ScanSource, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2020. The filing reports continuing operations separately from discontinued operations. ScanSource distributes technology solutions and services through approximately 30,000 channel partners, with operations in the United States, Canada, Brazil and the UK. During the quarter, it completed the divestiture of product distribution businesses in Europe, the UK and Latin America outside Brazil.
Key Financial Metrics
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales from continuing operations | $810.9 million | $824.0 million | $1,568.2 million | $1,666.7 million |
| Gross profit | $86.0 million | $98.3 million | $166.8 million | $196.8 million |
| Gross margin | 10.6% | 11.9% | 10.6% | 11.8% |
| Operating income | $17.1 million | $18.6 million | $18.8 million | $38.1 million |
| Operating margin | 2.1% | 2.3% | 1.2% | 2.3% |
| Net income from continuing operations | $11.1 million | $11.6 million | $10.9 million | $23.9 million |
| Net income (loss) | $(14.2) million | $11.4 million | $(26.0) million | $22.9 million |
| Diluted EPS from continuing operations | $0.43 | $0.46 | $0.43 | $0.94 |
| Diluted EPS | $(0.56) | $0.45 | $(1.02) | $0.90 |
Cash flow and liquidity: Cash provided by operating activities was $115.7 million for the six months, versus $82.7 million in the prior-year period. Investing activities provided $32.9 million, primarily from $34.4 million of proceeds from the divestitures. Financing activities used $109.9 million, including debt repayments and the $46.9 million final Intelisys earnout payment. Cash and cash equivalents were $67.2 million at December 31, 2020, compared with $29.5 million at June 30, 2020.
Balance sheet and debt: Accounts receivable were $534.6 million and inventories were $421.0 million at December 31, 2020. Total debt was $151.9 million, including $135.0 million of term debt and $5.0 million drawn on the revolving facility. Revolving-facility availability was $344.7 million based on outstanding borrowings, or $195.1 million after applying the facility’s leverage-ratio borrowing limitation. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Reported continuing-operations sales decreased 1.6% in the quarter and 5.9% for the six months. Excluding divestitures and foreign-currency translation, sales increased 1.8% in the quarter but decreased 2.7% for the six months.
- Worldwide Barcode, Networking & Security sales declined 4.1% in the quarter and 7.0% for the six months; operating income fell 55.7% and 67.0%, respectively. Lower vendor-program recognition and an unfavorable sales mix reduced gross profit and margins.
- Worldwide Communications & Services sales increased 4.2% in the quarter but declined 3.4% for the six months. Operating income increased 104.0% in the quarter and 36.7% for the six months, supported by lower SG&A and continued Intelisys growth.
- SG&A declined $7.4 million in the quarter and $13.8 million for the six months, reflecting the expense-reduction program and lower travel costs.
- Restructuring charges were $0.5 million in the quarter and $8.8 million for the six months, primarily employee severance. The company announced a $30 million annualized expense-reduction plan.
- Net loss was driven by discontinued operations, including a $23.1 million quarterly and $33.8 million six-month pre-tax loss on the divestiture group. The loss included a $11.6 million cumulative foreign-currency translation adjustment.
- Interest expense declined 45.8% in the quarter and 44.0% for the six months due primarily to lower revolving-facility borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2021 capital expenditures of approximately $3 million to $6 million, primarily for information technology investments and facility improvements.
- Management expects an effective tax rate, excluding discrete items, of approximately 28.75% to 29.75% for fiscal 2021.
- Management believes available cash, operating cash flow and credit facilities will provide sufficient liquidity for at least the next twelve months.
- COVID-19 continues to affect demand, employee-related costs and global economic conditions. Distribution facilities remained operational, while most office employees worked remotely. The company cannot predict the pandemic’s ultimate duration or impact.
- Other material risks include customer and supplier credit exposure, loss or modification of key supplier relationships, foreign-currency and interest-rate volatility, cyberattacks, information-technology failures, employee retention, and weaker economic conditions.
- Foreign-currency exposure is managed partly through forward contracts and other derivatives. The company had $29.7 million of foreign-currency derivative notional amounts and a $100 million interest-rate swap at December 31, 2020.
- The company closed its Canpango professional-services business because of limited partner adoption. Remaining restructuring accruals were $4.5 million and were expected to be paid through the first quarter of fiscal 2022.
- The company reported no material off-balance-sheet arrangements and stated that known litigation was not expected to have a material adverse effect, although adverse outcomes cannot be assured.
Important Facts for Investors to Verify
- Whether COVID-19-related demand and the lower-margin sales mix continue to pressure gross margins, particularly in Barcode, Networking & Security.
- The pace and sustainability of Intelisys and other higher-margin Communications & Services growth.
- Execution and cash benefits of the $30 million annualized expense-reduction and restructuring program.
- Final proceeds, receivables and any remaining obligations related to the completed divestitures.
- Compliance with the 3.50-to-1.00 leverage covenant and 3.00-to-1.00 interest-coverage covenant as operating results change.
- Accounts-receivable collectability, inventory turns and working-capital requirements as sales volumes recover.
- Exposure to foreign-currency movements, floating interest rates, supplier concentration, cybersecurity incidents and potential economic weakness.