growth through enhancing our sales partners' capabilities to provide hardware, software, services and connectivity solutions. Our teams deliver value-added support programs and services, including education and training, network assessments, implementation, custom development and marketing to help our sales partners extend their capabilities, develop new technology practices or reach new end customers.
Our objective is to grow profitable sales in the technologies we offer and expand in higher margin and adjacent markets to help our sales partners offer more products and services and increase recurring revenue opportunities. As part of our strategic plan, we consider strategic acquisitions and alliances to enhance our technology offerings and service capabilities.
Profitability
Our operating income is driven by gross profits and by control of operating expenses. 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. 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 from Continuing Operations
The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales. Totals may not sum due to rounding.
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended June 30, | | | | |
| | 2020 | | 2019 | | 2018 |
| Statement of income data: | | | | | |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 88.3 | | | 87.9 | | | 88.3 | |
| Gross profit | 11.7 | | | 12.1 | | | 11.7 | |
| Selling, general and administrative expenses | 8.5 | | | 7.8 | | | 7.3 | |
| Depreciation expense | 0.4 | | | 0.4 | | | 0.4 | |
| Intangible amortization expense | 0.7 | | | 0.6 | | | 0.6 | |
| Impairment charges | 4.0 | | | 0.0 | | | 0.0 | |
| Change in fair value of contingent consideration | 0.2 | | | 0.5 | | | 1.2 | |
| Operating (loss) income | (2.1) | | | 2.9 | | | 2.2 | |
| Interest expense | 0.4 | | | 0.4 | | | 0.3 | |
| Interest income | (0.2) | | | (0.1) | | | (0.1) | |
| Other (income) expense, net | 0.0 | | | 0.0 | | | 0.0 | |
| (Loss) Income from continuing operations before income taxes | (2.4) | | | 2.6 | | | 2.0 | |
| Provision for income taxes | 0.2 | | | 0.6 | | | 0.9 | |
| Net (loss) income from continuing operations | (2.6) | | | 2.0 | | | 1.1 | |
| Net (loss) from discontinued operations | (3.7) | | | (0.2) | | | (0.1) | |
| Net (loss) income | (6.3) | % | | 1.8 | % | | 1.0 | % |
Comparison of Fiscal Years Ended June 30, 2020, 2019 and 2018
Below is a discussion of fiscal years ended June 30, 2020, 2019 and 2018 for our continuing operations.
Net Sales
Fiscal year 2020 compared to fiscal year 2019
We have two reportable segments, which are based on the technologies provided to customers. The following table summarizes our net sales results by business segment and by geographic location for the comparable fiscal years ending June 30, 2020, 2019 and 2018.
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| 2020 | | 2019 | | $ Change | | % Change | | % Change Constant Currency, Excluding Divestitures and Acquisitions (a) |
| | (in thousands) | | | | | | | | |
| Sales by Segment: | | | | | | | | | |
| Worldwide Barcode, Networking & Security | $ | 2,093,217 | | | $ | 2,141,896 | | | $ | (48,679) | | | (2.3) | % | | (1.8) | % |
| Worldwide Communications & Services | 954,517 | | | 1,107,903 | | | (153,386) | | | (13.8) | % | | (11.9) | % |
| Total net sales | $ | 3,047,734 | | | $ | 3,249,799 | | | $ | (202,065) | | | (6.2) | % | | (5.2) | % |
| | | | | | | | | |
| Sales by Geography Category: | | | | | | | | | |
| United States | $ | 2,755,134 | | | $ | 2,917,780 | | | $ | (162,646) | | | (5.6) | % | | (5.7) | % |
| International | 292,600 | | | 332,019 | | | (39,419) | | | (11.9) | % | | (1.4) | % |
| Total net sales | $ | 3,047,734 | | | $ | 3,249,799 | | | $ | (202,065) | | | (6.2) | % | | (5.2) | % |
(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 and Brazil. During fiscal year 2020, net sales for this segment decreased $48.7 million, or 2.3%, compared to fiscal year 2019. Excluding the foreign exchange negative impact of $10.4 million, adjusted net sales for fiscal year 2020 decreased $38.3 million, or 1.8%, compared to the prior year. The decrease in net sales and adjusted net sales is primarily due to lower sales volume across North America and Brazil, with the exception of our payments business which grew year-over-year. Lower sales volume are largely a result of the negative impacts of the COVID-19 pandemic.
Worldwide Communications & Services
The Worldwide Communications & Services segment consists of sales to technology customers in North America, Brazil, Europe and the UK. During fiscal year 2020, net sales for this segment decreased $153.4 million or 13.8% compared to fiscal year 2019 largely as a result of the negative impacts of the COVID-19 pandemic. Excluding the foreign exchange negative impact of $29.8 million and sales from fiscal 2020 and 2019 acquisitions, adjusted net sales decreased $131.7 million, or 11.9%, compared to the prior year. The decrease in adjusted net sales is primarily due to lower sales volumes in the premise-based communications business in North America and the negative impacts of the COVID-19 pandemic. This impact was partially offset by sales growth in local currency in Brazil and increases in net sales for our master agency business, Intelisys.
Fiscal year 2019 compared to fiscal year 2018
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| | | | | | | | | |
| 2019 | | 2018 | | $ Change | | % Change | | % Change Constant Currency, Excluding Divestitures and Acquisitions (a) |
| | (in thousands) | | | | | | | | |
| Sales by Segment: | | | | | | | | | |
| Worldwide Barcode, Networking & Security | $ | 2,141,896 | | | $ | 2,143,135 | | | $ | (1,239) | | | (0.1) | % | | 0.3 | % |
| Communications & Services | 1,107,903 | | | 1,021,574 | | | 86,329 | | | 8.5 | % | | 11.6 | % |
| Total net sales | $ | 3,249,799 | | | $ | 3,164,709 | | | $ | 85,090 | | | 2.7 | % | | 4.0 | % |
| | | | | | | | | |
| Sales by Geography Category: | | | | | | | | | |
| United States | $ | 2,917,780 | | | $ | 2,847,196 | | | $ | 70,584 | | | 2.5 | % | | 1.9 | % |
| International | 332,019 | | | 317,513 | | | 14,506 | | | 4.6 | % | | 22.0 | % |
| Total net sales | $ | 3,249,799 | | | $ | 3,164,709 | | | $ | 85,090 | | | 2.7 | % | | 4.0 | % |
(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 2019, net sales for this segment decreased $1.2 million, or 0.1%, compared to fiscal year 2018 due to the negative impact of foreign exchange. Excluding the foreign exchange negative impact of $16.2 million and sales from the POS Portal acquisition for the first quarter of fiscal
years 2019year 2021, we anticipate recording an estimatedpre-tax
cash charge of approximately $8 to $9 million, consisting of severance and
2018, adjusted net salesrelated employee benefits. We completed substantially all of the workforce reduction of approximately 200 positions by the end of the September 2020 quarter.The Compensation Committee strives to provide our NEOs with a compensation package that balances short-term and long-term compensation. We believe that our current executive compensation program, consisting of a mix of base salary, retirement contributions, annual performance-based cash incentive awards and both performance-based and service-based grants of equity, (i) provides a predictable and transparent structure for executive compensation, (ii) provides a significant percentage of a NEO’s compensation through variable performance-based vehicles and (iii) attracts, retains and motivates our NEOs.
Our executive compensation program emphasizes performance-based pay. The elements of compensation and the general mix of compensation among the various elements remained largely unchanged in fiscal 2020 from the previous year. Our financial performance during fiscal 2020 is reflected in the compensation of each of our NEOs for fiscal
year 2019 increased $6.0 million, or 0.3%, compared2020, particularly with respect to
the prior year. Thepayouts pursuant to our annual cash incentive program. Our cash incentive opportunity is designed so that, if our financial results, as measured bynon-GAAP
operating income growth, non-GAAP 
