ScanSource, Inc. Form 10-Q Summary
Business Context and Reporting Period
ScanSource is a hybrid technology distributor providing hardware, software, SaaS, connectivity and cloud solutions through approximately 30,000 sales partners. Its two reportable segments are Specialty Technology Solutions and Modern Communications & Cloud, with operations in the United States, Canada, Brazil and the United Kingdom.
This unaudited Form 10-Q covers the quarter and six months ended December 31, 2022, ScanSource’s fiscal 2023 second quarter and first six months. Comparative periods ended December 31, 2021.
Financial Performance and Position
| Metric | Quarter Ended Dec. 31, 2022 | Year-over-Year | Six Months Ended Dec. 31, 2022 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $1,011.2 million | Up 17.0% | $1,955.1 million | Up 13.6% |
| Gross profit | $115.3 million | Up 7.1% | $228.8 million | Up 9.4% |
| Gross margin | 11.4% | Down from 12.5% | 11.7% | Down from 12.2% |
| Operating income | $39.4 million | Up 25.2% | $74.3 million | Up 20.2% |
| Operating margin | 3.9% | Up from 3.6% | 3.8% | Up from 3.6% |
| Net income | $25.7 million | Up from $23.3 million | $49.8 million | Up from $45.3 million |
| Diluted EPS | $1.01 | Up from $0.90 | $1.96 | Up from $1.76 |
- Specialty Technology Solutions sales increased 26.3% in the quarter and 20.6% for six months, driven primarily by strong North American growth. Six-month operating income increased 35.5%.
- Modern Communications & Cloud sales increased 4.5% in the quarter and 3.9% for six months. Intelisys sales increased 9.2% and 8.1%, respectively. Six-month operating income increased 5.1%.
- Reported net income margins were approximately 2.5% for both the quarter and six-month period, compared with approximately 2.7% and 2.6%, respectively, in the prior-year periods.
- Cash and cash equivalents were $66.4 million at December 31, 2022, compared with $38.0 million at June 30, 2022. Accounts receivable were $779.6 million and inventories were $761.9 million.
- Net cash used in operating activities was $75.3 million for the six months, substantially unchanged from $75.4 million in the prior-year period. Working capital usage increased as accounts receivable and inventory grew with higher sales.
- Capital expenditures were $4.3 million for the six months, primarily for information technology investments. Management expects fiscal 2023 capital expenditures of $6.5 million to $9.0 million.
- Total debt was $382.8 million at December 31, 2022, including $230.0 million drawn on the revolving credit facility, compared with $271.2 million at June 30, 2022. Revolving-credit availability was $120.0 million.
Material Changes Versus the Prior Comparable Period
- Sales growth accelerated, particularly in Specialty Technology Solutions, while consolidated gross margin declined because of less favorable mix, lower vendor program recognition and higher freight costs.
- Operating income grew faster than gross profit, supported by disciplined quarterly SG&A and a $2.9 million recovery of prior-period Brazilian withholding taxes. The recovery is a non-recurring or unusual item that benefited reported results.
- Interest expense increased to $5.1 million in the quarter and $8.5 million for six months, primarily because of higher borrowings and higher floating interest rates.
- The effective tax rate increased to 28.9% for the quarter and 27.3% for six months, compared with 23.9% and 24.4%, respectively, in the prior-year periods.
- The September 28, 2022 amended credit agreement established a $350 million revolving facility and a $150 million term loan facility, extended maturity to September 28, 2027 and added an accordion feature for up to $250 million of additional commitments, subject to lender approval.
- Foreign currency translation produced a $7.4 million comprehensive-income benefit in the quarter, versus a $2.8 million loss in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
Management expects a fiscal 2023 effective tax rate of approximately 27.0% to 28.0% and capital expenditures of $6.5 million to $9.0 million. Management believes cash, operating cash flow and available credit capacity will satisfy working-capital and other cash requirements for at least the next twelve months.
Management continues to identify macroeconomic uncertainty, inflation, supply-chain constraints and rising interest rates as potential adverse factors. Other disclosed risks include customer and supplier credit exposure, loss of major customers or key suppliers, foreign-exchange and regulatory risks, cybersecurity and information-technology disruptions, employee retention, and execution of the organic growth strategy.
- The company was in compliance with its credit-facility covenants at December 31, 2022. The leverage-ratio limit is 3.50 to 1.00 and the minimum interest-coverage ratio is 3.00 to 1.00.
- Cash dividends have never been paid and are restricted under the credit facility.
- Legal proceedings are considered by management unlikely to have a material adverse effect based on information currently known.
- Network1 pre-acquisition Brazilian tax contingencies were supported by indemnification receivables; $3.0 million remained available for future settlements or release to sellers at December 31, 2022.
- No material changes to market risks or internal control effectiveness were reported.
Important Facts for Investors to Verify
- Whether inventory growth, lower inventory turns and higher accounts receivable continue to pressure operating cash flow.
- The sustainability of reported operating-profit growth excluding the $2.9 million Brazilian tax recovery and other non-GAAP adjustments.
- Exposure to higher interest rates given increased revolving borrowings and floating-rate debt.
- Compliance with the 3.50x leverage and 3.00x interest-coverage covenants as operating conditions change.
- Whether gross-margin pressure from product mix, vendor incentives and freight costs persists.
- Progress toward the stated $6.5 million to $9.0 million fiscal 2023 capital-expenditure range and management’s tax-rate outlook.