ScanSource, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2021. The filing corresponds to fiscal 2021 third quarter, despite the request metadata identifying “2020 Q3.” Results are unaudited and primarily reflect continuing operations unless otherwise noted.
Business Context
ScanSource distributes technology solutions and services through approximately 30,000 sales partners and about 500 suppliers in the United States, Canada, Brazil and the UK. Its two operating segments are Worldwide Barcode, Networking & Security and Worldwide Communications & Services. During fiscal 2021, the Company completed divestitures of product-distribution businesses in Europe, the UK and Latin America outside Brazil.
Key Financial Metrics
| Metric | Quarter Ended March 31, 2021 | Quarter Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 |
|---|---|---|---|---|
| Net sales | $729.9 million | $744.6 million | $2.298 billion | $2.411 billion |
| Gross profit | $88.1 million | $84.6 million | $254.9 million | $281.4 million |
| Gross margin | 12.1% | 11.4% | 11.1% | 11.7% |
| Operating income | $19.4 million | $10.4 million | $38.2 million | $48.5 million |
| Operating margin | 2.7% | 1.4% | 1.7% | 2.0% |
| Income from continuing operations | $13.8 million | $5.7 million | $24.7 million | $29.6 million |
| Net income (loss) | $13.1 million | $1.7 million | $(12.9) million | $24.6 million |
| Diluted EPS from continuing operations | $0.54 | $0.23 | $0.97 | $1.16 |
| Diluted EPS | $0.51 | $0.07 | $(0.51) | $0.97 |
Cash flow and liquidity: Continuing-operations operating cash flow was $55.4 million for the first nine months, compared with $108.1 million in the prior-year period. Investing activities provided $32.1 million, primarily from $34.4 million of proceeds from divestitures. Financing activities used $62.8 million, including debt repayments and the $46.9 million final Intelisys earnout payment. Cash and cash equivalents were $49.3 million at March 31, 2021, compared with $29.5 million at June 30, 2020.
Debt: Total debt was $198.9 million at March 31, 2021, down from $247.0 million at June 30, 2020. Revolving-credit borrowings were $53.8 million. The Company had a $350 million revolving facility and a $150 million term loan facility, with contractual maturity of April 2024 for the amended credit facility. Reported availability was $296.2 million based on facility capacity and outstanding borrowings, and $172.6 million based on the applicable leverage-ratio calculation. The Company was in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Quarterly sales declined 2.0%, while nine-month sales declined 4.7%. On a constant-currency basis, sales were essentially flat for the quarter and declined 1.9% for the nine-month period.
- Quarterly gross profit increased 4.2% and gross margin expanded 70 basis points, driven by improved sales mix and vendor-program recognition. Nine-month gross profit declined 9.4% and margin decreased 60 basis points.
- Quarterly operating income increased 87.0%, primarily from higher gross profit and lower SG&A. Nine-month operating income declined 21.2%, principally because of lower gross profit and $9.3 million of restructuring charges.
- SG&A declined 7.5% in the quarter and 9.3% for the nine months, reflecting the expense-reduction plan and lower travel costs.
- Interest expense declined 49.1% for the quarter and 45.7% for the nine months because of lower revolving-credit borrowings.
- Quarterly net income from continuing operations more than doubled, but the nine-month result declined because of lower operating income. The nine-month consolidated net loss included a $37.6 million loss from discontinued operations, including a $34.5 million loss on disposal groups.
- Worldwide Barcode, Networking & Security sales increased 2.7% in the quarter but declined 4.1% for the nine months. Worldwide Communications & Services sales declined 10.9% in the quarter and 5.9% for the nine months, while its operating income improved substantially.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2021 capital expenditures of approximately $3 million to $5 million, primarily for information-technology investments and facility improvements.
- Management expects a fiscal 2021 effective tax rate, excluding discrete items, of approximately 28.25% to 29.25%.
- The Company expects existing cash, operating cash flow and available credit to provide sufficient liquidity for at least the next twelve months.
- A global cost-reduction and restructuring program targets approximately $30 million of annualized expense reductions. The Company recorded $9.3 million of restructuring and other charges during the first nine months, with $2.5 million remaining accrued at March 31, 2021.
- COVID-19 continues to create uncertainty regarding demand, economic conditions, operating costs and supply-chain conditions. Distribution facilities remained operational, and most office employees worked remotely.
- Key disclosed risks include customer and supplier credit exposure, loss or modification of major supplier relationships, foreign-exchange and interest-rate volatility, cybersecurity and information-technology failures, employee retention, and execution of the organic-growth strategy.
- The final Intelisys contingent-consideration payment was made in October 2020; no contingent-consideration liability remained at March 31, 2021.
- The Company reported no material off-balance-sheet arrangements and believes existing litigation is unlikely to have a material adverse effect, although adverse outcomes cannot be assured.
Investor Verification Points
- Verify the sustainability of quarterly margin expansion and whether the nine-month decline in vendor-program recognition reverses.
- Assess the recurring revenue growth and profitability contribution of Intelisys and other Communications & Services offerings.
- Reconcile consolidated earnings with discontinued-operation losses and confirm that divestiture-related charges are substantially complete.
- Monitor working-capital needs, particularly accounts receivable and inventory, as sales volumes recover.
- Confirm compliance with the 3.50-to-1.00 leverage covenant and 3.00-to-1.00 interest-coverage covenant.
- Evaluate the actual savings achieved from the $30 million annualized expense-reduction plan against restructuring costs and potential effects on growth investments.
- Consider the effects of COVID-19, foreign-currency movements, supplier concentration, cybersecurity exposure and the transition away from LIBOR.