SEC Company Response from SCANSOURCE, INC. (SCSC) (CIK 0000918965) (SCSC) — Feb 26, 2016
SCANSOURCE, INC. (SCSC) (CIK 0000918965)
Date: Feb. 26, 2016 · CIK: 0000918965 · Accession: 0000918965-16-000036
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-26926
Referenced dates: January 14, 2016
Letter
February 26, 2016
Via EDGAR Submission
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549
Attention: Ms. Kathleen Collins, Accounting Branch Chief
Office of Information Technologies and Services
Re: Form 10-K for the Fiscal Year Ended June 30, 2015
Filed August 27, 2015
File No. 000-26926
Ladies and Gentlemen:
This letter is submitted in response to comments contained in the letter dated January 14, 2016 from Kathleen Collins of the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Charles A. Mathis, Executive Vice President and Chief Financial Officer of ScanSource, Inc. (the “Company”), regarding the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (the “2015 Form 10-K”).
The comments and responses set forth below are keyed to the numbering of the comments and the headings used in the Staff’s January 14, 2016 letter. Capitalized terms used but not otherwise defined herein have the meanings given them in the 2015 Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Comparison of Fiscal Years Ended June 30, 2015 and 2014
Worldwide Communications and Services, page 28
1.
We note that net sales increased $265.8 million compared to the prior fiscal year and that such increase “is primarily due to the inclusion of Imago ScanSource (‘Imago’) and Network1 sales, which [you] acquired in September 2014 and January 2015, respectively.” We further note that in recent earnings calls you have quantified year-
February 26, 2016
Page 2
over-year sales variances in constant currency excluding acquisitions. However, you have not quantified the impact that the acquired businesses had on net sales in your MD&A. Please tell us what consideration was given to disclosing the relative contribution that acquired businesses have had on the increase in net sales as compared to other factors cited in your disclosures. We also note that in your discussion of the increase in SG&A expenses for the same time period, you identify two sources, including increased SG&A from the recent acquisitions, to which the overall SG&A increase is “primarily” attributable. Please advise what consideration you gave to quantifying the driving factors (as well as quantifying offsetting amounts) for the change in this line item. We refer you to Section III.D of SEC Release No. 33-6835.
Response
The Company considered Instruction 4 to Item 303(a) which requires a discussion of the causes of material changes from year-to-year in financial statement line items “changes shall be described to the extent necessary to an understanding of the registrant’s business as a whole.” During the preparation of the 2015 Form 10-K, the Company considered all of the previous disclosed information regarding the acquired businesses, including the Current Reports on Form 8-K’s filed to announce the agreements to acquire each entity. The acquired businesses accounted for over 65% of the year-over-year increase in sales and we therefore identified in our 10-K disclosures that the acquired businesses were the primary factor of the sales increase. The Company also identified growth in our North America businesses to provide clarity on which other businesses / geographies contributed to the increase in sales.
The Company has since re-evaluated its disclosures related to sales attributable to acquired companies and is now quantifying the driving and offsetting factors to sales including, in particular, any acquisitions that materially impact total net sales in its Form 10-Q for the quarter ended December 31, 2015 and will provide this disclosure in future filings to provide improved clarity to the reader of the financial statements to quantify the significant contributors to sales fluctuations, including the effects of acquisitions.
For the MD&A discussion related to SG&A, the Company reported a year-to-year variance of $30.5 million. Because over 85% of this variance was related to the acquisitions, additional SG&A related to the newly acquired entities was identified as the primary reason for the change year-over-year. We did not consider quantifying the amount because the year-over-year change was almost fully explained by the acquisitions. The bad debt factor was cited by the Company to provide responsive information with respect to offsetting amounts.
In future filings, the Company will consider providing additional disclosures around the primary reasons for fluctuations in SG&A and will quantify them appropriately. The Company will also consider isolating our explanations to substantive and recurring changes that are indicative of how the Company expects to operate and to provide the reader with the most meaningful information possible.
February 26, 2016
Page 3
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note (1) Business and Summary of Significant Accounting Policies
Goodwill, page 56
2.
We note you previously had seven reporting units and that during fiscal year 2015 you reorganized your reporting units and concluded that recognizing reporting units at the segment level was appropriate. Please provide us with your analysis that supports this change. We also note your disclosure that the new structure is more representative of how the business is managed; however, disclosures throughout your filing indicate that there are several business units within each operating segment. Please tell us how these business units were considered in your analysis. We refer you to ASC 350-20-35-33 through 38 and the implementation guidance in ASC 350-20-55-6 through 8.
Response
In summary, prior to June 2013, the Company was managed by regional executives. After June 2013, the Company re-organized to be technology focused, generally around vendor partners to strengthen and leverage the global relationships. In fiscal 2015, the Company began acquiring additional Companies which made the management of our structure too complex for one person to manage. As such, we re-evaluated our management structure and our internal reporting and therefore re-assessed our position under ASC 280 and ASC 350. The following is a more robust description of the activities that led the Company to change reporting units.
Prior to June 2013, the Company had three operating segments and four reporting units. The operating segments were North America, Europe and Latin America which were reported as North America and International Reporting Segments. Both Europe and Latin America were aggregated into one reportable segment due to their similar economic characteristics. The Europe and Latin America operating segments also reported to the same president. Furthermore, the reporting units were defined as North America, Europe, Latin America and Brazil after aggregation.
In June 2013, the Company changed the focus of its management team to a worldwide technology basis and the Worldwide Barcoding and Security Segment and the Worldwide Communication and Services Segment were formed. At this time, the Company determined its reporting units as follows (after aggregation) based upon looking at components one level down from the operating segment and reviewing management reporting structures, recovery of goodwill and gross margins:
a.
ScanSource POS & Barcode North America aggregated with Security due to its similar business model and gross margins.
b.
ScanSource POS & Barcode Europe.
c.
ScanSource POS & Barcode Latin America
d.
ScanSource POS & Barcode Brazil
February 26, 2016
Page 4
e.
Scan Source Communications North America aggregated with Catalyst due to their similar business model and the fact that both units reported to one President.
f.
ScanSource Communications Europe
g.
OUI (Later known as The ScanSource Services Group)
Over time, we found that the respective segment management teams began managing key vendor relationships from a global level. The consolidation of key vendor management allowed us to deepen our relationships and get more attention from our vendor-partners. In addition, we broadened the sharing of best practices across the component business units related to vendor management. This was done by rotating management through different geographic businesses and expanding the roles of several merchandising and sales management to include multiple geographies. Furthermore, many of our non-customer facing support functions like finance/accounting, credit and collections, information technology, human resources, legal, marketing and certain warehousing operations had management globally centralized.
In Fiscal 2015, we had several changes to our reporting units. We acquired Imago ScanSource in September 2014 and Network 1 in January of 2015. Both of these companies are considered components of the Worldwide Communications & Services Segment. Due to the addition of Network1 and the changing market conditions in our Latin America reporting, we reorganized the two legacy reporting units of Latin America POS & Barcoding and Brazil POS & Barcoding (CDC) in third quarter of fiscal year 2015. All of the point-of-sale and barcoding business for Central and South America and the Caribbean reported to one President, Alexandre Conde, in a component reporting unit known as ScanSource Latin America POS & Barcoding. Furthermore, all the communications businesses for the same region reported to Rafael Paloni, the President of Network 1, (known as ScanSource Communications Latin America), also a component reporting unit. Furthermore, the component unit known as the ScanSource Services Group was reorganized to report to the President of the ScanSource Catalyst unit, David Hertwig, as many of the services performed by this group relate to the technologies sold through the ScanSource Catalyst unit. This resulted in the aggregation of the two units.
As this reorganization took place after the two acquisitions, management changed the way we reviewed the business as the number of component business units increased. This change also triggered management to review the effects on the segments and goodwill reporting units. During this process, we reassessed the guidance described in ASC 350-20-35-35, which requires that components of a segment with similar economic characteristics to be aggregated. The guidance further states that the assessment of similar economic characteristics is a matter of judgment and should be more qualitative than quantitative. Factors that should be considered in ASC 350-20-55 are, but are not limited to the following:
a.
The manner in which an entity operates its business and the nature of those operations.
b.
Whether goodwill is recoverable from the separate operations of each component business or from two or more component businesses working in concert (which might be the case if the components are economically interdependent.)
February 26, 2016
Page 5
c.
The extent to which the component businesses share assets and other resources, as might be evidenced by extensive transfer pricing mechanisms.
d.
Whether the components support and benefit from common research and development projects.
The guidance also suggests that the factors in ASC 280-10-50-11 should be considered. The guidance does not require that all the factors be met in order for two components to be considered economically similar.
Under ASC 280-10-50-11, two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the objective and basic principles of ASC 280, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:
a.
The nature of products and services.
b.
The nature of the production processes.
c.
The type or class of customer for their products and services.
d.
The methods used to distribute their products or provide their services.
e.
If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.
Furthermore, the guidance is clear that components that share similar economic characteristics, but relate to different operating segments cannot be combined into a single reporting unit.
In assessing our reporting units, the Company only operates in one line of business; distribution of products and services to resellers. By performing this activity, we provide a lower variable cost option to our manufacturers to outsource their finished goods operation, by providing demand planning, large purchases and predictable cash flow with low credit risk. We then resell these products and services to value-added resellers with pre-sales technical support, pricing discount claiming, inventory availability and both unsecured and secured credit limits, which effectively makes the reseller more efficient both operationally and financially. This same model is used no matter the geography in which we operate or what products are sold. At a segment level, we differentiate only between the technologies we sell, which is generally driven by vendor. Currently the segments are: Worldwide Barcode & Security and Worldwide Communications & Services. Management believes that the recovery of goodwill is attributable across multiple components within the segment as vendor relationships strengthen when we acquire more business in new markets. This also allows greater sharing of resources such as people, marketing tools and sales strategies to enhance the business as a whole. We have also found that operating incomes for the component units within the segments are similar over time. Management considers these factors as well as the similar nature of its business, which includes the nature of its products and services, the type of customers served and the methods used to distribute its products and services described above, as strong arguments in the assessment that components below the segment are economically similar and should be aggregated as discussed in ASC 350-20-35-35 through 38 and ASC 350-20-55-6 through 8.
February 26, 2016
Page 6
Based on all of the factors considered above regarding economic similarities and weighing the qualitative factors more that the quantitative factors, the Company has elected to aggregate all components under each operating segment into one reporting unit for purposes of our impairment testing under ASC 350-20. For more information related to the identification of the segments, please see the response to item 4 below.
Note (5) Acquisitions, page 61
3.
We note your disclosure indicating that you have not provided pro forma results of operations for Imago and Network1 because the results of the acquisitions were not considered material to your consolidated results. However, based on your disclosures in MD&A, it would appear that these acquisitions had a significant impact on the current year’s revenues and certain expense items. Please explain to us how you concluded that the results of Imago and Network1 were not material. We refer you to ASC 805-10-50-2(h)(3).
Response
The Company referenced ASC 805-10-50-2(h)(3) and Rule 1-02(w) of Regulation S-X (“Rule 1-02”) to determine if the acquisitions during the fiscal year were significant to the Company.
The Company considered qualitative factors such as the type of business, customer basis and vendor basis, which are similar to our existing business. We feel readers of our financial statements would not find significant value in pro forma financial data given the newly acquired businesses are not substantively different from the activities that generate our historic revenues, operating income and EPS. More value can be gleaned from the current results presented, with the unders
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CORRESP
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CORRESP
February 26, 2016
Via EDGAR Submission
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549
Attention: Ms. Kathleen Collins, Accounting Branch Chief
Office of Information Technologies and Services
Re: Form 10-K for the Fiscal Year Ended June 30, 2015
Filed August 27, 2015
File No. 000-26926
Ladies and Gentlemen:
This letter is submitted in response to comments contained in the letter dated January 14, 2016 from Kathleen Collins of the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Charles A. Mathis, Executive Vice President and Chief Financial Officer of ScanSource, Inc. (the “Company”), regarding the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (the “2015 Form 10-K”).
The comments and responses set forth below are keyed to the numbering of the comments and the headings used in the Staff’s January 14, 2016 letter. Capitalized terms used but not otherwise defined herein have the meanings given them in the 2015 Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Comparison of Fiscal Years Ended June 30, 2015 and 2014
Worldwide Communications and Services, page 28
1.
We note that net sales increased $265.8 million compared to the prior fiscal year and that such increase “is primarily due to the inclusion of Imago ScanSource (‘Imago’) and Network1 sales, which [you] acquired in September 2014 and January 2015, respectively.” We further note that in recent earnings calls you have quantified year-
February 26, 2016
Page 2
over-year sales variances in constant currency excluding acquisitions. However, you have not quantified the impact that the acquired businesses had on net sales in your MD&A. Please tell us what consideration was given to disclosing the relative contribution that acquired businesses have had on the increase in net sales as compared to other factors cited in your disclosures. We also note that in your discussion of the increase in SG&A expenses for the same time period, you identify two sources, including increased SG&A from the recent acquisitions, to which the overall SG&A increase is “primarily” attributable. Please advise what consideration you gave to quantifying the driving factors (as well as quantifying offsetting amounts) for the change in this line item. We refer you to Section III.D of SEC Release No. 33-6835.
Response
The Company considered Instruction 4 to Item 303(a) which requires a discussion of the causes of material changes from year-to-year in financial statement line items “changes shall be described to the extent necessary to an understanding of the registrant’s business as a whole.” During the preparation of the 2015 Form 10-K, the Company considered all of the previous disclosed information regarding the acquired businesses, including the Current Reports on Form 8-K’s filed to announce the agreements to acquire each entity. The acquired businesses accounted for over 65% of the year-over-year increase in sales and we therefore identified in our 10-K disclosures that the acquired businesses were the primary factor of the sales increase. The Company also identified growth in our North America businesses to provide clarity on which other businesses / geographies contributed to the increase in sales.
The Company has since re-evaluated its disclosures related to sales attributable to acquired companies and is now quantifying the driving and offsetting factors to sales including, in particular, any acquisitions that materially impact total net sales in its Form 10-Q for the quarter ended December 31, 2015 and will provide this disclosure in future filings to provide improved clarity to the reader of the financial statements to quantify the significant contributors to sales fluctuations, including the effects of acquisitions.
For the MD&A discussion related to SG&A, the Company reported a year-to-year variance of $30.5 million. Because over 85% of this variance was related to the acquisitions, additional SG&A related to the newly acquired entities was identified as the primary reason for the change year-over-year. We did not consider quantifying the amount because the year-over-year change was almost fully explained by the acquisitions. The bad debt factor was cited by the Company to provide responsive information with respect to offsetting amounts.
In future filings, the Company will consider providing additional disclosures around the primary reasons for fluctuations in SG&A and will quantify them appropriately. The Company will also consider isolating our explanations to substantive and recurring changes that are indicative of how the Company expects to operate and to provide the reader with the most meaningful information possible.
February 26, 2016
Page 3
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note (1) Business and Summary of Significant Accounting Policies
Goodwill, page 56
2.
We note you previously had seven reporting units and that during fiscal year 2015 you reorganized your reporting units and concluded that recognizing reporting units at the segment level was appropriate. Please provide us with your analysis that supports this change. We also note your disclosure that the new structure is more representative of how the business is managed; however, disclosures throughout your filing indicate that there are several business units within each operating segment. Please tell us how these business units were considered in your analysis. We refer you to ASC 350-20-35-33 through 38 and the implementation guidance in ASC 350-20-55-6 through 8.
Response
In summary, prior to June 2013, the Company was managed by regional executives. After June 2013, the Company re-organized to be technology focused, generally around vendor partners to strengthen and leverage the global relationships. In fiscal 2015, the Company began acquiring additional Companies which made the management of our structure too complex for one person to manage. As such, we re-evaluated our management structure and our internal reporting and therefore re-assessed our position under ASC 280 and ASC 350. The following is a more robust description of the activities that led the Company to change reporting units.
Prior to June 2013, the Company had three operating segments and four reporting units. The operating segments were North America, Europe and Latin America which were reported as North America and International Reporting Segments. Both Europe and Latin America were aggregated into one reportable segment due to their similar economic characteristics. The Europe and Latin America operating segments also reported to the same president. Furthermore, the reporting units were defined as North America, Europe, Latin America and Brazil after aggregation.
In June 2013, the Company changed the focus of its management team to a worldwide technology basis and the Worldwide Barcoding and Security Segment and the Worldwide Communication and Services Segment were formed. At this time, the Company determined its reporting units as follows (after aggregation) based upon looking at components one level down from the operating segment and reviewing management reporting structures, recovery of goodwill and gross margins:
a.
ScanSource POS & Barcode North America aggregated with Security due to its similar business model and gross margins.
b.
ScanSource POS & Barcode Europe.
c.
ScanSource POS & Barcode Latin America
d.
ScanSource POS & Barcode Brazil
February 26, 2016
Page 4
e.
Scan Source Communications North America aggregated with Catalyst due to their similar business model and the fact that both units reported to one President.
f.
ScanSource Communications Europe
g.
OUI (Later known as The ScanSource Services Group)
Over time, we found that the respective segment management teams began managing key vendor relationships from a global level. The consolidation of key vendor management allowed us to deepen our relationships and get more attention from our vendor-partners. In addition, we broadened the sharing of best practices across the component business units related to vendor management. This was done by rotating management through different geographic businesses and expanding the roles of several merchandising and sales management to include multiple geographies. Furthermore, many of our non-customer facing support functions like finance/accounting, credit and collections, information technology, human resources, legal, marketing and certain warehousing operations had management globally centralized.
In Fiscal 2015, we had several changes to our reporting units. We acquired Imago ScanSource in September 2014 and Network 1 in January of 2015. Both of these companies are considered components of the Worldwide Communications & Services Segment. Due to the addition of Network1 and the changing market conditions in our Latin America reporting, we reorganized the two legacy reporting units of Latin America POS & Barcoding and Brazil POS & Barcoding (CDC) in third quarter of fiscal year 2015. All of the point-of-sale and barcoding business for Central and South America and the Caribbean reported to one President, Alexandre Conde, in a component reporting unit known as ScanSource Latin America POS & Barcoding. Furthermore, all the communications businesses for the same region reported to Rafael Paloni, the President of Network 1, (known as ScanSource Communications Latin America), also a component reporting unit. Furthermore, the component unit known as the ScanSource Services Group was reorganized to report to the President of the ScanSource Catalyst unit, David Hertwig, as many of the services performed by this group relate to the technologies sold through the ScanSource Catalyst unit. This resulted in the aggregation of the two units.
As this reorganization took place after the two acquisitions, management changed the way we reviewed the business as the number of component business units increased. This change also triggered management to review the effects on the segments and goodwill reporting units. During this process, we reassessed the guidance described in ASC 350-20-35-35, which requires that components of a segment with similar economic characteristics to be aggregated. The guidance further states that the assessment of similar economic characteristics is a matter of judgment and should be more qualitative than quantitative. Factors that should be considered in ASC 350-20-55 are, but are not limited to the following:
a.
The manner in which an entity operates its business and the nature of those operations.
b.
Whether goodwill is recoverable from the separate operations of each component business or from two or more component businesses working in concert (which might be the case if the components are economically interdependent.)
February 26, 2016
Page 5
c.
The extent to which the component businesses share assets and other resources, as might be evidenced by extensive transfer pricing mechanisms.
d.
Whether the components support and benefit from common research and development projects.
The guidance also suggests that the factors in ASC 280-10-50-11 should be considered. The guidance does not require that all the factors be met in order for two components to be considered economically similar.
Under ASC 280-10-50-11, two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the objective and basic principles of ASC 280, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:
a.
The nature of products and services.
b.
The nature of the production processes.
c.
The type or class of customer for their products and services.
d.
The methods used to distribute their products or provide their services.
e.
If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.
Furthermore, the guidance is clear that components that share similar economic characteristics, but relate to different operating segments cannot be combined into a single reporting unit.
In assessing our reporting units, the Company only operates in one line of business; distribution of products and services to resellers. By performing this activity, we provide a lower variable cost option to our manufacturers to outsource their finished goods operation, by providing demand planning, large purchases and predictable cash flow with low credit risk. We then resell these products and services to value-added resellers with pre-sales technical support, pricing discount claiming, inventory availability and both unsecured and secured credit limits, which effectively makes the reseller more efficient both operationally and financially. This same model is used no matter the geography in which we operate or what products are sold. At a segment level, we differentiate only between the technologies we sell, which is generally driven by vendor. Currently the segments are: Worldwide Barcode & Security and Worldwide Communications & Services. Management believes that the recovery of goodwill is attributable across multiple components within the segment as vendor relationships strengthen when we acquire more business in new markets. This also allows greater sharing of resources such as people, marketing tools and sales strategies to enhance the business as a whole. We have also found that operating incomes for the component units within the segments are similar over time. Management considers these factors as well as the similar nature of its business, which includes the nature of its products and services, the type of customers served and the methods used to distribute its products and services described above, as strong arguments in the assessment that components below the segment are economically similar and should be aggregated as discussed in ASC 350-20-35-35 through 38 and ASC 350-20-55-6 through 8.
February 26, 2016
Page 6
Based on all of the factors considered above regarding economic similarities and weighing the qualitative factors more that the quantitative factors, the Company has elected to aggregate all components under each operating segment into one reporting unit for purposes of our impairment testing under ASC 350-20. For more information related to the identification of the segments, please see the response to item 4 below.
Note (5) Acquisitions, page 61
3.
We note your disclosure indicating that you have not provided pro forma results of operations for Imago and Network1 because the results of the acquisitions were not considered material to your consolidated results. However, based on your disclosures in MD&A, it would appear that these acquisitions had a significant impact on the current year’s revenues and certain expense items. Please explain to us how you concluded that the results of Imago and Network1 were not material. We refer you to ASC 805-10-50-2(h)(3).
Response
The Company referenced ASC 805-10-50-2(h)(3) and Rule 1-02(w) of Regulation S-X (“Rule 1-02”) to determine if the acquisitions during the fiscal year were significant to the Company.
The Company considered qualitative factors such as the type of business, customer basis and vendor basis, which are similar to our existing business. We feel readers of our financial statements would not find significant value in pro forma financial data given the newly acquired businesses are not substantively different from the activities that generate our historic revenues, operating income and EPS. More value can be gleaned from the current results presented, with the unders