ScanSource, Inc. Form 10-Q Summary
Business Context and Reporting Period
ScanSource connects approximately 30,000 sales partners with technology suppliers across mobility and barcode, point-of-sale, payments, physical security, networking, unified communications, telecom and cloud services. The filing covers the quarter ended September 30, 2020, the first quarter of fiscal 2021, and compares results with the quarter ended September 30, 2019.
The company operates through Worldwide Barcode, Networking & Security and Worldwide Communications & Services. Product distribution businesses in Europe, the UK and Latin America outside Brazil were classified as discontinued operations and held for sale.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales from continuing operations | $757.3 million | $842.7 million | Down 10.1% |
| Gross profit | $80.8 million | $98.5 million | Down 18.0% |
| Gross margin | 10.7% | 11.7% | Down 100 basis points |
| Operating income | $1.6 million | $19.5 million | Down 91.6% |
| Operating margin | 0.2% | 2.3% | Down 210 basis points |
| Net income from continuing operations | $(0.1) million | $12.3 million | Declined $12.4 million |
| Net income (loss) | $(11.8) million | $11.5 million | Declined $23.3 million |
| Diluted EPS | $(0.47) | $0.45 | Declined $0.92 |
Continuing-operations results included $8.3 million of restructuring and other charges, $4.9 million of intangible amortization, $0.5 million of contingent-consideration expense and $0.5 million of acquisition and divestiture costs. Management reported non-GAAP operating income of $15.8 million versus $27.4 million in the prior-year quarter and non-GAAP diluted EPS from continuing operations of $0.42 versus $0.72.
- Worldwide Barcode, Networking & Security sales declined 9.9% to $523.6 million; operating income declined 80.6% to $2.1 million.
- Worldwide Communications & Services sales declined 10.6% to $233.8 million; operating income declined 10.3% to $8.3 million.
- Constant-currency sales excluding divestitures declined 7.1% year over year.
- Discontinued operations generated a $11.7 million net loss, including a $10.7 million pre-tax loss from reducing the estimated value of businesses held for sale.
Cash Flow, Liquidity and Debt
| Metric | September 30, 2020 | June 30, 2020 |
|---|---|---|
| Cash and cash equivalents from continuing operations | $49.9 million | $29.5 million |
| Accounts receivable | $509.8 million | $443.2 million |
| Inventory | $423.1 million | $454.9 million |
| Total assets | $1.733 billion | $1.692 billion |
| Total shareholders’ equity | $671.2 million | $678.2 million |
| Total debt, including discontinued operations | $168.7 million | $247.0 million |
- Cash provided by operating activities from continuing operations was $71.2 million, compared with $27.6 million in the prior-year quarter.
- Investing cash use was $0.7 million, compared with $50.0 million in the prior-year period, which included the $49.1 million intY acquisition.
- Financing cash use was $70.3 million, primarily reflecting net repayments on the revolving credit facility.
- Revolving-credit borrowings, including discontinued operations, were $19.9 million at September 30, 2020, versus $92.4 million at June 30, 2020.
- Reported borrowing availability was $330.1 million, subject to financial-covenant limitations; availability based on the leverage-ratio calculation was $179.9 million.
- The company was in compliance with its credit-facility covenants. The facility requires a leverage ratio no greater than 3.50 to 1.00 and an interest-coverage ratio of at least 3.00 to 1.00.
Material Changes Versus the Prior Comparable Period
- COVID-19 reduced customer demand and sales volumes, particularly in North American distribution and communications businesses. Management cited lower vendor-program recognition and lower gross margins.
- In July 2020, the company launched a global restructuring and cost-reduction program targeting $30 million of annualized expense reductions. Q1 charges were $8.3 million, primarily severance and employee benefits; $6.8 million remained accrued at quarter-end.
- The Canpango professional-services business was being closed because of limited partner adoption, with operations expected to cease by December 31, 2020.
- The final $46.9 million Intelisys earnout payment was paid in October 2020 and funded with revolver borrowings.
- The Latin American businesses outside Brazil were sold to Intcomex on October 30, 2020. Sales opportunities for the European and UK businesses remained in progress.
- Interest expense declined 42.3% to $1.9 million because of lower revolving-facility borrowings.
Guidance, Outlook, Risks and Unusual Items
Management stated that the duration and ultimate financial impact of COVID-19 cannot be predicted. Distribution facilities remained operational, while most office-based employees worked remotely. The company expects the pandemic to continue affecting demand, operating costs and the global economy.
- Fiscal 2021 effective tax rate guidance, excluding discrete items, is approximately 28.5% to 29.5%.
- Fiscal 2021 capital expenditures are expected to range from $3 million to $6 million.
- Management believes existing cash, operating cash flow and available credit will fund working-capital and other requirements for at least the next twelve months.
- Key risks include prolonged COVID-19 effects, execution of the divestitures, customer and supplier credit exposure, foreign-exchange and interest-rate volatility, cybersecurity and information-technology failures, employee retention, and loss of major customers or suppliers.
- The company had foreign-currency derivative notional amounts of $27.2 million and a $100 million interest-rate swap designated as a cash-flow hedge.
- Management reported no material off-balance-sheet arrangements and no legal proceedings expected to materially affect financial condition, results or cash flows.
Investor Verification Checklist
- Verify the final proceeds, accounting impact and remaining obligations from the Latin America sale and any future Europe or UK divestitures.
- Assess whether the $30 million annualized cost-reduction target is achieved and distinguish recurring savings from one-time restructuring charges.
- Monitor COVID-19-related demand, gross-margin recovery and the performance of Intelisys and other recurring-revenue businesses.
- Reconcile post-quarter-end revolver borrowings after the $46.9 million Intelisys earnout payment with covenant headroom and available liquidity.
- Review the valuation allowance and future carrying value of remaining discontinued operations held for sale.
- Confirm the company’s ability to maintain the required leverage and interest-coverage ratios if sales or adjusted EBITDA weaken.