ScanSource, Inc. Form 10-Q Summary
Business Context and Reporting Period
ScanSource is a hybrid technology distributor serving approximately 30,000 customers across the United States, Canada, Brazil, the United Kingdom and Europe. Its two operating segments are Specialty Technology Solutions and Modern Communications & Cloud. This unaudited Form 10-Q covers the quarter ended September 30, 2023, the first quarter of fiscal 2024, with comparisons to the quarter ended September 30, 2022.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $876.3 million | $943.8 million | Down 7.2% |
| Gross profit | $106.5 million | $113.5 million | Down 6.1% |
| Gross margin | 12.2% | 12.0% | Up 20 basis points |
| Operating income | $24.1 million | $34.9 million | Down 31.0% |
| Operating margin | 2.7% | 3.7% | Down 100 basis points |
| Net income | $15.4 million | $24.0 million | Down 35.8% |
| Diluted EPS | $0.61 | $0.94 | Down $0.33 |
| Net cash from operating activities | $93.5 million | $(48.5) million | Improved by $142.0 million |
Specialty Technology Solutions sales declined 11.6% to $509.6 million, primarily because of lower mobility and barcoding volumes. Modern Communications & Cloud sales were essentially stable, declining 0.2% to $366.7 million. Intelisys net sales increased 8.8% year over year, and annualized Intelisys net billings reached approximately $2.51 billion.
Specialty Technology Solutions gross margin declined to 9.7% from 10.1%, while Modern Communications & Cloud gross margin increased to 15.6% from 15.0%. Consolidated SG&A increased 5.4% to $75.4 million, primarily due to higher bad debt expense and specific customer reserves.
At September 30, 2023, cash and cash equivalents were $42.6 million, accounts receivable were $691.7 million, and inventories were $656.2 million. Total debt was $248.1 million, including $98.1 million drawn under the revolving credit facility. Revolving-facility availability was $251.9 million. The company reported compliance with all debt covenants.
The company generated $93.5 million of operating cash flow, used $2.3 million for capital expenditures and used $83.5 million in financing activities, primarily for net repayments on the revolving credit facility. Days sales outstanding were 71 days, and inventory turned 4.4 times during the quarter.
Material Changes Versus the Prior Comparable Period
- Consolidated sales decreased 7.2%, or 7.7% on a constant-currency basis excluding acquisitions and divestitures.
- Gross profit declined $7.0 million, although gross margin improved modestly because of segment mix and higher vendor program recognition in Modern Communications & Cloud.
- Operating income declined $10.8 million. Specialty Technology Solutions operating income fell 45.7%, while Modern Communications & Cloud operating income declined 4.8%.
- Interest expense increased 62.0% to $5.6 million because of higher interest rates and average revolving borrowings.
- The effective tax rate decreased to 19.4% from 25.5%, including a $1.5 million discrete tax benefit related primarily to additional foreign tax credits permitted by IRS Notice 2023-55.
- Operating cash flow improved substantially as accounts receivable and inventory declined during the quarter. Inventory decreased 13% and accounts receivable decreased 8% from the beginning of the quarter.
- Consolidated assets decreased to $1.90 billion from $2.07 billion at June 30, 2023, largely reflecting lower working capital balances. Shareholders’ equity increased to $915.3 million from $905.3 million.
Guidance, Outlook, Risks and Unusual Items
Management expects fiscal 2024 capital expenditures of approximately $6.0 million to $8.0 million, primarily for information technology investments and facility improvements. Management expects the fiscal 2024 effective tax rate, excluding discrete items, to be approximately 26.6% to 27.6%.
Management believes existing cash, operating cash flow and available borrowing capacity will satisfy working capital and other cash requirements for at least the next twelve months. The company’s $350 million revolving credit facility and $150 million term loan mature in September 2027. The facility includes a leverage-ratio covenant of no more than 3.50 to 1.00 and an interest-coverage covenant of at least 3.00 to 1.00. Cash dividends are restricted under the credit agreement, and the company has never paid a cash dividend.
Corporate operating loss included $0.2 million of cyberattack restoration costs. On a non-GAAP basis, adjusted EBITDA was $34.9 million, compared with $45.3 million in the prior-year quarter, and adjusted diluted EPS was $0.74, compared with $1.07.
Principal risks include macroeconomic weakness, inflation, supply-chain challenges, customer and supplier credit risk, higher interest rates, foreign-exchange movements, cybersecurity incidents, information-technology failures, customer concentration, supplier or sales-partner changes, and the ability to execute the company’s organic growth strategy. The filing states that there were no material changes to the risk factors disclosed in the fiscal 2023 Form 10-K.
The company reported approximately $3.4 million available for potential Network1 pre-acquisition Brazilian tax contingency settlements or release to sellers, and believes outstanding litigation is unlikely to have a material adverse effect based on currently known information.
Important Facts for Investors to Verify
- Whether lower mobility and barcoding volumes persist and whether Specialty Technology Solutions margins recover.
- Whether the increase in customer-specific bad debt reserves signals broader credit deterioration.
- Whether cash generation remains strong after the working-capital benefit from reducing receivables and inventory.
- Compliance with the leverage and interest-coverage covenants as interest costs and operating income fluctuate.
- The financial and operational effects of the cyberattack, including whether restoration costs or risks extend beyond the reported $0.2 million.
- Progress in Intelisys connectivity and cloud billings and the sustainability of its 8.8% year-over-year net-sales growth.
- The effect of foreign-exchange movements, floating-rate debt and hedging arrangements on future earnings and comprehensive income.
- The company’s ability to achieve the stated fiscal 2024 capital-expenditure and adjusted tax-rate expectations.