ScanSource, Inc. Fiscal 2021 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021. The request metadata references “2020 Q4,” but the supplied filing is the fiscal 2021 annual report, filed August 24, 2021. Unless noted, amounts relate to continuing operations.
Business Context
ScanSource is a technology solutions distributor serving approximately 30,000 sales partners in the United States, Canada, Brazil and the United Kingdom. Its two segments are Worldwide Barcode, Networking & Security and Worldwide Communications & Services. Offerings include mobility and barcode, point-of-sale, payments, physical security, networking, unified communications, telecom, cloud and related services.
During the first half of fiscal 2021, ScanSource completed the divestiture of product distribution operations in Europe, the United Kingdom, Mexico, Colombia, Chile, Peru and Miami-based export operations. These businesses are reported as discontinued operations. The company retained digital operations in certain divested markets and is focusing capital on higher-margin businesses.
Financial Performance and Key Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $3.151 billion | $3.048 billion | +3.4% |
| Gross profit | $350.7 million | $355.6 million | -1.4% |
| Gross margin | 11.1% | 11.7% | -0.6 percentage points |
| Operating income | $61.5 million | $(65.0) million | Improved by $126.5 million |
| Operating margin | 2.0% | (2.1)% | Improved by 4.1 percentage points |
| Net income from continuing operations | $45.4 million | $(79.2) million | Returned to profitability |
| Net income/(loss) | $10.8 million | $(192.7) million | Returned to profitability |
| Diluted EPS from continuing operations | $1.78 | $(3.12) | Improved by $4.90 |
| Cash flow from continuing operations | $116.8 million | $182.0 million | Down $65.3 million |
| Total debt | $143.2 million | $218.7 million | Down $75.6 million |
Constant-currency net sales, excluding the effects of acquisitions and divestitures, increased 5.5%. Worldwide Barcode, Networking & Security sales increased 3.9% reported, or 4.8% in constant currency. Worldwide Communications & Services sales increased 2.2% reported, or 7.1% in constant currency. Intelisys net sales increased 13%, with approximately $2.0 billion of supplier net billings and $64.9 million of reported net sales.
Adjusted operating income, excluding specified non-GAAP items, was $93.1 million versus $78.9 million in fiscal 2020. Adjusted EBITDA was $109.9 million versus $97.0 million, and return on invested capital increased to 11.8% from 7.5%.
Balance Sheet, Liquidity and Cash Flow
- Cash and cash equivalents were $62.7 million at June 30, 2021, compared with $29.5 million a year earlier; $52.1 million was held outside the United States.
- Working capital was $486.7 million, compared with $484.5 million on the consolidated selected-data presentation for fiscal 2020. Management reported net investment in working capital of $486.7 million versus $431.3 million, reflecting higher receivables and payables.
- Accounts receivable were $569.0 million and inventories were $470.1 million. Accounts payable increased to $634.8 million from $454.2 million.
- No borrowings were outstanding under the revolving credit facility at year-end. The facility provides $350 million of revolving capacity, with $281.6 million available based on leverage calculations at June 30, 2021.
- The senior secured term loan and Mississippi revenue bond comprised most of total debt. The credit facility matures April 30, 2024 and includes a $150 million term loan and a $350 million revolver.
- The company complied with its maximum 3.50:1.00 leverage covenant and minimum 3.00:1.00 interest coverage covenant at year-end.
- Cash used in financing activities was $118.8 million, primarily reflecting debt repayments and the final $46.9 million Intelisys earnout payment. Capital expenditures were $2.4 million.
Material Changes Versus the Prior Comparable Period
- Fiscal 2021 benefited from the absence of the $119.0 million goodwill impairment recorded in fiscal 2020 and the absence of $1.4 million of continuing-operations intangible impairment.
- Gross margin declined because of less favorable sales mix and lower vendor-program recognition.
- SG&A decreased $12.1 million, or 4.7%, largely due to a $30 million annualized expense-reduction plan implemented in response to the pandemic.
- Fiscal 2021 included $9.3 million of restructuring and other charges, primarily severance and employee benefits; $1.2 million remained accrued at year-end and was expected to be paid by the first quarter of fiscal 2022.
- Discontinued operations produced a $34.6 million net loss, including a $34.6 million pre-tax disposal loss and $11.6 million of realized foreign-currency translation losses. The divestitures generated $34.4 million of cash proceeds.
- Operating cash flow declined as accounts receivable increased $118.9 million and inventory increased $12.3 million, partly offset by a $175.1 million increase in accounts payable.
Guidance, Outlook, Risks and Unusual Items
Management expects a fiscal 2022 effective tax rate from continuing operations of approximately 25.0% to 26.0% and fiscal 2022 capital expenditures of approximately $5 million to $8 million. Management believes existing cash, operating cash flow and credit availability will fund working capital and other requirements for at least the next twelve months.
COVID-19 disruptions were most pronounced in the fourth quarter of fiscal 2020 and sales recovered during fiscal 2021. Management continued to identify supply-chain disruption, product shortages, staffing constraints, higher health and prevention costs and uncertain customer demand as risks.
- Supplier concentration is material: Cisco and Zebra each represented more than 10% of annual net sales.
- Semiconductor and other product shortages may constrain revenue, inventory availability and customer fulfillment.
- Competition may pressure pricing, gross margins and market share; management characterizes industry margins as historically narrow.
- Credit exposure, customer collections, inventory obsolescence, foreign exchange, variable interest rates and international operations may affect liquidity and earnings.
- Cybersecurity incidents, information-system failures and dependence on centralized distribution and third-party logistics providers could disrupt operations.
- Goodwill and intangible valuations depend on projected growth, margins, working capital and discount rates. No goodwill impairment was recorded in fiscal 2021, but future adverse changes could produce material non-cash charges.
- The company authorized a new $100 million share-repurchase program in August 2021 with no expiration date. It has never paid a cash dividend, and the credit facility restricts dividends.
- Management and Grant Thornton reported effective disclosure controls and internal control over financial reporting. Grant Thornton issued unqualified audit opinions; supplier incentives were identified as the critical audit matter.
Most Important Facts for Investors to Verify
- Reconcile continuing-operations performance with consolidated net income, particularly the $34.6 million discontinued-operations loss and prior-year impairment charges.
- Assess whether sales growth can continue without further gross-margin deterioration, especially given supplier rebates, product mix and Cisco/Zebra concentration.
- Verify sustained cash conversion as receivables and inventory grow with sales, and monitor availability under the revolving credit facility and covenant headroom.
- Evaluate whether the expense-reduction plan is sustainable without impairing service levels, employee retention or organic growth investments.
- Review the remaining goodwill, intangible assets and assumptions used in impairment testing.
- Monitor COVID-19 effects, semiconductor availability, supply-chain conditions, customer credit losses, foreign exchange and Brazilian operating risks.
- Confirm the timing and execution of the $100 million repurchase authorization relative to debt reduction, acquisitions and liquidity needs.