Item 2. Management’s Discussion and Analysis
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, software, connectivity and cloud. We provide technology solutions and services from more than 500 leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration (UCaaS, CCaaS), telecom and cloud services to our more than 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. During the quarter ended September 30, 2021, we aligned technologies with our hybrid distribution growth strategy and renamed our operating segments. With this change, we moved some North American business with communications and collaborations solutions to the Modern Communications & Cloud segment. Our segments operate in the United States, Canada, Brazil and the UK:
• Specialty Technology Solutions
• Modern Communications & Cloud
We sell hardware, software, 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 Software as a Service (“SaaS”) and subscriptions, through our digital tools and platforms.
Our key suppliers include 8x8, ACC Business, AT&T, Aruba/HPE, AudioCodes, Avaya, Axis, Barco, Bematech, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Equinix, Extreme, F5, Five9, Fortinet, Genesys, Hanwha, Honeywell, HID, Ingenico, Intrado, Jabra, LogMeIn, Lumen, March Networks, Masergy, Microsoft, Mitel, NCR, NICE inContact, Oracle, Palo Alto, Panasonic, Poly, RingCentral, Spectralink, Spectrum, Toshiba Global Commerce Solutions, Ubiquiti, Verifone, Verizon, Windstream, Zebra Technologies and Zoom.
Unless otherwise indicated, the amounts and analysis provided within Management's Discussion and Analysis of Financial Condition and Results of Operations pertain to our continuing operations only.
Impact of COVID-19 on our Business Environment
The spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders, business shutdowns, and limitations of in-person gatherings. The pandemic and these containment measures have had a substantial impact on businesses around the world and on global, regional and national economies, including labor shortages and heightened supply chain challenges, along with an increase in e-commerce. More scheduled deals in this quarter pushed out as a result of the supply constrained environment. We cannot predict the continued impact of the pandemic, including the impact of the proposed U.S. vaccine mandate, and the degree to which our business and results of operations may be affected.
Our top priority is protecting the health and safety of our employees. We have teams monitoring the evolving situation and recommending risk mitigation actions. All of our distribution facilities have remained open and operational throughout the pandemic. Our employees are committed to providing the high level of customer service our partners have grown to expect from us in order to achieve positive results.
In July 2020, we announced actions to address the business impacts of the COVID-19 pandemic and prepare for our next phase of growth. These actions included a $30 million annualized expense reduction plan. These actions were designed to better align the cost structure for our wholesale distribution business with lower sales volumes as a result of the COVID-19 pandemic. As part of the plan, we have continued to invest in our higher growth agency business, Intelisys. Strong growth for the Intelisys business has continued, even with the COVID-19 pandemic.
Our Strategy
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We rely on a channel sales model using a hybrid distribution strategy to offer hardware, software, connectivity and cloud 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. Through our digital tools and platforms, we offer customers SaaS and subscription services from leading technology suppliers. While we do not manufacture products, we provide technology solutions and services from leading technology suppliers. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services, such as custom configuration, key injection, integration support, custom development and other services. We also offer the flexibility of on-premise, cloud and hybrid solutions.
As a trusted adviser to our sales partners, we provide more complete solutions through a better understanding of end-customer needs. We drive growth through enhancing our sales partners' capabilities to provide hardware, software, connectivity and cloud solutions. Our teams deliver value-added support programs and services, including education and training, network assessments, implementation, custom development and marketing to help our sales partners extend their capabilities, develop new technology practices or reach new end customers.
Our objective is to grow profitable sales in the technologies we offer and expand in higher margin and adjacent markets to help our sales partners offer more products and services and increase recurring revenue opportunities. As part of our strategic plan, we consider strategic acquisitions and alliances to enhance our technology offerings and service capabilities.
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Results of Operations
Net Sales
The following tables summarize our net sales results by technology segment and by geographic location for the quarters and six months ended December 31, 2021 and 2020:
Quarter ended December 31, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)
Net Sales by Segment: 2021 2020 $ Change % Change
(in thousands)
Specialty Technology Solutions $ 496,920 $ 455,248 $ 41,672 9.2 % 9.4 %
Modern Communications & Cloud 367,431 355,649 11,782 3.3 % 3.9 %
Total net sales $ 864,351 $ 810,897 $ 53,454 6.6 % 7.0 %
Six months ended December 31, % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
2021 2020 $ Change % Change
(in thousands)
Specialty Technology Solutions $ 998,630 $ 864,026 $ 134,604 15.6 % 15.6 %
Modern Communications & Cloud 723,032 704,212 18,820 2.7 % 2.7 %
Total net sales $ 1,721,662 $ 1,568,238 $ 153,424 9.8 % 9.8 %
(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, 2021, net sales for the Specialty Technology Solutions segment increased $41.7 million, or 9.2%, and $134.6 million, or 15.6%, respectively, compared to the prior-year periods. Excluding the foreign exchange negative impact, adjusted net sales increased $42.7 million, or 9.4%, for the quarter ended December 31, 2021 and $135.1 million, or 15.6% for the six months ended December 31, 2021 compared to the prior-year periods. The increase in net sales and adjusted net sales for the quarter and six months periods is primarily due to broad-based demand growth across our technologies in North America.
Modern Communications & Cloud
The Modern Communications & Cloud segment consists of sales to customers in North America, Brazil, Europe and the UK. For the quarter ended December 31, 2021, net sales increased $11.8 million, or 3.3% compared to the prior-year quarter. Excluding the foreign exchange negative impact, adjusted net sales for the quarter ended December 31, 2021 increased $13.7 million, or 3.9%, from the prior-year quarter. The increase in net sales and adjusted net sales reflects the shift to cloud and subscriptions. For the Intelisys business, second quarter 2022 net sales increased 14.1% year-over-year.
For the six months ended December 31, 2021, net sales and adjusted net sales increased $18.8 million, or 2.7%, primarily from increases in sales volume in Brazil.
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Quarter ended December 31, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)
Net Sales by Geography: 2021 2020 $ Change % Change
(in thousands)
United States and Canada $ 773,932 $ 720,004 $ 53,928 7.5 % 7.5 %
International 90,419 90,893 (474) (0.5) % 2.7 %
Total net sales $ 864,351 $ 810,897 $ 53,454 6.6 % 7.0 %
Six months ended December 31, % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
2021 2020 $ Change % Change
(in thousands)
United States and Canada $ 1,543,431 $ 1,403,607 $ 139,824 10.0 % 10.0 %
International 178,231 164,631 13,600 8.3 % 8.6 %
Total net sales $ 1,721,662 $ 1,568,238 $ 153,424 9.8 % 9.8 %
(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 tables summarize our gross profit for the quarters and six months ended December 31, 2021 and 2020:
Quarter ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Specialty Technology Solutions $ 52,048 $ 38,612 $ 13,436 34.8 % 10.5 % 8.5 %
Modern Communications & Cloud 55,877 47,431 8,446 17.8 % 15.2 % 13.3 %
Gross profit $ 107,925 $ 86,043 $ 21,882 25.4 % 12.5 % 10.6 %
Six months ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Specialty Technology Solutions $ 97,742 $ 73,277 $ 24,465 33.4 % 9.8 % 8.5 %
Modern Communications & Cloud 111,483 93,546 17,937 19.2 % 15.4 % 13.3 %
Gross profit $ 209,225 $ 166,823 $ 42,402 25.4 % 12.2 % 10.6 %
Specialty Technology Solutions
Gross profit dollars and gross profit margin for the Specialty Technology Solutions segment increased for the quarter and six months ended December 31, 2021, primarily from higher sales volume, sales mix and higher supplier sales incentives, compared to the prior-year periods.
Modern Communications & Cloud
Gross profit dollars and gross profit margin increased for the Modern Communications & Cloud segment for the quarter and six months ended December 31, 2021, primarily from higher sales volume and sales mix, compared to the prior-year periods.
Operating Expenses
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The following tables summarize our operating expenses for the quarters and six months ended December 31, 2021 and 2020:
Quarter ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Selling, general and administrative expenses $ 69,433 $ 60,470 $ 8,963 14.8 % 8.0 % 7.5 %
Depreciation expense 2,547 3,097 (550) (17.8) % 0.3 % 0.4 %
Intangible amortization expense 4,447 4,862 (415) (8.5) % 0.5 % 0.6 %
Restructuring and other charges — 484 (484) (100.0) % 0.0 % 0.1 %
Operating expenses $ 76,427 $ 68,913 $ 7,514 10.9 % 8.8 % 8.5 %
Six months ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Selling, general and administrative expenses $ 133,016 $ 122,580 $ 10,436 8.5 % 7.7 % 7.8 %
Depreciation expense 5,427 6,494 (1,067) (16.4) % 0.3 % 0.4 %
Intangible amortization expense 8,956 9,716 (760) (7.8) % 0.5 % 0.6 %
Restructuring and other charges — 8,753 (8,753) (100.0) % 0.0 % 0.6 %
Change in fair value of contingent consideration — 516 (516) (100.0) % 0.0 % 0.0 %
Operating expenses $ 147,399 $ 148,059 $ (660) (0.4) % 8.6 % 9.4 %
Selling, general and administrative expenses ("SG&A") increased $9.0 million and $10.4 million for the quarter and six months ended December 31, 2021, respectively, compared to the prior-year periods. The increase is attributable to higher employee costs and a charge to bad debt expense.
Restructuring and other charges incurred of $0.5 million and $8.8 million for the quarter and six months ended December 31, 2020, respectively, primarily relate to employee severance and benefit costs in connection with our expense reduction plan implemented at the end of July 2020.
We recorded expense of $0.5 million for the change in fair value of contingent consideration for the six months ended December 31, 2020, all of which relates to Intelisys. The final Intelisys earnout payment was paid in October 2020.
Operating Income
The following tables summarize our operating income for the quarters and six months ended December 31, 2021 and 2020:
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Quarter ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Specialty Technology Solutions $ 16,551 $ 7,161 $ 9,390 131.1 % 3.3 % 1.6 %
Modern Communications & Cloud 14,894 11,813 3,081 26.1 % 4.1 % 3.3 %
Corporate 53 (1,844) 1,897 nm* nm* nm*
Operating income $ 31,498 $ 17,130 $ 14,368 83.9 % 3.6 % 2.1 %
Six months ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Specialty Technology Solutions $ 30,655 $ 8,845 $ 21,810 246.6 % 3.1 % 1.0 %
Modern Communications & Cloud 31,201 20,529 10,672 52.0 % 4.3 % 2.9 %
Corporate (30) (10,610) 10,580 nm* nm* nm*
Operating income $ 61,826 $ 18,764 $ 43,062 229.5 % 3.6 % 1.2 %
*nm - percentages are not meaningful
Specialty Technology Solutions
For the Specialty Technology Solutions segment, operating income increased $9.4 million and $21.8 million for the quarter and six months ended December 31, 2021, respectively, compared to the prior-year period. Operating margin increased to 3.3% and 3.1% for the quarter and six months ended December 31, 2021, respectively. The increase in operating income and margin for both 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 $3.1 million and $10.7 million for the quarter and six months ended December 31, 2021, respectively, compared to the prior-year periods. Operating margin increased to 4.1% and 4.3% for the quarter and six months ended December 31, 2021, respectively. The increase in operating income and operating margin for the quarter and six months is primarily due to higher gross profits.
Corporate
Corporate recognized a less than $0.1 million gain against divestiture expense for the quarter ended December 31, 2021, compared to $1.4 million divestiture expense incurred in the prior-year quarter. Corporate also incurred $0.5 million in restructuring expense in the prior-year quarter.
Corporate incurred less than $0.1 million in divestiture expenses for the six months ended December 31, 2021, compared to $1.9 million and $8.8 million in restructuring and divestiture expenses, respectively, for the six months ended December 31, 2020.
Total Other (Income) Expense
The following tables summarize our total other (income) expense for the quarters and six months ended December 31, 2021 and 2020:
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Quarter ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Interest expense $ 1,493 $ 1,796 $ (303) (16.9) % 0.2 % 0.2 %
Interest income (947) (531) (416) (78.3) % (0.1) % (0.1) %
Net foreign exchange losses 480 381 99 26.0 % 0.1 % 0.0 %
Other, net 63 (260) 323 124.2 % 0.0 % (0.0) %
Total other expense, net $ 1,089 $ 1,386 $ (297) (21.4) % 0.1 % 0.2 %
Six months ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
(in thousands)
Interest expense $ 3,153 $ 3,709 $ (556) (15.0) % 0.2 % 0.2 %
Interest income (1,973) (1,011) (962) 95.2 % (0.1) % (0.1) %
Net foreign exchange losses 966 819 147 17.9 % 0.1 % 0.1 %
Other, net (159) (335) 176 (52.5) % (0.0) % (0.0) %
Total other expense, net $ 1,987 $ 3,182 $ (1,195) (37.6) % 0.1 % 0.2 %
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 decreased for the quarter and six months ended December 31, 2021 compared to the prior-year periods, principally from lower borrowing rates on our multi-currency revolving credit facility due to a more favorable leverage ratio achieved.
Interest income for the quarter and six months ended December 31, 2021 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents. Interest income increased for the quarter and six months ended December 31, 2021 compared to the prior-year periods, principally from higher interest earned on cash and cash equivalents in Brazil.
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 primarily generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real 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, 2021, income tax expense was $7.3 million and $14.6 million, respectively, reflecting an effective tax rate of 23.9% and 24.4%, respectively. In comparison, for the quarter and six months ended December 31, 2020, income tax expense totaled $4.7 million and $4.6 million, respectively, reflecting an effective tax rate of 29.7% and 29.8%, respectively. The decrease in the effective tax rate is primarily due to an increase in forecasted tax-exempt income and, for the quarter, the benefit from discrete items. We expect the effective tax rate, excluding discrete items, for fiscal year 2022 to be approximately 24.5% to 25.5%. See Note 14 - 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"); return on invested capital ("ROIC"); and "constant currency." Constant currency is a measure that excludes the translation exchange impact from changes in foreign
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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.
Return on Invested Capital
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 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, changes in fair value of contingent considerations, and other non-GAAP adjustments. Effective with the first quarter of fiscal year 2022, non-cash share-based compensation expense is also added back in calculating adjusted EBITDA. 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. The presentation for adjusted EBITDA for all periods presented has been recast to reflect this change to enhance comparability between periods.
We calculate 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 ROIC for the quarters ended December 31, 2021 and 2020, respectively:
Quarter ended December 31,
2021 2020
Return on invested capital ratio, annualized (a)
17.6 % 13.3 %
(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,
2021 2020
(in thousands)
Reconciliation of net income to adjusted EBITDA:
Net income from continuing operations (GAAP) $ 23,152 $ 11,061
Plus: Interest expense 1,493 1,796
Plus: Income taxes 7,257 4,683
Plus: Depreciation and amortization 7,229 8,349
EBITDA (non-GAAP) 39,131 25,889
Plus: Share-based compensation 3,464 2,006
Plus: Acquisition and divestiture costs (a)
(53) 1,360
Plus: Restructuring costs — 484
Adjusted EBITDA (numerator for ROIC) (non-GAAP) $ 42,542 $ 29,739
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Quarter ended December 31,
2021 2020
(in thousands)
Invested capital calculations:
Equity – beginning of the quarter $ 746,094 $ 671,227
Equity – end of the quarter 768,525 682,139
Plus: Share-based compensation, net 2,590 1,510
Plus: Acquisition and divestiture costs (a)
(53) 1,360
Plus: Restructuring, net — 366
Plus: Discontinued operations net (income) loss (100) 25,255
Average equity 758,528 690,929
Average funded debt (b)
200,708 198,620
Invested capital (denominator for ROIC) (non-GAAP) $ 959,236 $ 889,549
(a) Acquisition and divestiture costs are generally nondeductible for tax purposes.
(b) 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. If applicable, we also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date and the impact of Divestitures 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 Divestitures and acquisitions, if applicable. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding Divestitures:
Net Sales by Segment:
Quarter ended December 31,
2021 2020 $ Change % Change
Specialty Technology Solutions: (in thousands)
Net sales, reported $ 496,920 $ 455,248 $ 41,672 9.2 %
Foreign exchange impact (a)
1,011 —
Non-GAAP net sales, constant currency $ 497,931 $ 455,248 $ 42,683 9.4 %
Modern Communications & Cloud:
Net sales, reported $ 367,431 $ 355,649 $ 11,782 3.3 %
Foreign exchange impact (a)
1,961 —
Non-GAAP net sales, constant currency $ 369,392 $ 355,649 $ 13,743 3.9 %
Consolidated:
Net sales, reported $ 864,351 $ 810,897 $ 53,454 6.6 %
Foreign exchange impact (a)
2,972 —
Non-GAAP net sales, constant currency $ 867,323 $ 810,897 $ 56,426 7.0 %
(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, 2021 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2020.
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Net Sales by Segment:
Six months ended December 31,
2021 2020 $ Change % Change
Specialty Technology Solutions (in thousands)
Net sales, reported $ 998,630 $ 864,026 $ 134,604 15.6 %
Foreign exchange impact (a)
543 —
Non-GAAP net sales, constant currency $ 999,173 $ 864,026 $ 135,147 15.6 %
Modern Communications & Cloud
Net sales, reported $ 723,032 $ 704,212 $ 18,820 2.7 %
Foreign exchange impact (a)
(8) —
Non-GAAP net sales, constant currency $ 723,024 $ 704,212 $ 18,812 2.7 %
Consolidated:
Net sales, reported $ 1,721,662 $ 1,568,238 $ 153,424 9.8 %
Foreign exchange impact (a)
535 —
Non-GAAP net sales, constant currency $ 1,722,197 $ 1,568,238 $ 153,959 9.8 %
(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, 2021 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2020.
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Net Sales by Geography:
Quarter ended December 31,
2021 2020 $ Change % Change
United States and Canada: (in thousands)
Net sales, as reported $ 773,932 $ 720,004 $ 53,928 7.5 %
International:
Net sales, reported $ 90,419 $ 90,893 $ (474) (0.5) %
Foreign exchange impact (a)
2,972 —
Non-GAAP net sales, constant currency $ 93,391 $ 90,893 $ 2,498 2.7 %
Consolidated:
Net sales, reported $ 864,351 $ 810,897 $ 53,454 6.6 %
Foreign exchange impact (a)
2,972 —
Non-GAAP net sales, constant currency $ 867,323 $ 810,897 $ 56,426 7.0 %
(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, 2021 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2020.
Six months ended December 31,
2021 2020 $ Change % Change
United States and Canada: (in thousands)
Net sales, as reported $ 1,543,431 $ 1,403,607 $ 139,824 10.0 %
International:
Net sales, reported $ 178,231 $ 164,631 $ 13,600 8.3 %
Foreign exchange impact (a)
535 —
Non-GAAP net sales, constant currency $ 178,766 $ 164,631 $ 14,135 8.6 %
Consolidated:
Net sales, reported $ 1,721,662 $ 1,568,238 $ 153,424 9.8 %
Foreign exchange impact (a)
535 —
Non-GAAP net sales, constant currency $ 1,722,197 $ 1,568,238 $ 153,959 9.8 %
(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, 2021 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2020.
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Operating Income by Segment:
Quarter ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
Specialty Technology Solutions: (in thousands)
GAAP operating income $ 16,551 $ 7,161 $ 9,390 131.1 % 3.3 % 1.6 %
Adjustments:
Amortization of intangible assets 1,491 1,610 (119)
Non-GAAP operating income $ 18,042 $ 8,771 $ 9,271 105.7 % 3.6 % 1.9 %
Modern Communications & Cloud:
GAAP operating income $ 14,894 $ 11,813 $ 3,081 26.1 % 4.1 % 3.3 %
Adjustments:
Amortization of intangible assets 2,956 3,252 (296)
Non-GAAP operating income $ 17,850 $ 15,065 $ 2,785 18.5 % 4.9 % 4.2 %
Corporate:
GAAP operating income (loss) $ 53 $ (1,844) $ 1,897 nm* nm* nm*
Adjustments:
Acquisition and divestiture costs (53) 1,360 (1,413)
Restructuring costs — 484 (484)
Non-GAAP operating income $ — $ — $ — nm* nm* nm*
Consolidated:
GAAP operating income $ 31,498 $ 17,130 $ 14,368 83.9 % 3.6 % 2.1 %
Adjustments:
Amortization of intangible assets 4,447 4,862 (415)
Acquisition and divestiture costs (53) 1,360 (1,413)
Restructuring costs — 484 (484)
Non-GAAP operating income $ 35,892 $ 23,836 $ 12,056 50.6 % 4.2 % 2.9 %
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Operating Income by Segment:
Six months ended December 31, % of Net Sales December 31,
2021 2020 $ Change % Change 2021 2020
Specialty Technology Solutions: (in thousands)
GAAP operating income $ 30,655 $ 8,845 $ 21,810 246.6 % 3.1 % 1.0 %
Adjustments:
Amortization of intangible assets 3,023 3,220 (197)
Non-GAAP operating income $ 33,678 $ 12,065 $ 21,613 179.1 % 3.4 % 1.4 %
Modern Communications & Cloud:
GAAP operating income $ 31,201 $ 20,529 $ 10,672 52.0 % 4.3 % 2.9 %
Adjustments:
Amortization of intangible assets 5,933 6,496 (563)
Change in fair value of contingent consideration — 516 (516)
Non-GAAP operating income $ 37,134 $ 27,541 $ 9,593 34.8 % 5.1 % 3.9 %
Corporate:
GAAP operating loss $ (30) $ (10,610) $ 10,580 nm* nm* nm*
Adjustments:
Acquisition and divestiture costs 30 1,857 (1,827)
Restructuring costs — 8,753 (8,753)
Non-GAAP operating income $ — $ — $ — nm* nm* nm*
Consolidated:
GAAP operating income $ 61,826 $ 18,764 $ 43,062 229.5 % 3.6 % 1.2 %
Adjustments:
Amortization of intangible assets 8,956 9,716 (760)
Change in fair value of contingent consideration — 516 (516)
Acquisition and divestiture costs 30 1,857 (1,827)
Restructuring costs — 8,753 (8,753)
Non-GAAP operating income 70,812 39,606 $ 31,206 78.8 % 4.1 % 2.5 %
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Income Statement Non-GAAP Metrics
To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP net sales, non-GAAP gross profit, non-GAAP operating income, non-GAAP net other expense, 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, 2021
GAAP Measure Intangible amortization expense Acquisition and divestiture costs Restructuring costs Non-GAAP measure
(in thousands, except per share data)
Net sales $ 864,351 $ — $ — $ — $ 864,351
Gross profit 107,925 — — — 107,925
Operating income 31,498 4,447 (53) — 35,892
Other expense, net 1,089 — — — 1,089
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
Quarter ended December 31, 2020
GAAP Measure Intangible amortization expense Acquisition and divestiture costs Restructuring costs Non-GAAP measure
(in thousands, except per share data)
Net sales $ 810,897 $ — $ — $ — $ 810,897
Gross profit 86,043 — — — 86,043
Operating income 17,130 4,862 1,360 484 23,836
Other expense, net 1,386 — — — 1,386
Pre-tax income 15,744 4,862 1,360 484 22,450
Net income 11,061 3,682 1,360 366 16,469
Diluted EPS $ 0.43 $ 0.15 $ 0.06 $ 0.01 $ 0.65
Six months ended December 31, 2021
GAAP Measure Intangible amortization expense Change in fair value of contingent consideration Acquisition and divestiture costs Restructuring costs Non-GAAP measure
(in thousands, except per share data)
Net sales $ 1,721,662 $ — $ — $ — $ — $ 1,721,662
Gross profit 209,225 — — — — 209,225
Operating income 61,826 8,956 — 30 — 70,812
Other expense, net 1,987 — — — — 1,987
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
Six months ended December 31, 2020
GAAP Measure Intangible amortization expense Change in fair value of contingent consideration Acquisition and divestiture costs Restructuring costs Non-GAAP measure
(in thousands, except per share data)
Net sales $ 1,568,238 $ — $ — $ — $ — $ 1,568,238
Gross profit 166,823 — — — — 166,823
Operating income 18,764 9,716 516 1,857 8,753 39,606
Other expense, net 3,182 — — — — 3,182
Pre-tax income 15,582 9,716 516 1,857 8,753 36,424
Net income 10,946 7,357 390 1,857 6,617 27,167
Diluted EPS $ 0.43 $ 0.29 $ 0.02 $ 0.07 $ 0.26 $ 1.07
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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 $34.1 million at December 31, 2021, compared to $62.7 million at June 30, 2021, including $28.7 million and $52.1 million held outside of the United States at December 31, 2021 and June 30, 2021, respectively. Checks released but not yet cleared in the amounts of $18.5 million and $14.3 million are included in accounts payable at December 31, 2021 and June 30, 2021, 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 14 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.
Our net investment in working capital increased $100.9 million to $587.6 million at December 31, 2021 from $486.7 million at June 30, 2021, 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, 2021, our working capital investment increased to support our 9.8% year-over-year net sales growth.
Six months ended
December 31,
2021 2020
(in thousands)
Cash (used in) provided by:
Operating activities $ (75,378) $ 115,674
Investing activities 480 32,902
Financing activities 51,365 (109,883)
Net cash used in operating activities was $75.4 million for the six months ended December 31, 2021, compared to $115.7 million provided by operating activities in the prior-year period. Cash used in operating activities for the six months ended December 31, 2021 is primarily attributable to increases in inventory and accounts receivable, partially offset by increases in accounts payable. Cash provided by operating activities for the six months ended December 31, 2020 is primarily attributable to increased accounts payable, decreased inventory, and earnings from operations adjusted for non-cash items, partially offset by increased accounts receivable.
The number of days sales outstanding ("DSO") was 64 days at December 31, 2021, compared to 60 days at June 30, 2021 and 60 days at December 31, 2020. Inventory turned 5.7 times during the quarter ended December 31, 2021, compared to 6.3 times for previous quarter ended September 30, 2021 and 6.9 times in the prior-year quarter ended December 31, 2020.
Cash provided by investing activities for the six months ended December 31, 2021 was $0.5 million, compared to $32.9 million in the prior-year period. 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. Cash provided by investing activities for the six months ended December 31, 2020 primarily represents proceeds from the sale of our discontinued operations .
Management expects capital expenditures for fiscal year 2022 to range from $5 million to $8 million, primarily for IT investments and facility improvements.
For the six months ended December 31, 2021, cash provided by financing activities totaled $51.4 million, compared to $109.9 million used in financing activities for the prior-year period. Cash provided by financing activities for the six months ended December 31, 2021 is primarily attributable to net borrowings on the revolving credit facility. For the six months ended December 31, 2020, cash used in financing activities was primarily for net repayments on the revolving credit facility and contingent consideration payments to the former shareholders of Intelisys.
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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. On April 30, 2019, we amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. The Amended Credit Agreement established (i) a five-year $350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. Pursuant to an “accordion feature,” we may increase borrowings up to an additional $250 million. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit, subject to obtaining additional credit commitments from the lenders participating in the increase. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65% of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement. Under the terms of the revolving credit facility, the payment of cash dividends is restricted.
At our option, U.S. dollar loans under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon our net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash to trailing four-quarter adjusted EBITDA.
This spread ranges from 1.00% to 1.75% for LIBOR-based loans and 0.00% to 0.75% for alternate base rate loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR for U.S. dollar loans, subject to agreement between the Company and the administrative agent. On December 23, 2021, we amended our credit facility to replace LIBOR as the benchmark rate for non-U.S. dollar loans.
The Amended Credit Agreement contains customary yield protection provisions. Additionally, we are assessed commitment fees ranging from 0.15% to 0.30%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The secured term loan facility will amortize based on the percentage of original principal amount with 2.5% in Year 1, 5.0% in Year 2, 5.0% in Year 3, 7.5% in Year 4 and 10.0% in Year 5.
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, 2021. There was $57.8 million in outstanding borrowings on our revolving credit facility at December 31, 2021. There was no outstanding borrowings on our revolving credit facility at June 30, 2021.
The average daily balance for the revolving credit facility, excluding the term loan facility, was $57.1 million for the six month period ended December 31, 2021. Including borrowings for both continuing and discontinued operations, the average daily balance for the revolving credit facility, excluding the term loan facility, was $70.4 million for the six month period ended December 31, 2020. There were no letters of credit issued under the multi-currency revolving credit facility at December 31, 2021 and June 30, 2021, respectively. There was $292.2 million and $350.0 million available for additional borrowings at December 31, 2021 and June 30, 2021, respectively. 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. At December 31, 2021, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $292.2 million available for borrowing. While we were in compliance with the financial covenants contained in the Credit Facility as of December 31, 2021, 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
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 the present and future working capital and cash requirements for at least the next twelve months.
Off-Balance Sheet Arrangements and Contractual Obligations
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We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect or change on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the company is a party, under which the company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
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, 2021 for a complete discussion.
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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, 2021. No material changes have occurred to our market risks since June 30, 2021.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.