ScanSource, Inc. Form 10-Q Summary
Business context and reporting period
ScanSource is a hybrid technology distributor serving more than 30,000 channel partners across hardware, software, connectivity and cloud markets. Its reportable segments are Specialty Technology Solutions and Modern Communications & Cloud, operating primarily in the United States, Canada, Brazil and the UK. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2021, the second quarter of fiscal 2022.
The company continued to operate all distribution facilities during the COVID-19 pandemic. Management reported ongoing labor shortages, supply-chain constraints and customer deal delays. Certain prior-year segment amounts were reclassified to conform to the current segment structure.
Key financial metrics
| Metric | Quarter ended December 31, 2021 | Quarter ended December 31, 2020 | Six months ended December 31, 2021 | Six months ended December 31, 2020 |
|---|---|---|---|---|
| Net sales | $864.4 million | $810.9 million | $1.722 billion | $1.568 billion |
| Gross profit | $107.9 million | $86.0 million | $209.2 million | $166.8 million |
| Gross margin | 12.5% | 10.6% | 12.2% | 10.6% |
| Operating income | $31.5 million | $17.1 million | $61.8 million | $18.8 million |
| Operating margin | 3.6% | 2.1% | 3.6% | 1.2% |
| Net income from continuing operations | $23.2 million | $11.1 million | $45.2 million | $10.9 million |
| Net income attributable to all operations | $23.3 million | $(14.2) million | $45.3 million | $(26.0) million |
| Diluted EPS from continuing operations | $0.89 | $0.43 | $1.75 | $0.43 |
| Adjusted EBITDA | $42.5 million | $29.7 million | The filing does not provide a six-month adjusted EBITDA value in the cited reconciliation | The filing does not provide a six-month adjusted EBITDA value in the cited reconciliation |
Specialty Technology Solutions revenue increased 9.2% in the quarter and 15.6% for the six months. Modern Communications & Cloud revenue increased 3.3% and 2.7%, respectively. Intelisys second-quarter revenue increased 14.1% year over year. Consolidated constant-currency revenue growth was 7.0% for the quarter and 9.8% for the six months.
For the six months, cash used in operating activities was $75.4 million, compared with $115.7 million of cash provided in the prior-year period. The use of cash primarily reflected increases of $54.4 million in accounts receivable and $95.5 million in inventory, partially offset by a $25.4 million increase in accounts payable. Capital expenditures were $2.6 million. Financing activities provided $51.4 million, principally from net revolving-credit borrowings.
At December 31, 2021, cash and cash equivalents were $34.1 million, accounts receivable were $613.2 million, inventory was $562.4 million and working capital was approximately $587.6 million. Days sales outstanding increased to 64 days from 60 days at both June 30, 2021 and December 31, 2020; quarterly inventory turns declined to 5.7 from 6.9 in the prior-year quarter.
Total debt was $196.9 million, including $57.8 million outstanding under the revolving credit facility, compared with $143.2 million at June 30, 2021. The company had $292.2 million of additional revolving availability and was in compliance with all debt covenants. The credit facility matures April 30, 2024 and includes a $350 million revolving facility and a $150 million term loan facility.
Material changes versus the prior comparable period
- Quarterly revenue increased $53.5 million, or 6.6%; six-month revenue increased $153.4 million, or 9.8%.
- Quarterly gross profit increased 25.4%, and gross margin expanded 190 basis points to 12.5%. Six-month gross margin expanded 160 basis points to 12.2%.
- Quarterly operating income increased 83.9%; six-month operating income increased 229.5%. Both segments reported higher operating income and margins.
- Prior-year results included restructuring and other charges of $0.5 million for the quarter and $8.8 million for the six months, plus a $0.5 million contingent-consideration fair-value charge for the six months. No restructuring costs or contingent-consideration charge were recorded in the 2021 periods.
- Prior-year net loss included discontinued-operation losses of $25.3 million for the quarter and $37.0 million for the six months, primarily from divestiture losses. The 2021 periods included a $0.1 million gain from final working-capital adjustments related to the divestitures.
- Cash flow deteriorated substantially because higher sales volumes required greater investment in receivables and inventory. Revolving-credit borrowings increased from zero at June 30, 2021 to $57.8 million at December 31, 2021.
- Accumulated other comprehensive loss increased to $110.5 million from $98.1 million, primarily because of foreign-currency translation losses.
Guidance, outlook, commentary and risks
Management expects fiscal 2022 capital expenditures of approximately $5 million to $8 million, primarily for information-technology investments and facility improvements. Management expects the fiscal 2022 effective tax rate, excluding discrete items, to be approximately 24.5% to 25.5%.
Management believes existing cash, operating cash flow and available credit capacity will be sufficient to meet working-capital and other cash requirements for at least the next twelve months. The company has never paid a cash dividend, and its credit agreement restricts cash dividends. A $100 million share-repurchase authorization was approved in August 2021; $0.2 million of shares were repurchased during the quarter, consisting of shares withheld for employee tax obligations.
Principal risks include continued COVID-19 effects, supply-chain disruptions, labor shortages, delayed customer deals, customer and supplier credit exposure, loss of major customers or key supplier relationships, foreign-exchange and interest-rate volatility, cybersecurity and information-technology failures, employee retention, international regulatory changes and execution of the organic-growth strategy. The company uses foreign-currency contracts and a $100 million interest-rate swap to manage portions of these exposures.
The company disclosed no material off-balance-sheet arrangements. Management stated that litigation liabilities are not expected to have a material adverse effect based on currently known information. Network1 pre-acquisition Brazilian tax contingencies were $3.6 million, offset by corresponding indemnification receivables. Management concluded that disclosure controls and procedures were effective at December 31, 2021.
Important facts for investors to verify
- Whether supply-chain constraints, labor shortages and delayed deals continue to affect revenue conversion, inventory levels and working-capital cash usage.
- The sustainability of gross-margin expansion, including the contribution from sales mix and supplier incentives.
- Revolving-credit utilization, covenant headroom and leverage as working-capital requirements change.
- Accounts-receivable aging, inventory turns and potential credit-loss or excess-inventory exposure.
- The treatment and comparability of non-GAAP measures, including adjusted EBITDA, constant-currency revenue and exclusions for amortization and restructuring items.
- Foreign-exchange movements, interest-rate changes and the effectiveness of related hedging instruments.
- Progress against the $5 million to $8 million fiscal 2022 capital-expenditure outlook and the expected 24.5% to 25.5% effective tax rate.
- The effects of the discontinued operations and divestitures on year-over-year comparisons and future reported results.