ScanSource, Inc. Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020. The provided filing is a fiscal 2020 annual report, not a fiscal 2019 fourth-quarter filing. Quarterly data identify the quarter ended June 30, 2020 as fiscal Q4.
Business Context
ScanSource distributes technology solutions and services through value-added resellers, agents, independent sales organizations and software vendors. Its continuing operations are organized into Worldwide Barcode, Networking & Security and Worldwide Communications & Services. The company serves approximately 30,000 customers and offers products and services from approximately 500 suppliers.
ScanSource acquired intY and its CASCADE cloud-services platform on July 1, 2019. It also classified product-distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and Miami-based export operations as held for sale and discontinued operations.
Financial Performance and Key Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3.048 billion | $3.250 billion | Down 6.2% |
| Gross profit | $355.6 million | $392.8 million | Down 9.5% |
| Gross margin | 11.7% | 12.1% | Down 40 basis points |
| Operating income/(loss) | $(65.0) million | $94.7 million | Declined $159.7 million |
| Net income/(loss) from continuing operations | $(79.2) million | $64.9 million | Turned to loss |
| Net income/(loss) | $(192.7) million | $57.6 million | Turned to loss |
| Diluted EPS | $(7.59) | $2.24 | Declined |
| Operating cash flow from continuing operations | $182.0 million | $16.0 million | Increased $166.0 million |
| Total debt | $218.7 million | $327.5 million | Down $108.8 million |
| Cash and cash equivalents from continuing operations | $29.5 million | $19.3 million | Increased $10.2 million |
Fiscal 2020 net loss included $120.5 million of continuing-operations impairment charges, including $119.0 million of goodwill impairment in Worldwide Barcode, Networking & Security and $1.4 million related to Canpango. Discontinued operations generated a $113.4 million net loss, including an $88.9 million pre-tax loss from held-for-sale classification and $13.7 million of impairment charges.
Adjusted operating income, excluding specified non-GAAP items, was $78.9 million compared with $129.0 million in fiscal 2019. Adjusted diluted EPS from continuing operations was $2.05 compared with $3.41. Return on invested capital declined to 7.5% from 12.1%.
Segment and Quarterly Trends
- Worldwide Barcode, Networking & Security: Sales declined 2.3% to $2.093 billion. Gross margin fell to 8.6% from 9.8%. Reported operating loss was $83.5 million, including $119.0 million of goodwill impairment; adjusted operating income was $37.9 million.
- Worldwide Communications & Services: Sales declined 13.8% to $954.5 million. Gross margin improved to 18.3% from 16.6%, aided by Intelisys recurring revenue and intY SaaS activity. Operating income declined to $22.5 million from $38.9 million.
- Fiscal fourth quarter: Net sales were $636.5 million, down 21.6% year over year on a GAAP basis and down 19.3% on a non-GAAP basis excluding foreign-currency translation. Continuing-operations net loss was $108.9 million, substantially affected by impairment charges.
Cash Flow, Liquidity and Debt
- Operating cash flow from continuing operations was $182.0 million, primarily due to lower accounts receivable and inventory balances as sales declined.
- Investing cash outflow was $55.3 million, including $48.9 million for the intY acquisition and $6.4 million of capital expenditures.
- Financing cash outflow was $152.7 million, primarily reflecting debt repayments and contingent-consideration payments.
- The amended credit facility includes a $350 million revolving facility and a $150 million term loan, with an accordion feature permitting total commitments of up to $750 million subject to lender commitments. Maturity is April 30, 2024.
- The company reported compliance with its maximum 3.50-to-1.00 leverage ratio and minimum 3.00-to-1.00 interest-coverage ratio at June 30, 2020. Borrowing availability was $132.1 million based on covenant calculations, although total facility availability before covenant limitations was reported at $257.3 million.
- One final Intelisys earnout remained, with a recorded fair value of $46.3 million and estimated undiscounted payments of up to $46.9 million.
Material Changes, Outlook and Risks
- COVID-19 materially reduced demand, particularly in the fourth quarter, and increased employee-related healthcare and prevention costs. Management expected adverse effects to continue for at least the next two quarters or longer.
- In July 2020, management announced an approximately $30 million annualized expense-reduction plan, partly offset by $8 million to $9 million of severance and employee benefits. The plan reduces costs in wholesale distribution while continuing investment in Intelisys.
- ScanSource initiated the closure of Canpango because of limited partner adoption and recorded an approximately $2 million pre-tax non-cash charge. Existing contracts were expected to be completed over the following months.
- An agreement was signed July 23, 2020 to sell the Latin American divestiture businesses outside Brazil to Intcomex, with closing expected around September 30, 2020. No definitive agreement had been executed for the Europe and UK businesses as of the filing date.
- Management expected fiscal 2021 continuing-operations effective tax rate of approximately 28.5% to 29.5% and fiscal 2021 capital expenditures of approximately $3 million to $6 million.
- Principal risks include COVID-19, economic weakness, customer credit losses, supplier concentration and termination risk, intense competition and narrow margins, foreign-currency exposure, cyber and information-system disruptions, inventory obsolescence, acquisition execution, divestiture execution, goodwill impairment and compliance with debt covenants.
- Cisco and Zebra each accounted for more than 10% of fiscal 2020 net sales. Supplier agreements are generally short term and may be terminated without cause on 30 to 120 days’ notice.
Important Facts for Investors to Verify
- Whether the announced expense reductions offset continued COVID-19-related revenue pressure and preserve customer and supplier relationships.
- The timing, proceeds and final accounting for the Latin American, Europe and UK divestitures.
- The sustainability of Intelisys growth and the higher gross margin in Worldwide Communications & Services.
- Remaining liquidity after the Intelisys earnout, discontinued-operation obligations and any required debt repayments.
- Potential additional goodwill, intangible-asset or inventory impairments if revenue and margin assumptions weaken.
- Exposure to Cisco and Zebra supplier relationships, supplier rebates, product availability and termination provisions.
- Customer receivable quality, including the increase in days sales outstanding to 63 days from 58 days.
- The filing states that Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management excluded intY from its internal-control assessment because it was acquired during fiscal 2020.