ScanSource, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2023; fiscal year ended June 30. The financial statements are unaudited and should be read with the fiscal 2023 Form 10-K.
Business context
ScanSource is a hybrid technology distributor serving approximately 30,000 customers across hardware, software-as-a-service, connectivity and cloud services. Its reportable segments are Specialty Technology Solutions and Modern Communications & Cloud. Operations span the United States, Canada, Brazil and the United Kingdom.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2023 | Quarter ended Dec. 31, 2022 | Six months ended Dec. 31, 2023 | Six months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Net sales | $884.8 million | $1,011.2 million | $1,761.1 million | $1,955.1 million |
| Gross profit | $100.7 million | $115.3 million | $207.3 million | $228.8 million |
| Gross margin | 11.4% | 11.4% | 11.8% | 11.7% |
| Operating income | $26.8 million | $39.4 million | $50.9 million | $74.3 million |
| Operating margin | 3.0% | 3.9% | 2.9% | 3.8% |
| Net income | $32.7 million | $25.7 million | $48.2 million | $49.8 million |
| Diluted EPS | $1.29 | $1.01 | $1.91 | $1.96 |
| Operating cash flow | Not separately provided | Not separately provided | $156.8 million | $(75.3) million |
Net income benefited from a $14.5 million gain on the sale of the UK-based intY business and a $3.8 million discrete tax benefit primarily related to that transaction. Excluding disclosed adjustments, non-GAAP diluted EPS was $0.85 for the quarter and $1.60 for the six months, compared with $1.06 and $2.13, respectively, in the prior-year periods.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $45.0 million at December 31, 2023, up from $36.2 million at June 30, 2023. Approximately $38.3 million was held outside the United States.
- Total debt was $168.6 million, down from $329.9 million at June 30, 2023. Revolving-credit borrowings were $20.9 million versus $179.0 million at June 30, 2023.
- The company had $329.1 million available under its $350 million revolving credit facility. The facility and term loan mature September 28, 2027 and include an accordion feature of up to an additional $250 million, subject to lender commitments.
- The company was in compliance with its leverage and interest-coverage covenants at December 31, 2023. Cash dividends are restricted under the credit facility.
- Inventory declined 24% and accounts receivable declined 12% from June 30, 2023. Days sales outstanding improved to 68 days from 72 days at June 30, 2023.
- Fiscal 2024 capital expenditures are expected to range from $6.0 million to $8.0 million, primarily for information-technology investments and facility improvements.
Material changes versus the prior comparable period
- Quarterly net sales fell 12.5%; six-month sales fell 9.9%. On a constant-currency basis excluding divestitures, declines were 13.0% and 10.5%, respectively.
- Specialty Technology Solutions sales declined 17.0% for the quarter and 14.4% for the six months, primarily because of lower mobility and barcode volumes. Networking sales partially offset the decline.
- Modern Communications & Cloud sales declined 5.1% for the quarter and 2.7% for the six months, mainly because of lower communications hardware volumes. Cisco growth and Intelisys connectivity and cloud activity were partially offsetting. Intelisys net sales increased 7.5% for the quarter and 8.1% for the six months.
- Operating income declined 32.0% for the quarter and 31.5% for the six months. Segment operating margins also contracted, reflecting lower gross profit, less favorable mix and higher specific customer bad-debt reserves.
- Six-month operating cash flow improved by $232.1 million year over year, primarily because of inventory and receivables reductions. Financing cash flow was $(161.3) million, principally reflecting net revolving-credit repayments.
- SG&A declined 3.1% in the quarter but increased 1.2% for the six months. Six-month expense included higher bad-debt expense, while employee costs were lower.
- On December 19, 2023, ScanSource sold its UK-based intY business for $18.0 million of net cash proceeds and recorded a $14.5 million gain. It retained the CASCADE cloud-services distribution platform.
Guidance, outlook, risks and unusual items
Management expects the fiscal 2024 effective tax rate, excluding discrete items, to be approximately 27.0% to 28.0%. Management believes cash, operating cash flow and available borrowing capacity will satisfy current and expected working-capital and funding requirements for at least the next twelve months.
Key risks include prolonged economic weakness, inflation and supply-chain challenges; customer and supplier credit risk; loss of major customers or supplier relationships; foreign-exchange and interest-rate volatility; cybersecurity attacks and information-technology failures; execution of the organic-growth strategy; and employee retention. Management reported no material changes to the risk factors in the fiscal 2023 Form 10-K.
The company incurred $1.3 million of corporate operating costs during the six months related to the intY sale and cyberattack restoration. It also recorded higher specific customer reserves and maintained a $19.2 million allowance for doubtful accounts at December 31, 2023. Network1-related Brazilian tax contingencies were backed by escrowed indemnification receivables with $3.6 million available for future settlements or release to sellers.
Management stated that disclosure controls and procedures were effective at December 31, 2023, and that no material change occurred in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether lower hardware volumes stabilize and whether Intelisys, Cisco, networking and cloud growth can offset weakness in mobility, barcode and communications hardware.
- Whether inventory, receivables and accounts payable trends support continued strong operating cash flow without impairing vendor relationships or customer service.
- Progress toward restoring operating margins and controlling bad-debt, divestiture and cybersecurity-related costs.
- The sustainability of reported earnings after removing the intY sale gain and discrete tax benefit.
- Compliance with the 3.50-to-1.00 leverage covenant and 3.00-to-1.00 minimum interest-coverage covenant as operating results change.
- Exposure to floating interest rates, foreign currencies, cybersecurity incidents and unresolved Brazilian tax contingencies.
- The timing and financial impact of upcoming accounting standards on segment reporting and income-tax disclosures.