Form 10-Q SCANSOURCE, INC. For: Dec 31
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Quarterly period ended December 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ____ to ____
Commission File Number: 000-26926
(State of Incorporation)
(I.R.S. Employer Identification No.)
(864 ) 288-2432
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class: | Trading Symbol: | Name of exchange on which registered: | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Smaller reporting company | ||||||||||||||||
| Accelerated filer | ☐ | Emerging growth company | |||||||||||||||
| Non-accelerated filer | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at February 1, 2023 | |||||||
| Common Stock, no par value per share | ||||||||
SCANSOURCE, INC.
INDEX TO FORM 10-Q
December 31, 2022
| Page # | ||||||||
| Item 1. | Financial Statements | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
3
FORWARD-LOOKING STATEMENTS
Forward-looking statements are included in the "Risk Factors," "Legal Proceedings," "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures About Market Risk" sections and elsewhere herein. Words such as "expects," "anticipates," "believes," "intends," "plans," "hopes," "forecasts," "seeks," "estimates," "goals," "projects," "strategy," "future," "likely," "may," "should," and variations of such words and similar expressions generally identify such forward-looking statements. Any forward-looking statement made by us in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to the following factors, which are neither presented in order of importance nor weighted: the impact of the COVID-19 pandemic, macroeconomic conditions, including potential prolonged economic weakness, inflation and supply chain challenges, the failure to manage and implement the Company's organic growth strategy, credit risks involving the Company's larger customers and suppliers, changes in interest and exchange rates and regulatory regimes impacting the Company's international operations, risk to the Company's business from a cyber-security attack, a failure of the Company's IT systems, failure to hire and retain quality employees, loss of the Company's major customers, termination of the Company's relationship with key suppliers or a significant modification of the terms under which it operates with a key supplier, changes in the Company's operating strategy and other factors set forth in "Risk Factors" contained in our Annual Report on Form 10-K for the year ended June 30, 2022.
4
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements | ||||
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share information)
| December 31, 2022 | June 30, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowance of $ and $ | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Identifiable intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Borrowings under revolving credit facility | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, no par value; | |||||||||||
Common stock, no par value; | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
June 30, 2022 amounts are derived from audited consolidated financial statements. | |||||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||
5
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(In thousands, except per share data)
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation expense | |||||||||||||||||||||||
| Intangible amortization expense | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Other expense, net | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income from continuing operations | |||||||||||||||||||||||
| Net income from discontinued operations | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Per share data: | |||||||||||||||||||||||
| Net income from continuing operations per common share, basic | $ | $ | $ | $ | |||||||||||||||||||
| Net income from discontinued operations per common share, basic | |||||||||||||||||||||||
| Net income per common share, basic | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares outstanding, basic | |||||||||||||||||||||||
| Net income from continuing operations per common share, diluted | $ | $ | $ | $ | |||||||||||||||||||
| Net income from discontinued operations per common share, diluted | |||||||||||||||||||||||
| Net income per common share, diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares outstanding, diluted | |||||||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | ||
6
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | ||
7
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share information)
| Common Stock (Shares) | Common Stock (Amount) | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | ( | ||||||||||||||||||||||||
| Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ||||||||||||||||||||||||||
| Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||||||||||||||||||||
8
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share information)
| Common Stock (Shares) | Common Stock (Amount) | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | ( | ||||||||||||||||||||||||
| Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes | — | — | |||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | ( | ||||||||||||||||||||||||
| Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||
| Common stock repurchased | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||||||||||||||||||||
9
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| Six months ended | |||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Net income from discontinued operations | |||||||||||
| Net income from continuing operations | |||||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt issue costs | |||||||||||
| Provision for doubtful accounts | |||||||||||
| Share-based compensation | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Finance lease interest | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Other non-current assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | ( | ( | |||||||||
| Income taxes payable | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from the sale of discontinued operations | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings on revolving credit, net of expenses | |||||||||||
| Repayments on revolving credit, net of expenses | ( | ( | |||||||||
| Borrowings (repayments) on long-term debt, net | ( | ||||||||||
| Repayments on finance lease obligation | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Exercise of stock options | |||||||||||
| Taxes paid on settlement of equity awards | ( | ( | |||||||||
| Common stock repurchased | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||
10
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Business and Summary of Significant Accounting Policies
Business Description
ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “ScanSource”) is a leading hybrid distributor connecting devices to the cloud and accelerating growth for partners across hardware, Software as a Service ("SaaS"), connectivity and cloud. The Company brings technology solutions and services from the world’s leading suppliers of mobility and barcode, point-of-sale ("POS"), payments, physical security, unified communications and collaboration, telecom and cloud services to market. The Company operates in the United States, Canada, Brazil and the UK. The Company's two operating segments, Specialty Technology Solutions and Modern Communications & Cloud, are based on technology.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("U.S. GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position at December 31, 2022 and June 30, 2022, the results of operations for the quarters and six months ended December 31, 2022 and 2021, the statements of comprehensive income for the quarters and six months ended December 31, 2022 and 2021, the statements of shareholders' equity for the quarters and six months ended December 31, 2022 and 2021 and the statements of cash flows for the six months ended December 31, 2022 and 2021. The results of operations for the quarters and six months ended December 31, 2022 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Unless otherwise indicated, disclosures provided in the Notes pertain to continuing operations only.
The Company has reclassified certain prior-year amounts in the segment results to conform with current year presentation. The reclassifications had no effect on the condensed consolidated financial results.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
Long-lived Assets
11
Recent Accounting Pronouncements
(2) Trade Accounts and Notes Receivable, Net
The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due to the Company. The Company has notes receivable with certain customers, which are included in “Accounts receivable, less allowance” in the Condensed Consolidated Balance Sheets.
Management determines the estimate of the allowance for doubtful accounts receivable by considering a number of factors, including: (i) historical experience, (ii) aging of the accounts receivable, (iii) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country-specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables over the contractual life are recorded at inception and adjusted over the contractual life.
The changes in the allowance for doubtful accounts for the six months ended December 31, 2022 are set forth in the table below.
| June 30, 2022 | Amounts Charged to Expense | Write-offs | Other (1) | December 31, 2022 | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Trade accounts and current notes receivable allowance | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
(3) Revenue Recognition
The Company provides technology solutions and services from the world's leading suppliers of mobility, barcode, POS, payments, physical security, unified communications, collaboration, telecom and cloud services. This includes hardware, related accessories and device configuration as well as software licenses, professional services and hardware support programs.
In determining the appropriate amount of revenue to recognize, the Company applies the following five-step model: (i) identify contracts with customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company recognizes revenue as control of products and services are transferred to customers, which is generally at the point of shipment. The Company delivers products to customers in several ways, including: (i) shipment from a Company warehouse, (ii) drop-shipment directly from the supplier or (iii) electronic delivery for non-physical products.
Principal versus Agent Considerations
12
The Company is the principal for sales of all hardware and certain software and services. The Company considers itself the principal in those transactions where it has control of the product or service before it is transferred to the customer. The Company recognizes the principal-associated revenue and cost of goods sold on a gross basis.
The Company is the agent for third-party service contracts, including product warranties and supplier-hosted software. These service contracts are sold separately from the products, and the Company often serves as the agent for the contract on behalf of the original equipment manufacturer. The Company's responsibility is to arrange for the provision of the specified service by the original equipment manufacturer, and the Company does not control the specified service before it is transferred to the customer. Because the Company acts as an agent, revenue is recognized net of cost at the time of sale. The Intelisys business operates under an agency model.
Variable Considerations
For certain transactions, products are sold with a right of return and may also provide other rebates or incentives, which are accounted for as variable consideration. The Company estimates a returns allowance based on historical experience and reduces revenue accordingly. The Company estimates the amount of variable consideration for rebates and incentives by using the expected value to be given to the customer and reduces the revenue by those estimated amounts. These estimates are reviewed and updated as necessary at the end of each reporting period.
Contract Balances
The Company records contract assets and liabilities for payments received from customers in advance of services performed. These assets and liabilities are the result of the sales of the Company's self-branded warranty programs and other transactions where control has not yet passed to the customer. These amounts are immaterial to the consolidated financial statements for the periods presented.
Disaggregation of Revenue
The following tables represent the Company's disaggregation of revenue:
| Quarter ended December 31, 2022 | ||||||||||||||||||||
| Specialty Technology Solutions | Modern Communications & Cloud | Total | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue by product/service | ||||||||||||||||||||
| Hardware, software and cloud (excluding Intelisys) | $ | $ | $ | |||||||||||||||||
| Intelisys connectivity and cloud | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Six months ended December 31, 2022 | ||||||||||||||||||||
| Specialty Technology Solutions | Modern Communications & Cloud | Total | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue by product/service: | ||||||||||||||||||||
| Hardware, software and cloud (excluding Intelisys) | $ | $ | $ | |||||||||||||||||
| Intelisys connectivity and cloud | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
13
| Quarter ended December 31, 2021 | ||||||||||||||||||||
| Specialty Technology Solutions | Modern Communications & Cloud | Total | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue by product/service | ||||||||||||||||||||
| Hardware, software and cloud (excluding Intelisys) | $ | $ | $ | |||||||||||||||||
| Intelisys connectivity and cloud | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Six months ended December 31, 2021 | ||||||||||||||||||||
| Specialty Technology Solutions | Modern Communications & Cloud | Total | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue by product/service: | ||||||||||||||||||||
| Hardware, software and cloud (excluding Intelisys) | $ | $ | $ | |||||||||||||||||
| Intelisys connectivity and cloud | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
(4) Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Net income from discontinued operations | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares, basic | |||||||||||||||||||||||
| Dilutive effect of share-based payments | |||||||||||||||||||||||
| Weighted-average shares, diluted | |||||||||||||||||||||||
| Net income from continuing operations per common share, basic | $ | $ | $ | $ | |||||||||||||||||||
| Net loss from discontinued operations per common share, basic | |||||||||||||||||||||||
| Net income per common share, basic | $ | $ | $ | $ | |||||||||||||||||||
| Net income from continuing operations per common share, diluted | $ | $ | $ | $ | |||||||||||||||||||
| Net loss from discontinued operations per common share, diluted | |||||||||||||||||||||||
| Net income per common share, diluted | $ | $ | $ | $ | |||||||||||||||||||
14
(5) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following:
| December 31, 2022 | June 30, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Foreign currency translation adjustment | $ | ( | $ | ( | |||||||
| Unrealized gain on hedged transaction, net of tax | |||||||||||
| Accumulated other comprehensive loss | $ | ( | $ | ( | |||||||
The tax effect of amounts in comprehensive loss reflect a tax expense or as follows:
| Quarter ended December 31, | Six months ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Tax expense | $ | $ | $ | $ | |||||||||||||||||||
(6) Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the six months ended December 31, 2022, by reporting segment, are set forth in the table below.
| Specialty Technology Solutions | Modern Communications & Cloud | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ||||||||||||||
The following table shows changes in the amount recognized for net identifiable intangible assets for the six months ended December 31, 2022.
| Net Identifiable Intangible Assets | |||||
| (in thousands) | |||||
| Balance at June 30, 2022 | $ | ||||
| Amortization expense | ( | ||||
| Foreign currency translation adjustment | ( | ||||
| Balance at December 31, 2022 | $ | ||||
(7) Short-Term Borrowings and Long-Term Debt
15
| December 31, 2022 | June 30, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Mississippi revenue bond, net of current portion | |||||||||||
| Senior secured term loan facility, net of current portion | |||||||||||
| Borrowings under revolving credit facility | |||||||||||
| Total debt | $ | $ | |||||||||
Credit Facility
The Company has a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (as amended, the “Amended Credit Agreement”). On September 28, 2022, ScanSource, Inc. amended and restated the Amended Credit Agreement, which includes (i) a five-year , $350 million multicurrency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. The Amended Credit Agreement extended the credit facility maturity date to September 28, 2027. In addition, pursuant to an “accordion feature,” the Company may increase its borrowings up to an additional $250 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and its domestic subsidiaries. Under the terms of the revolving credit facility, the payment of cash dividends is restricted. The Company incurred debt issuance costs of $1.4 million in connection with the amendment and restatement of the Amended Credit Agreement. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.
Loans denominated in U.S. dollars, other than swingline loans, shall bear interest at a rate per annum equal to, at the Company’s option, (i) the adjusted Term SOFR or adjusted daily simple SOFR plus an additional margin ranging from 1.00 % to 1.75 %, depending upon the Company’s ratio of (A) total consolidated debt less up to $30 million of unrestricted domestic cash to (B) trailing four-quarter consolidated EBITDA measured as of the end of the most recent year or quarter, as applicable, for which financial statements have been delivered to the Lenders (the “leverage ratio”); or (ii) the alternate base rate plus an additional margin ranging from 0 % to 0.75 %, depending upon the Company’s leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars shall bear interest based upon the adjusted daily simple SOFR, floating daily, plus an additional margin ranging from 1.00 % to 1.75 %, depending upon the Company's leverage ratio, or such other rate as the Company and the applicable swingline lender may agree. The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10 % over the applicable SOFR reference rate. Loans denominated in foreign currencies shall bear interest at a rate per annum equal to the applicable benchmark rate set forth in the New Credit Agreement plus an additional margin ranging from 1.00 % to 1.75 %, depending upon the Company’s leverage ratio, plus, if applicable, certain mandatory costs.
During the quarter and six months ended December 31, 2022, the Company's borrowings under the credit facility were U.S. dollar loans. The spread in effect as of December 31, 2022 was 1.50 %, plus a 0.10 % credit spread adjustment for SOFR-based loans and 0.50 % for alternate base rate loans. The commitment fee rate in effect at December 31, 2022 was 0.25 %. The Amended Credit Agreement includes customary representations, warranties and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, the Company’s Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. The Company was in compliance with all covenants under the credit facility at December 31, 2022.
The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the six month periods ended December 31, 2022 and 2021 was $219.5 million and $57.1 million, respectively. There was $120.0 million and $214.2 million available for additional borrowings as of December 31, 2022 and June 30, 2022, respectively. There were no
Mississippi Revenue Bond
16
On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85 %. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100 % of the principal amount outstanding. At December 31, 2022, the Company was in compliance with all covenants under this bond. The interest rates at December 31, 2022 and June 30, 2022 were 4.97 % and 1.97 %, respectively.
Debt Issuance Costs
At December 31, 2022, net debt issuance costs associated with the credit facility and bond totaled $1.8 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument.
(8) Derivatives and Hedging Activities
The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the Condensed Consolidated Balance Sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.
Foreign Currency Derivatives – The Company conducts a portion of its business internationally in a variety of foreign currencies and is exposed to market risk for changes in foreign currency exchange rates. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and once these opportunities have been exhausted the Company uses currency options and forward contracts or other hedging instruments with third parties. These contracts will periodically hedge the exchange of various currencies, including the U.S. dollar, Brazilian real, euro, British pound and Canadian dollar.
The Company had contracts outstanding for purposes of managing cash flows with notional amounts of $47.4 million and $34.5 million for the exchange of foreign currencies at December 31, 2022 and June 30, 2022, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures included in the Condensed Consolidated Income Statements for the quarters and six months ended December 31, 2022 and 2021 are as follows:
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net foreign exchange derivative contract losses (gains) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Net foreign currency transactional and re-measurement (gains) losses | ( | ( | |||||||||||||||||||||
| Net foreign currency exchange losses | $ | $ | $ | $ | |||||||||||||||||||
Net foreign currency exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses and are included in other income and expense. Foreign exchange gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, the British pound versus the euro, and the Canadian dollar versus the U.S. dollar..
Interest Rates - The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. The Company manages its exposure to changes in interest rates by using interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating rate debt. On April 30, 2019, the Company entered into an interest rate swap agreement, which was amended on September 28, 2022 to change the reference rate from LIBOR to SOFR. The swap agreement has a notional amount of $100.0 million, with a $50.0 million tranche scheduled to mature on April 30, 2024 and a $50.0 million tranche scheduled to mature April 30, 2026. This swap
17
agreement is designated as a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for the quarters and six months ended December 31, 2022 and 2021.
The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive Income for the quarters and six months ended December 31, 2022 and 2021, are as follows:
| Quarter ended | Six months ended | |||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net interest (income) expense recognized as a result of interest rate swap | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Unrealized gain in fair value of interest rate swap | ||||||||||||||||||||||||||
| Net increase in accumulated other comprehensive income | ||||||||||||||||||||||||||
| Income tax effect | ||||||||||||||||||||||||||
| Net increase in accumulated other comprehensive income, net of tax | $ | $ | $ | $ | ||||||||||||||||||||||
The Company used the following derivative instruments at December 31, 2022 and June 30, 2022, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:
| December 31, 2022 | June 30, 2022 | ||||||||||||||||||||||||||||
| Balance Sheet Location | Fair Value of Derivatives Designated as Hedge Instruments | Fair Value of Derivatives Not Designated as Hedge Instruments | Fair Value of Derivatives Designated as Hedge Instruments | Fair Value of Derivatives Not Designated as Hedge Instruments | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||||||||
| Interest rate swap agreement | Other non-current assets | $ | $ | ||||||||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||||||||
| Foreign exchange contracts | Accrued expenses and other current liabilities | $ | $ | ||||||||||||||||||||||||||
| Foreign currency hedge | Accrued expenses and other current liabilities | $ | $ | ||||||||||||||||||||||||||
18
(9) Fair Value of Financial Instruments
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company classifies certain assets and liabilities based on the fair value hierarchy, which aggregates fair value measured assets and liabilities based upon the following levels of inputs:
•Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
•Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The assets and liabilities maintained by the Company that are required to be measured at fair value on a recurring basis include deferred compensation plan investments, forward foreign currency exchange contracts, foreign currency hedge agreements and interest rate swap agreements. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to a variable rate using the market approach (Level 2).
The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at December 31, 2022:
| Total | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Assets: | |||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | ||||||||||||||
| Interest rate swap agreement | |||||||||||||||||
| Total assets at fair value | $ | $ | $ | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | ||||||||||||||
| Forward foreign currency exchange contracts | |||||||||||||||||
| Foreign currency hedge | |||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | ||||||||||||||
The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at June 30, 2022:
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| Total | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Assets: | |||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | ||||||||||||||
| Interest rate swap agreement | |||||||||||||||||
| Total assets at fair value | $ | $ | $ | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | ||||||||||||||
| Forward foreign currency exchange contracts | |||||||||||||||||
| Foreign currency hedge | |||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | ||||||||||||||
The investments in the deferred compensation plan are held in a "rabbi trust" and include mutual funds and cash equivalents for payment of non-qualified benefits for certain retired, terminated and active employees. These investments are recorded to prepaid expenses and other current assets or other non-current assets depending on their corresponding, anticipated distribution dates to recipients, which are reported in accrued expenses and other current liabilities or other long-term liabilities, respectively.
Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including LIBOR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Condensed Consolidated Balance Sheets as prepaid expenses and other non-current assets or accrued expenses and other long-term liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 8 - Derivatives and Hedging Activities.
(10) Segment Information
The Company is a leading provider of technology solutions and services to customers in specialty technology markets. The Company has two reportable segments, based on technology.
Specialty Technology Solutions Segment
The Specialty Technology Solutions segment includes the Company’s business in mobility and barcode, POS, payments, security and networking technologies. Mobility and barcode solutions include mobile computing, barcode scanners and imagers, radio frequency identification devices, barcode printing and services. POS and payments solutions include POS systems, integrated POS software platforms, self-service kiosks including self-checkout, payment terminals and mobile payment devices. Security solutions include video surveillance and analytics, video management software and access control. Networking solutions include switching, routing and wireless products and software. The Company has business operations within this segment in the United States, Canada and Brazil.
Modern Communications & Cloud Segment
The Modern Communications & Cloud segment includes the Company’s business in communications and collaboration, connectivity and cloud services. Communications and collaboration solutions, delivered in the cloud, on-premise or hybrid, include voice, video, integration of communication platforms and contact center solutions. The Intelisys connectivity and cloud marketplace offers telecom, cable, Unified Communications as a Service (“UCaaS”), Contact Center as a Service (“CCaaS”), Infrastructure as a Service, Software-Defined Wide-Area Network and other cloud services. This segment includes SaaS and subscription services, which the Company offers using digital tools and platforms. The Company has business operations within this segment in the United States, Canada, Brazil and the UK.
20
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Specialty Technology Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Modern Communications & Cloud | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Specialty Technology Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Modern Communications & Cloud | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| Specialty Technology Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Modern Communications & Cloud | |||||||||||||||||||||||
| Corporate | ( | ||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Capital expenditures: | |||||||||||||||||||||||
| Specialty Technology Solutions | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Modern Communications & Cloud | ( | ( | ( | ( | |||||||||||||||||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Sales by Geography Category: | |||||||||||||||||||||||
| United States and Canada | $ | $ | $ | $ | |||||||||||||||||||
| International | |||||||||||||||||||||||
| Less intercompany sales | ( | ( | ( | ( | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| December 31, 2022 | June 30, 2022 | ||||||||||
| (in thousands) | |||||||||||
| Assets: | |||||||||||
| Specialty Technology Solutions | $ | $ | |||||||||
| Modern Communications & Cloud | |||||||||||
| Corporate | |||||||||||
| $ | $ | ||||||||||
| Property and equipment, net by Geography Category: | |||||||||||
| United States and Canada | $ | $ | |||||||||
| International | |||||||||||
| $ | $ | ||||||||||
(11) Leases
21
leases with an initial term of 12 months or less on the Condensed Consolidated Balance Sheets. Operating leases are recorded as other non-current assets, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company has finance leases for information technology equipment expiring through fiscal year 2027. Finance leases are recorded as , and on the Condensed Consolidated Balance Sheets. The gross amount of the balances recorded related to finance leases is immaterial to the condensed consolidated financial statements at December 31, 2022 and the consolidated financial statements at June 30, 2022.
Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the net present value of future minimum lease payments over the lease term. The Company generally is not able to determine the rate implicit in its leases and has elected to apply an incremental borrowing rate as the discount rate for the present value determination, which is based on the Company's cost of borrowings for the relevant terms of each lease and geographical economic factors. Certain operating lease agreements contain options to extend or terminate the lease. The lease term used is adjusted for these options when the Company is reasonably certain it will exercise the option. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments not based on a rate or index, such as costs for common area maintenance, are expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable.
The following table presents amounts recorded on the Condensed Consolidated Balance Sheets related to operating leases at December 31, 2022 and June 30, 2022:
| December 31, 2022 | June 30, 2022 | |||||||||||||||||||
| Operating leases | Balance Sheet location | (in thousands) | ||||||||||||||||||
| Operating lease right-of-use assets | $ | $ | ||||||||||||||||||
| Current operating lease liabilities | $ | $ | ||||||||||||||||||
| Long-term operating lease liabilities | $ | $ | ||||||||||||||||||
The following table presents amounts recorded in operating lease expense as part of selling general and administrative expenses on the Condensed Consolidated Income Statements during the quarters and six months ended December 31, 2022 and 2021. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less.
| Quarter ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Variable lease cost | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
Supplemental cash flow information related to the Company's operating leases for the six months ended December 31, 2022 and 2021 are presented in the table below:
| Six months ended | |||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cash paid for amounts in the measurement of lease liabilities | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||
The weighted-average remaining lease term and discount rate at December 31, 2022 are presented in the table below:
22
| December 31, 2022 | ||||||||
| Weighted-average remaining lease term | ||||||||
| Weighted-average discount rate | % | |||||||
The following table presents the maturities of the Company's operating lease liabilities at December 31, 2022:
| Operating leases | ||||||||
| (in thousands) | ||||||||
| 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total future payments | ||||||||
| Less: amounts representing interest | ||||||||
| Present value of lease payments | $ | |||||||
(12) Commitments and Contingencies
The Company and its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
During the Company's due diligence for the Network1 acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company recorded indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as the funds were escrowed as part of the acquisition. The amount available after the impact of foreign currency translation for future pre-acquisition contingency settlements or to be released to the sellers was $3.0 million and $4.1 million at December 31, 2022 and June 30, 2022, respectively.
The table below summarizes the balances and line item presentation of Network1's pre-acquisition contingencies and corresponding indemnification receivables in the Company's Condensed Consolidated Balance Sheets at December 31, 2022 and June 30, 2022:
| December 31, 2022 | June 30, 2022 | ||||||||||
| Network1 | |||||||||||
| (in thousands) | |||||||||||
| Assets | |||||||||||
| Prepaid expenses and other current assets | $ | $ | |||||||||
| Other non-current assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Accrued expenses and other current liabilities | $ | $ | |||||||||
| Other long-term liabilities | $ | $ | |||||||||
(13) Income Taxes
23
The Company’s effective tax rate of 28.9 % and 27.3 % for the quarter and six months ended December 31, 2022, differs from the current federal statutory rate of 21% primarily as a result of income derived from tax jurisdictions with varying income tax rates, nondeductible expenses and state income taxes. The Company's effective tax rate was 23.9 % and 24.4 % for the quarter and six months ended December 31, 2021.
As of December 31, 2022, the Company is not permanently reinvested with respect to all earnings generated by foreign operations. The Company has determined that there is no material deferred tax liability for federal, state and withholding tax related to undistributed earnings. During the quarter ended December 31, 2022, foreign subsidiaries repatriated cash of $9.1 million to the United States. There is no certainty to the timing of any future distributions of such earnings to the U.S. in whole or in part.
The Company had approximately $1.1 0.9 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At December 31, 2022 and June 30, 2022, the Company had approximately $1.2
The Company conducts business globally and one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to federal, state and local or non-U.S. income tax examinations by tax authorities for the years before June 30, 2017.
(14) Discontinued Operations
On August 20, 2019, the Company announced plans to divest the product distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and the Miami-based export operations ("Divestitures") as these businesses were performing below management's expectations. The Company continues to operate its digital business in these countries. Management determined that the Company did not have sufficient scale in these markets to maximize the value-added model for product distribution, leading the Company to focus and invest in its higher-growth, higher-margin businesses. Results from the Divestitures were included within each reportable segment, which includes the Specialty Technology Solutions and Modern Communications & Cloud segments.
The Company signed an agreement on July 23, 2020 with Intcomex for its businesses located in Latin America, outside of Brazil. The Company finalized the sale of the Latin America businesses on October 30, 2020. The Company also finalized the sale of the Europe and UK business on November 12, 2020. Total cash received for the sale of divestitures was $37.5 million.
There were no 0.1
There were no
There were no
24
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Overview
ScanSource is a leading hybrid distributor connecting devices to the cloud and accelerating growth for partners across hardware, SaaS, connectivity and cloud. We provide technology solutions and services from more than 500 leading suppliers of mobility and barcode, POS and payments, physical security and networking, communications and collaboration, connectivity and cloud services to our approximately 30,000 sales partners located in the United States, Canada, Brazil, the UK and Europe.
We operate our business under a management structure that enhances our technology focus and hybrid distribution growth strategy. Our segments operate in the United States, Canada, Brazil and the UK and consist of the following:
•Specialty Technology Solutions
•Modern Communications & Cloud
We sell hardware, SaaS, connectivity and cloud solutions and services through channel partners to end-customers. We operate distribution facilities that support our United States and Canada business in Mississippi, California and Kentucky. Brazil distribution facilities are located in the Brazilian states of Paraná, Espirito Santo and Santa Catarina. We provide some of our digital products, which include SaaS and subscriptions, through our digital tools and platforms.
Our key suppliers include 8x8, AT&T, Aruba/HPE, Avaya, Axis, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Equinix, Extreme, F5, Five9, Fortinet, Genesys, Granite, GTT, Hanwha, Honeywell, Ingenico, Jabra, Lumen, Microsoft, MetTel, Mitel, NCR, NICE CXone, Poly, RingCentral, Spectrum, Toshiba Global Commerce Solutions, Trend Micro, Ubiquiti, Verifone, Verizon, VMWare, Windstream, Zebra Technologies and Zoom.
Recent Developments
Impact of the Macroeconomic Environment, Including Inflation and Supply Chain Constraints
The macroeconomic environment, including the economic impacts of supply chain constraints, rising interest rates and inflation continues to create significant uncertainty and may adversely affect our consolidated results of operations. We are actively monitoring changes to the global macroeconomic environment and assessing the potential impacts these challenges may have on our financial condition, results of operations and liquidity. We are also mindful of the potential impact these conditions could have on our customers and suppliers.
In spite of these challenges and uncertainties, we believe we have managed the supply chain requirements of our customers and suppliers effectively to date. While we are unable to predict the ultimate impact these factors will have on our business, certain technologies have benefited from the widespread adoption to a work-from-anywhere business model, as well as the accelerated shift to digitize and automate processes.
Our Strategy
Our strategy is to drive sustainable, profitable growth by orchestrating hybrid technology solutions through a growing ecosystem of partners by leveraging our people, processes and tools. Our goal is to provide exceptional experiences for our partners, suppliers and employees through operational excellence. Our hybrid distribution strategy relies on a channel sales model to offer hardware, SaaS, connectivity and cloud services from leading technology suppliers to sales partners that solve end-customers’ challenges. ScanSource enables sales partners to deliver solutions for their customers to address changing end-customer buying and consumption patterns. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services. As a trusted adviser to our sales partners, we provide customized solutions through our strong understanding of end-customer needs.
25
Results of Operations
Net Sales
We have two reportable segments, which are based on technology. The following tables summarize our net sales results by business segment and by geographic location for the quarters and six months ended December 31, 2022 and 2021:
| Quarter ended December 31, | % Change, Constant Currency, Excluding Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| Net Sales by Segment: | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Specialty Technology Solutions | $ | 627,548 | $ | 496,920 | $ | 130,628 | 26.3 | % | 26.1 | % | |||||||||||||||||||
| Modern Communications & Cloud | 383,693 | 367,159 | 16,534 | 4.5 | % | 3.3 | % | ||||||||||||||||||||||
| Total net sales | $ | 1,011,241 | $ | 864,079 | $ | 147,162 | 17.0 | % | 16.4 | % | |||||||||||||||||||
| Six months ended December 31, | % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Specialty Technology Solutions | $ | 1,203,878 | $ | 998,630 | $ | 205,248 | 20.6 | % | 20.4 | % | |||||||||||||||||||
| Modern Communications & Cloud | 751,176 | 723,032 | 28,144 | 3.9 | % | 3.4 | % | ||||||||||||||||||||||
| Total net sales | $ | 1,955,054 | $ | 1,721,662 | $ | 233,392 | 13.6 | % | 13.3 | % | |||||||||||||||||||
(a) A reconciliation of non-GAAP net sales in constant currency is presented at the end of Results of Operations, under Non-GAAP Financial Information.
Specialty Technology Solutions
The Specialty Technology Solutions segment consists of sales to customers in North America and Brazil. For the quarter and six months ended December 31, 2022, net sales for the Specialty Technology Solutions segment increased $130.6 million, or 26.3%, and $205.2 million, or 20.6%, respectively, compared to the prior-year periods. Excluding the foreign exchange positive impact, adjusted net sales increased $129.5 million, or 26.1% for the quarter ended December 31, 2022 and $204.2 million, or 20.4%, for the six months ended December 31, 2022, compared to the prior-year periods. The increase in net sales and adjusted net sales for the quarter and six month periods is primarily due to strong growth across technologies in North America.
Modern Communications & Cloud
The Modern Communications & Cloud segment consists of sales to customers in North America, Brazil and the UK. For the quarter and six months ended December 31, 2022, net sales for the Modern Communications & Cloud segment increased $16.5 million, or 4.5%, and $28.1 million, or 3.9%, respectively, compared to the prior-year periods. Excluding the foreign exchange positive impact, adjusted net sales increased $12.0 million, or 3.3%, for the quarter ended December 31, 2022 and $24.3 million, or 3.4%, for the six months ended December 31, 2022, compared to the prior-year periods. The increase in net sales and adjusted net sales for the quarter and six month periods is primarily due to increased demand for our Cisco products and growth in Brazil. For our Intelisys business, net sales for the second quarter and six month period of fiscal year 2023 increased 9.2% and 8.1%, respectively, year-over-year.
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| Quarter ended December 31, | % Change, Constant Currency, Excluding Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| Net Sales by Geography: | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| United States and Canada | $ | 909,221 | $ | 773,660 | $ | 135,561 | 17.5 | % | 17.5 | % | |||||||||||||||||||
| International | 102,020 | 90,419 | 11,601 | 12.8 | % | 6.6 | % | ||||||||||||||||||||||
| Total net sales | $ | 1,011,241 | $ | 864,079 | $ | 147,162 | 17.0 | % | 16.4 | % | |||||||||||||||||||
| Six months ended December 31, | % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| United States and Canada | $ | 1,768,760 | $ | 1,543,431 | $ | 225,329 | 14.6 | % | 14.6 | % | |||||||||||||||||||
| International | 186,294 | 178,231 | 8,063 | 4.5 | % | 1.7 | % | ||||||||||||||||||||||
| Total net sales | $ | 1,955,054 | $ | 1,721,662 | $ | 233,392 | 13.6 | % | 13.3 | % | |||||||||||||||||||
(a) A reconciliation of non-GAAP net sales in constant currency is presented at the end of Results of Operations in the non-GAAP section.
Gross Profit
The following table summarizes our gross profit for the quarters and six months ended December 31, 2022 and 2021:
| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Specialty Technology Solutions | $ | 56,732 | $ | 52,048 | $ | 4,684 | 9.0 | % | 9.0 | % | 10.5 | % | |||||||||||||||||||||||
| Modern Communications & Cloud | 58,602 | 55,605 | 2,997 | 5.4 | % | 15.3 | % | 15.1 | % | ||||||||||||||||||||||||||
| Gross profit | $ | 115,334 | $ | 107,653 | $ | 7,681 | 7.1 | % | 11.4 | % | 12.5 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Specialty Technology Solutions | $ | 115,135 | $ | 97,742 | $ | 17,393 | 17.8 | % | 9.6 | % | 9.8 | % | |||||||||||||||||||||||
| Modern Communications & Cloud | 113,683 | 111,483 | 2,200 | 2.0 | % | 15.1 | % | 15.4 | % | ||||||||||||||||||||||||||
| Gross profit | $ | 228,818 | $ | 209,225 | $ | 19,593 | 9.4 | % | 11.7 | % | 12.2 | % | |||||||||||||||||||||||
Our gross profit is primarily affected by sales volume and gross margin mix. Gross margin mix is impacted by multiple factors, which include sales mix (proportion of sales of higher margin products or services relative to total sales), vendor program recognition (consisting of volume rebates, inventory price changes and purchase discounts) and freight costs. Increases in vendor program recognition decrease cost of goods sold, thereby increasing gross profit. Net sales derived from our Intelisys business contribute 100% to our gross profit dollars and margin as they have no associated cost of goods sold.
Specialty Technology Solutions
For the quarter ended December 31, 2022, gross profit dollars for the Specialty Technology Solutions segment increased $4.7 million, or 9.0%. Higher sales volume, after considering the associated cost of goods sold, contributed $13.7 million to the growth of gross profit dollars. Gross margin mix negatively impacted gross profit by $9.0 million, largely from a less favorable sales mix and decreased vendor program recognition. For the quarter ended December 31, 2022, the gross profit margin decreased 143 basis points over the prior-year to 9.0%.
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For the six months ended December 31, 2022, the Specialty Technology Solutions segment achieved gross profit growth of $17.4 million, or 17.8%. Increases in sales volume, after considering the associated cost of goods sold, contributed $20.1 million to the growth of gross profit dollars. Gross margin mix negatively impacted gross profit by $2.7 million, primarily from increased freight costs. For the six months ended December 31, 2022, the gross profit margin decreased 22 basis points over the prior year to 9.6%.
Modern Communications & Cloud
For the quarter ended December 31, 2022, the Modern Communications & Cloud segment gross profit increased by $3.0 million, or 5.4%. Higher sales volume, after considering the associated cost of goods sold, positively contributed $2.5 million to gross profit dollars. Gross margin mix positively impacted gross profit by $0.5 million, largely driven by a more favorable sales mix. For the quarter ended December 31, 2022, the gross profit margin increased 13 basis points over the prior year to 15.3%.
For the six months ended December 31, 2022, the Modern Communications & Cloud segment achieved gross profit growth of $2.2 million, or 2.0%. Increases in sales volume, after considering the associated cost of goods sold, contributed $4.3 million to the growth of gross profit dollars. Gross margin mix negatively impacted gross profit by $2.1 million, primarily from increased freight costs. For the six months ended December 31, 2022, the gross profit margin decreased 28 basis points over the prior year to 15.1%.
Operating Expenses
The following table summarizes our operating expenses for the quarters and six months ended December 31, 2022 and 2021:
| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 69,074 | $ | 69,161 | $ | (87) | (0.1) | % | 6.8 | % | 8.0 | % | |||||||||||||||||||||||
| Depreciation expense | 2,678 | 2,547 | 131 | 5.1 | % | 0.3 | % | 0.3 | % | ||||||||||||||||||||||||||
| Intangible amortization expense | 4,150 | 4,447 | (297) | (6.7) | % | 0.4 | % | 0.5 | % | ||||||||||||||||||||||||||
| Operating expenses | $ | 75,902 | $ | 76,155 | $ | (253) | (0.3) | % | 7.5 | % | 8.8 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 140,667 | $ | 133,016 | $ | 7,651 | 5.8 | % | 7.2 | % | 7.7 | % | |||||||||||||||||||||||
| Depreciation expense | 5,441 | 5,427 | 14 | 0.3 | % | 0.3 | % | 0.3 | % | ||||||||||||||||||||||||||
| Intangible amortization expense | 8,391 | 8,956 | (565) | (6.3) | % | 0.4 | % | 0.5 | % | ||||||||||||||||||||||||||
| Operating expenses | $ | 154,499 | $ | 147,399 | $ | 7,100 | 4.8 | % | 7.9 | % | 8.6 | % | |||||||||||||||||||||||
Selling, general and administrative expenses ("SG&A") decreased by less than $0.1 million for the quarter ended December 31, 2022, compared to the prior-year period. The decrease for the quarter ended December 31, 2022 is primarily attributable to a recovery of prior period withholding taxes in Brazil, which reduced SG&A by $2.9 million, partially offset by higher employee costs.
For the six months ended December 31, 2022, SG&A expenses increased by $7.7 million, or 5.8%, compared to the prior-year period. The increase for the six months ended December 31, 2022 is primarily attributable to higher employee costs, partially offset by a $2.9 million recovery of prior period withholding taxes in Brazil.
Operating Income
The following table summarizes our operating income for the quarters and six months ended December 31, 2022 and 2021:
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| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Specialty Technology Solutions | $ | 19,682 | $ | 16,551 | $ | 3,131 | 18.9 | % | 3.1 | % | 3.3 | % | |||||||||||||||||||||||
| Modern Communications & Cloud | 19,750 | 14,894 | 4,856 | 32.6 | % | 5.1 | % | 4.1 | % | ||||||||||||||||||||||||||
| Corporate | — | 53 | (53) | nm* | nm* | nm* | |||||||||||||||||||||||||||||
| Operating income | $ | 39,432 | $ | 31,498 | $ | 7,934 | 25.2 | % | 3.9 | % | 3.6 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Specialty Technology Solutions | $ | 41,534 | $ | 30,655 | $ | 10,879 | 35.5 | % | 3.5 | % | 3.1 | % | |||||||||||||||||||||||
| Modern Communications & Cloud | 32,785 | 31,201 | 1,584 | 5.1 | % | 4.4 | % | 4.3 | % | ||||||||||||||||||||||||||
| Corporate | — | (30) | 30 | nm* | nm* | nm* | |||||||||||||||||||||||||||||
| Operating income | $ | 74,319 | $ | 61,826 | $ | 12,493 | 20.2 | % | 3.8 | % | 3.6 | % | |||||||||||||||||||||||
Specialty Technology Solutions
For the Specialty Technology Solutions segment, operating income increased $3.1 million and $10.9 million for the quarter and six months ended December 31, 2022, respectively, compared to the prior-year period. Operating margin decreased to 3.1% for the quarter ended December 31, 2022. For the six months ended December 31, 2022, operating margin increased to 3.5%. The increase in operating income for the quarter and six month period is primarily due to higher gross profits.
Modern Communications & Cloud
For the Modern Communications & Cloud segment, operating income increased $4.9 million and $1.6 million for the quarter and six months ended December 31, 2022, respectively, compared to the prior-year period. Operating margin increased to 5.1% and 4.4% for the quarter and six months ended December 31, 2022, respectively. The increase in operating income and margin for the quarter and six month period is primarily due to higher gross profits and a $2.9 million recovery of prior period withholding taxes in Brazil.
Corporate
Corporate recognized no restructuring or divestiture expenses for the quarter and six months ended December 31, 2022, compared to less than $0.1 million in the prior-year quarter and six month period.
Total Other (Income) Expense
The following table summarizes our total other (income) expense for the quarters and six months ended December 31, 2022 and 2021:
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| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | 5,060 | $ | 1,493 | $ | 3,567 | 238.9 | % | 0.5 | % | 0.2 | % | |||||||||||||||||||||||
| Interest income | (2,027) | (947) | (1,080) | 114.0 | % | (0.2) | % | (0.1) | % | ||||||||||||||||||||||||||
| Net foreign exchange losses | 347 | 480 | (133) | (27.7) | % | 0.0 | % | 0.1 | % | ||||||||||||||||||||||||||
| Other, net | (140) | 63 | (203) | (322.2) | % | (0.0) | % | 0.0 | % | ||||||||||||||||||||||||||
| Total other expense, net | $ | 3,240 | $ | 1,089 | $ | 2,151 | 197.5 | % | 0.3 | % | 0.1 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | 8,507 | $ | 3,153 | $ | 5,354 | 169.8 | % | 0.4 | % | 0.2 | % | |||||||||||||||||||||||
| Interest income | (3,618) | (1,973) | (1,645) | 83.4 | % | (0.2) | % | (0.1) | % | ||||||||||||||||||||||||||
| Net foreign exchange losses | 1,270 | 966 | 304 | 31.5 | % | 0.1 | % | 0.1 | % | ||||||||||||||||||||||||||
| Other, net | (315) | (159) | (156) | 98.1 | % | (0.0) | % | (0.0) | % | ||||||||||||||||||||||||||
| Total other expense, net | $ | 5,844 | $ | 1,987 | $ | 3,857 | 194.1 | % | 0.3 | % | 0.1 | % | |||||||||||||||||||||||
Interest expense consists primarily of interest incurred on borrowings, non-utilization fees charged on the revolving credit facility and amortization of debt issuance costs. Interest expense increased for the quarter and six months ended December 31, 2022 compared to the prior-year periods, primarily from higher borrowings and increases in interest rates on our multi-currency revolving credit facility.
Interest income for the quarter and six months ended December 31, 2022 was generated on interest-bearing investments in Brazil and customer receivables.
Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, the British pound versus the euro, and the Canadian dollar versus the U.S. dollar. We partially offset foreign currency exposure with the use of foreign exchange forward contracts to hedge against these exposures. The costs associated with foreign exchange forward contracts are included in the net foreign exchange losses.
Provision for Income Taxes
For the quarter and six months ended December 31, 2022, income tax expense was $10.5 million and $18.7 million reflecting an effective tax rate of 28.9% and 27.3%, respectively. In comparison, for the quarter and six months ended December 31, 2021, income tax expense was $7.3 million and $14.6 million, reflecting an effective tax rate of 23.9% and 24.4%, respectively. The increase in the effective tax rate for the quarter and six months is primarily due to a decrease in forecasted tax exempt income and a decrease in creditable foreign taxes compared to the prior-year quarter. We expect the effective tax rate for fiscal year 2023 to be approximately 27.0% to 28.0%. See Note 13 - Income Taxes to the Notes to Consolidated Financial Statements for further discussion.
Non-GAAP Financial Information
Evaluating Financial Condition and Operating Performance
In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating income; non-GAAP pre-tax income; non-GAAP net income; non-GAAP EPS; adjusted earnings before interest expense, income taxes, depreciation, and amortization ("adjusted EBITDA"); adjusted return on invested capital ("adjusted ROIC"); and constant currency. Constant currency is a measure that excludes the translation exchange impact from changes in
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foreign currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.
These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP.
Adjusted Return on Invested Capital
Adjusted ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of adjusted ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.
Adjusted EBITDA starts with net income and adds back interest expense, income tax expense, depreciation expense, amortization of intangible assets, share-based compensation expense, changes in fair value of contingent consideration, and other non-GAAP adjustments. Since adjusted EBITDA excludes some non-cash costs of investing in our business and people, we believe that adjusted EBITDA shows the profitability from our business operations more clearly.
We calculate adjusted ROIC as adjusted EBITDA, divided by invested capital. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. The following table summarizes annualized adjusted ROIC for the quarters ended December 31, 2022 and 2021, respectively:
| Quarter ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Adjusted return on invested capital ratio, annualized (a) | 15.6 | % | 17.6 | % | |||||||
(a)The annualized EBITDA amount is divided by days in the quarter times 365 days per year, or 366 days for leap year. There were 92 days in the current and prior-year quarter.
The components of this calculation and reconciliation to our financial statements are shown on the following schedule:
| Quarter ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Reconciliation of net income to adjusted EBITDA: | |||||||||||
| Net income (GAAP) | $ | 25,734 | $ | 23,152 | |||||||
| Plus: Interest expense | 5,060 | 1,493 | |||||||||
| Plus: Income taxes | 10,458 | 7,257 | |||||||||
| Plus: Depreciation and amortization | 7,057 | 7,229 | |||||||||
| EBITDA (non-GAAP) | 48,309 | 39,131 | |||||||||
Plus: Tax recovery (a) | (2,858) | — | |||||||||
| Plus: Share-based compensation | 3,364 | 3,464 | |||||||||
Plus: Acquisition and divestiture costs (b) | — | (53) | |||||||||
| Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) | $ | 48,815 | $ | 42,542 | |||||||
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| Quarter ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Invested capital calculations: | |||||||||||
| Equity – beginning of the quarter | $ | 827,004 | $ | 746,094 | |||||||
| Equity – end of the quarter | 862,386 | 768,525 | |||||||||
| Plus: Share-based compensation, net | 2,496 | 2,590 | |||||||||
Plus: Acquisition and divestiture costs (b) | — | (53) | |||||||||
| Plus: Tax recovery, net | (1,886) | — | |||||||||
| Plus: Discontinued operations net loss | — | (100) | |||||||||
| Average equity | 845,000 | 758,528 | |||||||||
Average funded debt (c) | 392,853 | 200,708 | |||||||||
| Invested capital (denominator for adjusted ROIC) (non-GAAP) | $ | 1,237,853 | $ | 959,236 | |||||||
(a)Recovery of prior period withholding taxes in Brazil.
(b)Acquisition and divestiture costs are generally nondeductible for tax purposes.
(c)Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt.
Net Sales in Constant Currency, Excluding Acquisitions and Divestitures
We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the average foreign exchange rates between reporting periods. Constant currency is calculated by translating current period results from currencies other than the U.S. dollar into U.S. dollars using the comparable average foreign exchange rates from the prior year period. We also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date in order to show net sales results on an organic basis. This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and the impact of acquisitions. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding acquisitions:
| Net Sales by Segment: | |||||||||||||||||||||||
| Quarter ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| Specialty Technology Solutions: | (in thousands) | ||||||||||||||||||||||
| Net sales, reported | $ | 627,548 | $ | 496,920 | $ | 130,628 | 26.3 | % | |||||||||||||||
Foreign exchange impact (a) | (1,120) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 626,428 | $ | 496,920 | $ | 129,508 | 26.1 | % | |||||||||||||||
| Modern Communications & Cloud: | |||||||||||||||||||||||
| Net sales, reported | $ | 383,693 | $ | 367,159 | $ | 16,534 | 4.5 | % | |||||||||||||||
Foreign exchange impact (a) | (4,497) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 379,196 | $ | 367,159 | $ | 12,037 | 3.3 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Net sales, reported | $ | 1,011,241 | $ | 864,079 | $ | 147,162 | 17.0 | % | |||||||||||||||
Foreign exchange impact (a) | (5,617) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 1,005,624 | $ | 864,079 | $ | 141,545 | 16.4 | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended December 31, 2022 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2021.
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| Net Sales by Segment: | |||||||||||||||||||||||
| Six months ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| Specialty Technology Solutions | (in thousands) | ||||||||||||||||||||||
| Net sales, reported | $ | 1,203,878 | $ | 998,630 | $ | 205,248 | 20.6 | % | |||||||||||||||
Foreign exchange impact (a) | (1,060) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 1,202,818 | $ | 998,630 | $ | 204,188 | 20.4 | % | |||||||||||||||
| Modern Communications & Cloud | |||||||||||||||||||||||
| Net sales, reported | $ | 751,176 | $ | 723,032 | $ | 28,144 | 3.9 | % | |||||||||||||||
Foreign exchange impact (a) | (3,884) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 747,292 | $ | 723,032 | $ | 24,260 | 3.4 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Net sales, reported | $ | 1,955,054 | $ | 1,721,662 | $ | 233,392 | 13.6 | % | |||||||||||||||
Foreign exchange impact (a) | (4,944) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 1,950,110 | $ | 1,721,662 | $ | 228,448 | 13.3 | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the six months ended December 31, 2022 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2021. | |||||||||||||||||||||||
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| Net Sales by Geography: | |||||||||||||||||||||||
| Quarter ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| United States and Canada: | (in thousands) | ||||||||||||||||||||||
| Net sales, as reported | $ | 909,221 | $ | 773,660 | $ | 135,561 | 17.5 | % | |||||||||||||||
| International: | |||||||||||||||||||||||
| Net sales, reported | $ | 102,020 | $ | 90,419 | $ | 11,601 | 12.8 | % | |||||||||||||||
Foreign exchange impact (a) | (5,617) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 96,403 | $ | 90,419 | $ | 5,984 | 6.6 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Net sales, reported | $ | 1,011,241 | $ | 864,079 | $ | 147,162 | 17.0 | % | |||||||||||||||
Foreign exchange impact (a) | (5,617) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 1,005,624 | $ | 864,079 | $ | 141,545 | 16.4 | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended December 31, 2022 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2021. | |||||||||||||||||||||||
| Six months ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| United States and Canada: | (in thousands) | ||||||||||||||||||||||
| Net sales, as reported | $ | 1,768,760 | $ | 1,543,431 | $ | 225,329 | 14.6 | % | |||||||||||||||
| International: | |||||||||||||||||||||||
| Net sales, reported | $ | 186,294 | $ | 178,231 | $ | 8,063 | 4.5 | % | |||||||||||||||
Foreign exchange impact (a) | (4,944) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 181,350 | $ | 178,231 | $ | 3,119 | 1.7 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Net sales, reported | $ | 1,955,054 | $ | 1,721,662 | $ | 233,392 | 13.6 | % | |||||||||||||||
Foreign exchange impact (a) | (4,944) | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency | $ | 1,950,110 | $ | 1,721,662 | $ | 228,448 | 13.3 | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the six months ended December 31, 2022 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2021. | |||||||||||||||||||||||
34
| Operating Income by Segment: | |||||||||||||||||||||||||||||||||||
| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| Specialty Technology Solutions: | (in thousands) | ||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 19,682 | $ | 16,551 | $ | 3,131 | 18.9 | % | 3.1 | % | 3.3 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 1,266 | 1,491 | (225) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 20,948 | $ | 18,042 | $ | 2,906 | 16.1 | % | 3.3 | % | 3.6 | % | |||||||||||||||||||||||
| Modern Communications & Cloud: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 19,750 | $ | 14,894 | $ | 4,856 | 32.6 | % | 5.1 | % | 4.1 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,884 | 2,956 | (72) | ||||||||||||||||||||||||||||||||
Tax recovery (a) | (2,858) | — | (2,858) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 19,776 | $ | 17,850 | $ | 1,926 | 10.8 | % | 5.2 | % | 4.9 | % | |||||||||||||||||||||||
| Corporate: | |||||||||||||||||||||||||||||||||||
| GAAP operating loss | $ | — | $ | 53 | $ | (53) | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | — | (53) | 53 | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | — | $ | — | $ | — | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Consolidated: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 39,432 | $ | 31,498 | $ | 7,934 | 25.2 | % | 3.9 | % | 3.6 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 4,150 | 4,447 | (297) | ||||||||||||||||||||||||||||||||
Tax recovery (a) | (2,858) | — | (2,858) | ||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | — | (53) | 53 | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 40,724 | $ | 35,892 | $ | 4,832 | 13.5 | % | 4.0 | % | 4.2 | % | |||||||||||||||||||||||
(a) Recovery of prior period withholding taxes in Brazil
35
| Operating Income by Segment: | |||||||||||||||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | ||||||||||||||||||||||||||||||
| Specialty Technology Solutions: | (in thousands) | ||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 41,534 | $ | 30,655 | $ | 10,879 | 35.5 | % | 3.5 | % | 3.1 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,608 | 3,023 | (415) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 44,142 | $ | 33,678 | $ | 10,464 | 31.1 | % | 3.7 | % | 3.4 | % | |||||||||||||||||||||||
| Modern Communications & Cloud: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 32,785 | $ | 31,201 | $ | 1,584 | 5.1 | % | 4.4 | % | 4.3 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 5,783 | 5,933 | (150) | ||||||||||||||||||||||||||||||||
Tax recovery (a) | (2,858) | — | (2,858) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 35,710 | $ | 37,134 | $ | (1,424) | (3.8) | % | 4.8 | % | 5.1 | % | |||||||||||||||||||||||
| Corporate: | |||||||||||||||||||||||||||||||||||
| GAAP operating loss | $ | — | $ | (30) | $ | 30 | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | — | 30 | (30) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | — | $ | — | $ | — | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Consolidated: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 74,319 | $ | 61,826 | $ | 12,493 | 20.2 | % | 3.8 | % | 3.6 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 8,391 | 8,956 | (565) | ||||||||||||||||||||||||||||||||
Tax recovery (a) | (2,858) | — | (2,858) | ||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | — | 30 | (30) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | 79,852 | 70,812 | $ | 9,040 | 12.8 | % | 4.1 | % | 4.1 | % | |||||||||||||||||||||||||
(a) Recovery of prior period withholding taxes in Brazil
36
Additional Non-GAAP Metrics
To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP SG&A expenses, non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share. Non-GAAP results exclude amortization of intangible assets related to acquisitions, changes in fair value of contingent consideration, acquisition and divestiture costs, restructuring costs, impact of Divestitures and other non-GAAP adjustments. These year-over-year metrics include the translation impact of changes in foreign currency exchange rates. These metrics are useful in assessing and understanding our operating performance, especially when comparing results with previous periods or forecasting performance for future periods. Below we provide a non-GAAP reconciliation of the aforementioned metrics adjusted for the costs and charges mentioned above:
| Quarter ended December 31, 2022 | |||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Acquisition and divestiture costs | Tax recovery(a) | Non-GAAP measure | |||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||
| SG&A expenses | $ | 69,074 | $ | — | $ | — | $ | 2,858 | $ | 71,932 | |||||||||||||||||||
| Operating income | 39,432 | 4,150 | — | (2,858) | 40,724 | ||||||||||||||||||||||||
| Pre-tax income | 36,192 | 4,150 | — | (2,858) | 37,484 | ||||||||||||||||||||||||
| Net income | 25,734 | 3,093 | — | (1,886) | 26,941 | ||||||||||||||||||||||||
| Diluted EPS | $ | 1.01 | $ | 0.12 | $ | — | $ | (0.07) | $ | 1.06 | |||||||||||||||||||
| Quarter ended December 31, 2021 | |||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Acquisition and divestiture costs | Tax recovery | Non-GAAP measure | |||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||
| SG&A expenses | $ | 69,161 | $ | — | $ | 53 | $ | — | $ | 69,214 | |||||||||||||||||||
| Operating income | 31,498 | 4,447 | (53) | — | 35,892 | ||||||||||||||||||||||||
| Pre-tax income | 30,409 | 4,447 | (53) | — | 34,803 | ||||||||||||||||||||||||
| Net income | 23,152 | 3,347 | (53) | — | 26,446 | ||||||||||||||||||||||||
| Diluted EPS | $ | 0.89 | $ | 0.13 | $ | — | $ | — | $ | 1.02 | |||||||||||||||||||
37
| Six months ended December 31, 2022 | |||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Acquisition and divestiture costs | Tax recovery(a) | Non-GAAP measure | |||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||
| SG&A expenses | $ | 140,667 | $ | — | $ | — | $ | 2,858 | $ | 143,525 | |||||||||||||||||||
| Operating income | 74,319 | 8,391 | — | (2,858) | 79,852 | ||||||||||||||||||||||||
| Pre-tax income | 68,475 | 8,391 | — | (2,858) | 74,008 | ||||||||||||||||||||||||
| Net income | 49,776 | 6,254 | — | (1,886) | 54,144 | ||||||||||||||||||||||||
| Diluted EPS | $ | 1.96 | $ | 0.25 | $ | — | $ | (0.07) | $ | 2.13 | |||||||||||||||||||
| Six months ended December 31, 2021 | |||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Acquisition and divestiture costs | Tax recovery | Non-GAAP measure | |||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||
| SG&A expenses | $ | 133,016 | $ | — | $ | (30) | $ | — | $ | 132,986 | |||||||||||||||||||
| Operating income | 61,826 | 8,956 | 30 | — | 70,812 | ||||||||||||||||||||||||
| Pre-tax income | 59,839 | 8,956 | 30 | — | 68,825 | ||||||||||||||||||||||||
| Net income | 45,225 | 6,740 | 30 | — | 51,995 | ||||||||||||||||||||||||
| Diluted EPS | $ | 1.75 | $ | 0.26 | $ | — | $ | — | $ | 2.01 | |||||||||||||||||||
(a) Recovery of prior period withholding taxes in Brazil
38
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under our $350 million revolving credit facility. Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit. In general, as our sales volumes increase, our net investment in working capital increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.
Our cash and cash equivalents balance totaled $66.4 million at December 31, 2022, compared to $38.0 million at June 30, 2022, including $44.3 million and $35.0 million held outside of the United States at December 31, 2022 and June 30, 2022, respectively. Checks released but not yet cleared in the amounts of $8.9 million and $18.0 million are included in accounts payable at December 31, 2022 and June 30, 2022, respectively.
We conduct business in many locations throughout the world where we generate and use cash. We provide for United States income taxes from the earnings of our Canadian and Brazilian subsidiaries. See Note 13 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.
Our net investment in working capital increased $172.8 million to $882.3 million at December 31, 2022 from $709.5 million at June 30, 2022, primarily from increases in accounts receivable and inventory. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels and payments to vendors. For the six months ended December 31, 2022, our working capital investment increased to support our 13.6% year-over-year net sales growth.
| Six months ended | |||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Cash (used in) provided by: | |||||||||||
| Operating activities | $ | (75,346) | $ | (75,378) | |||||||
| Investing activities | (4,262) | 480 | |||||||||
| Financing activities | 108,029 | 51,365 | |||||||||
Net cash used in operating activities was $75.3 million for the six months ended December 31, 2022, compared to $75.4 million used in operating activities in the prior-year period. Cash used in operating activities for the six months ended December 31, 2022 is attributable to increases in inventory and accounts receivable, which increased 24% and 7%, respectively, compared to the beginning of the six month period. Cash used in operating activities for the six months ended December 31, 2021 is primarily attributable to increases in inventory and accounts receivable, which increased 20% and 8%, respectively, compared to the beginning of the six month period.
Operating cash flows are subject to variability period over period as a result of the timing of payments related to accounts receivable, accounts payable, and other working capital items.
The number of days sales outstanding ("DSO") was 69 days at December 31, 2022, compared to 68 days at June 30, 2022 and 64 days at December 31, 2021. The increase in DSO for the quarter ended December 31, 2022 is primarily due to increased net receivables, driven by project specific customer terms and timing of sales near the end of the reporting period. Inventory turned 5.0 times during the quarter ended December 31, 2022, compared to 5.1 times for previous quarter ended September 30, 2022 and 5.7 times in the prior-year quarter ended December 31, 2021. The decrease in inventory turns for the quarter ended December 31, 2022 is primarily due to increased average inventory.
Cash used in investing activities for the six months ended December 31, 2022 was $4.3 million, compared to $0.5 million provided by investing activities in the prior-year period. Cash used in investing activities for the six months ended December 31, 2022 represents capital expenditures, primarily for IT investments. Cash provided by investing activities for the six months ended December 31, 2021 represents proceeds from the sale of our discontinued operations, partially offset by capital expenditures.
39
Management expects capital expenditures for fiscal year 2023 to range from $6.5 million to $9.0 million, primarily for IT investments and facility improvements.
For the six months ended December 31, 2022, cash provided by financing activities totaled $108.0 million, compared to $51.4 million provided by financing activities for the prior-year period. Cash provided by financing activities for the six months ended December 31, 2022 and 2021 is primarily attributable to net borrowings on the revolving credit facility.
Credit Facility
We have a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (as amended, the “Amended Credit Agreement”). On September 28, 2022, we amended and restated our Amended Credit Agreement, which includes (i) a five-year, $350 million multicurrency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. The Amended Credit Agreement extended the credit facility maturity date to September 28, 2027. In addition, pursuant to an “accordion feature,” we may increase our borrowings up to an additional $250 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of our domestic assets and our domestic subsidiaries. Under the terms of the revolving credit facility, the payment of cash dividends is restricted. We incurred debt issuance costs of $1.4 million in connection with the amendment and restatement of the Amended Credit Agreement. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.
Loans denominated in U.S. dollars, other than swingline loans, shall bear interest at a rate per annum equal to, at our option, (i) the adjusted Term SOFR or adjusted daily simple SOFR plus an additional margin ranging from 1.00% to 1.75%, depending upon our ratio of (A) total consolidated debt less up to $30 million of unrestricted domestic cash to (B) trailing four-quarter consolidated EBITDA measured as of the end of the most recent year or quarter, as applicable, for which financial statements have been delivered to the Lenders (the “leverage ratio”); or (ii) the alternate base rate plus an additional margin ranging from 0% to 0.75%, depending upon our leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars shall bear interest based upon the adjusted daily simple SOFR, floating daily, plus an additional margin ranging from 1.00% to 1.75%, depending upon our leverage ratio, or such other rate as agreed upon with the applicable swingline lender. The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10% over the applicable SOFR reference rate. Loans denominated in foreign currencies shall bear interest at a rate per annum equal to the applicable benchmark rate set forth in the New Credit Agreement plus an additional margin ranging from 1.00% to 1.75%, depending upon our leverage ratio, plus, if applicable, certain mandatory costs.
During the quarter and six months ended December 31, 2022, our borrowings under the credit facility were U.S. dollar loans. The spread in effect as of December 31, 2022 was 1.50% for LIBOR and SOFR-based loans and 0.50% for alternate base rate loans. The commitment fee rate in effect at December 31, 2022 was 0.25%. The Amended Credit Agreement includes customary representations, warranties and affirmative and negative covenants, including financial covenants. Specifically, our Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, our Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. We were in compliance with all covenants under the credit facility at December 31, 2022.
The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the six month periods ended December 31, 2022 and 2021 was $219.5 million and $57.1 million, respectively. There was $120.0 million and $214.2 million available for additional borrowings as of December 31, 2022 and June 30, 2022, respectively. There were no letters of credit issued under the multi-currency revolving credit facility at December 31, 2022 or June 30, 2022. Availability to use this borrowing capacity depends upon, among other things, the levels of our Leverage Ratio and Interest Coverage Ratio, which, in turn, will depend upon (1) our Credit Facility Net Debt relative to our Credit Facility EBITDA and (2) Credit Facility EBITDA relative to total interest expense, respectively. As a result, our availability will increase if EBITDA increases (subject to the limit of the facility) and decrease if EBITDA decreases. While we were in compliance with the financial covenants contained in the Credit Facility as of December 31, 2022, and currently expect to continue to maintain such compliance, should we encounter difficulties, our historical relationship with our Credit Facility lending group has been strong and we anticipate their continued support of our long-term business.
Summary
40
We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet our present and future working capital and cash requirements for at least the next twelve months. We also believe that our longer-term working capital, planned expenditures and other general funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities.
Accounting Standards Recently Issued
See Note 1 of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on our consolidated financial position and results of operations.
Critical Accounting Policies and Estimates
Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. See Management's Discussion and Analysis of Financial Condition and Results from Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 for a complete discussion.
41
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||
For a description of our market risks, see Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. No material changes have occurred to our market risks since June 30, 2022.
42
| Item 4. | Controls and Procedures | ||||
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the effectiveness of our disclosure controls and procedures at December 31, 2022. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective at December 31, 2022. During the quarter ended December 31, 2022, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
43
PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings | ||||
The Company and our subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to us, we believe that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on our financial condition or results of operations. For a description of our material legal proceedings, see Note 12 - Commitments and Contingencies in the notes to the condensed consolidated financial statements, which is incorporated herein by reference.
| Item 1A. | Risk Factors | ||||
In addition to the risk factors discussed in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2022, which could materially affect our business, financial condition and/or future operating results.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Purchases of Equity Securities by the Issuer
The following table presents the share-repurchase activity for the quarter ended December 31, 2022:
| Period | Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of the publicly announced plan or program | Approximate dollar value of shares that may yet be purchased under the plan or program | ||||||||||||||||||||||
| October 1 - 31, 2022 | 2,177 | $ 26.41 | — | $ 81,814,854 | ||||||||||||||||||||||
| November 1 - 30, 2022 | 52,230 | $ 32.05 | — | $ 81,814,854 | ||||||||||||||||||||||
| December 1 - 31, 2022 | 134 | $ 30.70 | — | $ 81,814,854 | ||||||||||||||||||||||
| Total | 54,541 | — | ||||||||||||||||||||||||
(1) Includes 54,541 shares withheld from employees' stock-based awards to satisfy required tax withholding obligations for the months of October through December 2022.
In August 2021, our Board of Directors authorized a $100 million share repurchase program. The authorization does not have any time limit.
Dividends
We have never declared or paid a cash dividend. Under the terms of our credit facility, the payment of cash dividends is restricted.
44
| Item 6. | Exhibits | ||||
| Exhibit Number | Description | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following materials from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at December 31, 2022 and June 30, 2022; (ii) the Condensed Consolidated Income Statements for the quarters and six months ended December 31, 2022 and 2021; (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income for the quarters and six months ended December 31, 2022 and 2021; (iv) the Condensed Consolidated Statements of Shareholder's Equity at December 31, 2022 and 2021; (v) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2022 and 2021; and (vi) the Notes to the Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL | ||||
| 104 | Cover page Inline XBRL File (Included in Exhibit 101) | ||||
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ScanSource, Inc. | ||||||||
| Date: | February 7, 2023 | /s/ MICHAEL L. BAUR | ||||||
| Michael L. Baur | ||||||||
| Chairman and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: | February 7, 2023 | /s/ STEVE JONES | ||||||
| Steve Jones | ||||||||
| Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||
46
ATTACHMENTS / EXHIBITS
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
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