ScanSource, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2022. The request identifies “2021 Q3,” but the filing is ScanSource’s fiscal third quarter of 2022. Results are unaudited and primarily reflect continuing operations.
Business Context
ScanSource is a hybrid technology distributor serving more than 30,000 channel partners across the United States, Canada, Brazil, the United Kingdom and Europe. Its two segments are Specialty Technology Solutions and Modern Communications & Cloud, covering hardware, software, SaaS, connectivity, cloud, communications, mobility, barcode, point-of-sale, payments and security solutions.
Key Financial Metrics
| Metric | Quarter ended March 31, 2022 | Quarter ended March 31, 2021 | Nine months ended March 31, 2022 | Nine months ended March 31, 2021 |
|---|---|---|---|---|
| Net sales | $846.0 million | $729.9 million | $2.568 billion | $2.298 billion |
| Gross profit | $106.5 million | $88.1 million | $315.7 million | $254.9 million |
| Gross margin | 12.6% | 12.1% | 12.3% | 11.1% |
| Operating income | $32.9 million | $19.4 million | $94.7 million | $38.2 million |
| Operating margin | 3.9% | 2.7% | 3.7% | 1.7% |
| Net income from continuing operations | $23.5 million | $13.8 million | $68.8 million | $24.7 million |
| Diluted EPS from continuing operations | $0.91 | $0.54 | $2.66 | $0.97 |
| Adjusted EBITDA | $44.1 million | $32.0 million | Not provided in the filing excerpt | Not provided in the filing excerpt |
Quarterly sales increased 15.9%, while nine-month sales increased 11.7%. On a constant-currency basis, excluding applicable divestitures and acquisitions, growth was 15.4% for the quarter and 11.6% for the nine-month period.
Segment Performance and Material Changes
- Specialty Technology Solutions: Quarterly sales increased 15.3% to $503.1 million and nine-month sales increased 15.5% to $1.502 billion. Quarterly gross margin rose to 10.7% from 8.9%, primarily due to higher vendor program recognition. Quarterly operating income increased 136.7% to $20.6 million.
- Modern Communications & Cloud: Quarterly sales increased 16.9% to $342.9 million and nine-month sales increased 6.8% to $1.066 billion. Quarterly gross margin declined to 15.3% from 16.7% due mainly to a less favorable Brazil sales mix, although nine-month gross margin improved to 15.4% from 14.3%. Intelisys sales increased 18.2% in the quarter and 15.4% for the nine months.
- Operating income benefited from the absence of prior-year restructuring, acquisition/divestiture and contingent-consideration charges. Restructuring charges were zero in 2022 versus $0.6 million in the quarter and $9.3 million in the nine-month 2021 period.
- The prior-year nine-month results included a $37.6 million net loss from discontinued operations, including a $34.5 million loss on disposal. The 2022 nine-month period included $0.1 million of income from discontinued operations and no related cash flows.
- SG&A increased 10.7% for the quarter and 9.2% for the nine months, primarily due to higher employee costs, but declined as a percentage of sales for the quarter and remained broadly stable for the nine months.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $43.5 million at March 31, 2022, down from $62.7 million at June 30, 2021.
- Operating cash flow was negative $45.7 million for the nine months, compared with positive $55.4 million in the prior-year period. The decline primarily reflected a $118.3 million increase in inventory and a $67.4 million increase in accounts receivable to support sales growth.
- Investing cash flow was negative $0.2 million, including $3.3 million of capital expenditures and $3.1 million of proceeds from the final discontinued-business sale payment.
- Financing cash flow was positive $27.7 million, principally from net revolving-credit borrowings. The company repurchased $8.5 million of common stock during the nine months.
- Total debt was $181.5 million at March 31, 2022, including $44.3 million drawn under the revolving credit facility, compared with $143.2 million at June 30, 2021.
- The $350 million revolving facility had $305.7 million available at March 31, 2022. The facility and term loan mature in April 2024 and are secured by substantially all domestic assets and specified foreign equity interests.
- The company was in compliance with its debt covenants. The maximum leverage ratio is 3.50 to 1.00 and the minimum interest coverage ratio is 3.00 to 1.00. Management believes liquidity sources will cover requirements for at least the next twelve months.
- Working capital investment increased $120.2 million to $606.9 million. Days sales outstanding increased to 69 days from 60 days at June 30, 2021, while inventory turns declined to 5.1 from 5.8 in the prior-year quarter.
Guidance, Outlook and Risks
- Management expects fiscal 2022 capital expenditures of $4 million to $5 million, primarily for information technology investments and facility improvements.
- Management expects a fiscal 2022 effective tax rate, excluding discrete items, of approximately 25.5% to 26.5%.
- COVID-19 continues to cause supply-chain disruption, product availability constraints, labor scarcity, logistical delays and higher costs. Management noted that the duration and scope of these effects remain uncertain.
- Other identified risks include customer and supplier credit exposure, loss of key customers or suppliers, foreign-exchange and interest-rate changes, cybersecurity and information-technology failures, regulatory issues in international markets, and the ability to execute the company’s organic growth strategy.
- The company has never paid a cash dividend, and its credit facility restricts cash dividends. In August 2021, the board authorized a $100 million share-repurchase program; approximately $90.9 million remained available at March 31, 2022.
- Brazilian tax contingencies related to the Network1 acquisition were backed by indemnification receivables; approximately $4.4 million remained available for future settlements or release to sellers at March 31, 2022.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material change in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether elevated inventory and receivables convert into operating cash flow and whether days sales outstanding and inventory turns normalize.
- Review the sustainability of gross-margin improvement, particularly the contribution from vendor program recognition in Specialty Technology Solutions.
- Monitor Modern Communications & Cloud’s quarterly margin pressure and the effect of Brazil’s sales mix.
- Assess revolving-credit usage, interest-rate exposure, covenant headroom and the April 2024 debt maturity.
- Evaluate the effect of ongoing supply-chain, labor and logistics disruptions on product availability, costs and customer demand.
- Distinguish GAAP results from adjusted EBITDA, non-GAAP operating income and constant-currency growth measures.