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 as a Service ("SaaS"), 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. 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.
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 continues to disrupt global supply chains. While we have been able to broadly maintain our operations, we have experienced some disruption in our supply chain caused by product availability, labor scarcity and logistical disruptions, resulting in extended lead-times, unpredictability and higher costs. We intend to continue to work with our suppliers to implement measures to minimize disruption to the distribution of our products. However, uncertainty in the duration and scope of the pandemic could result in an unforeseen disruption to our supply chain and impact our operations.
Our Strategy
Our strategy is to drive sustainable, profitable growth by orchestrating hybrid technology solutions through a growing ecosystem of partners leveraging our people, processes, and tools. Our goal is to provide exceptional experiences for our partners, suppliers, and employees, and we strive for 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.
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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 nine months ended March 31, 2022 and 2021:
Quarter ended March 31, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)
Net Sales by Segment: 2022 2021 $ Change % Change
(in thousands)
Specialty Technology Solutions $ 503,072 $ 436,462 $ 66,610 15.3 % 15.1 %
Modern Communications & Cloud 342,918 293,411 49,507 16.9 % 16.0 %
Total net sales $ 845,990 $ 729,873 $ 116,117 15.9 % 15.4 %
Nine months ended March 31, % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
2022 2021 $ Change % Change
(in thousands)
Specialty Technology Solutions $ 1,501,702 $ 1,300,488 $ 201,214 15.5 % 15.4 %
Modern Communications & Cloud 1,065,950 997,623 68,327 6.8 % 6.6 %
Total net sales $ 2,567,652 $ 2,298,111 $ 269,541 11.7 % 11.6 %
(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 nine months ended March 31, 2022, net sales for the Specialty Technology Solutions segment increased $66.6 million, or 15.3%, and $201.2 million, or 15.5%, respectively, compared to the prior-year periods. Excluding the foreign exchange positive impact, adjusted net sales increased $65.7 million, or 15.1%, for the quarter ended March 31, 2022 and $200.8 million, or 15.4%, for the nine months ended March 31, 2022 compared to the prior-year periods. The increase in net sales and adjusted net sales for the quarter and nine months periods is primarily due to broad-based demand across our technologies.
Modern Communications & Cloud
The Modern Communications & Cloud segment consists of sales to customers in North America, Brazil, Europe and the UK. For the quarter and nine months ended March 31, 2022, net sales for the Modern Communications & Cloud segment increased $49.5 million, or 16.9%, and $68.3 million, or 6.8%, respectively, compared to the prior-year periods. Excluding the foreign exchange positive impact, adjusted net sales increased $46.8 million, or 16.0%, for the quarter ended March 31, 2022 and $65.7 million, or 6.6%, for the nine months ended March 31, 2022 compared to the prior-year periods. The increase in net sales and adjusted net sales for the quarter and nine months periods is primarily due to increased demand across our communications solutions. For our Intelisys business, net sales for the third quarter and nine-month period of fiscal year 2022 increased 18.2% and 15.4%, respectively, year-over-year.
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Quarter ended March 31, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)
Net Sales by Geography: 2022 2021 $ Change % Change
(in thousands)
United States and Canada $ 764,529 $ 665,720 $ 98,809 14.8 % 14.8 %
International 81,461 64,153 17,308 27.0 % 21.4 %
Total net sales $ 845,990 $ 729,873 $ 116,117 15.9 % 15.4 %
Nine months ended March 31, % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
2022 2021 $ Change % Change
(in thousands)
United States and Canada $ 2,307,959 $ 2,069,327 $ 238,632 11.5 % 11.5 %
International 259,693 228,784 30,909 13.5 % 12.2 %
Total net sales $ 2,567,652 $ 2,298,111 $ 269,541 11.7 % 11.6 %
(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 nine months ended March 31, 2022 and 2021:
Quarter ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Specialty Technology Solutions $ 54,021 $ 39,002 $ 15,019 38.5 % 10.7 % 8.9 %
Modern Communications & Cloud 52,487 49,114 3,373 6.9 % 15.3 % 16.7 %
Gross profit $ 106,508 $ 88,116 $ 18,392 20.9 % 12.6 % 12.1 %
Nine months ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Specialty Technology Solutions $ 151,763 $ 112,279 $ 39,484 35.2 % 10.1 % 8.6 %
Modern Communications & Cloud 163,969 142,660 21,309 14.9 % 15.4 % 14.3 %
Gross profit $ 315,732 $ 254,939 $ 60,793 23.8 % 12.3 % 11.1 %
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 programs decrease cost of goods sold, thereby increasing gross profit.
Specialty Technology Solutions
For the quarter ended March 31, 2022, gross profit dollars for the Specialty Technology Solutions segment increased $15.0 million, or 38.5%. Higher sales volume, after considering the associated cost of goods sold, contributed $6.0 million to the growth of gross profit dollars. Gross margin mix positively impacted gross profit by $9.0 million, largely from higher vendor program recognition. For the quarter ended March 31, 2022, the gross profit margin increased 180 basis points over the prior-year to 10.7%.
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For the nine months ended March 31, 2022, the Specialty Technology Solutions segment achieved gross profit growth of $39.5 million, or 35.2%. Increases in sales volume, after considering the associated cost of goods sold, contributed $17.4 million to the growth of gross profit dollars. Gross margin mix positively impacted gross profit by $22.1 million, largely from higher vendor program recognition. For the nine months ended March 31, 2022, the gross profit margin increased 150 basis points over the prior-year to 10.1%.
Modern Communications & Cloud
For the quarter ended March 31, 2022, the Modern Communications & Cloud segment achieved gross profit growth of $3.4 million, or 6.9%. Higher sales volume, after considering the associated cost of goods sold, contributed $8.3 million to the growth of gross profit dollars. Lower gross margin mix negatively impacted gross profit by $4.9 million, largely driven by a less favorable sales mix in Brazil. For the quarter ended March 31, 2022, the gross profit margin decreased 140 basis points compared to the prior-year to 15.3%.
For the nine months ended March 31, 2022, the Modern Communications & Cloud segment achieved gross profit growth of $21.3 million, or 14.9%. Higher sales volume, after considering the associated cost of goods sold, contributed $9.8 million to the growth of gross profit dollars. Gross margin mix positively impacted gross profit by $11.5 million, driven by a more favorable sales mix, including our higher-margin recurring revenue business, principally from Intelisys connectivity and cloud services and SaaS subscriptions. For the nine months ended March 31, 2022, the gross profit margin increased 110 basis points over the prior-year to 15.4%.
Operating Expenses
The following tables summarize our operating expenses for the quarters and nine months ended March 31, 2022 and 2021:
Quarter ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Selling, general and administrative expenses $ 66,522 $ 60,099 $ 6,423 10.7 % 7.9 % 8.2 %
Depreciation expense 2,612 3,141 (529) (16.8) % 0.3 % 0.4 %
Intangible amortization expense 4,457 4,880 (423) (8.7) % 0.5 % 0.7 %
Restructuring and other charges — 560 (560) (100.0) % 0.0 % 0.1 %
Operating expenses $ 73,591 $ 68,680 $ 4,911 7.2 % 8.7 % 9.4 %
Nine months ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Selling, general and administrative expenses $ 199,538 $ 182,681 $ 16,857 9.2 % 7.8 % 7.9 %
Depreciation expense 8,039 9,634 (1,595) (16.6) % 0.3 % 0.4 %
Intangible amortization expense 13,413 14,595 (1,182) (8.1) % 0.5 % 0.6 %
Restructuring and other charges — 9,312 (9,312) (100.0) % 0.0 % 0.4 %
Change in fair value of contingent consideration — 516 (516) (100.0) % 0.0 % 0.0 %
Operating expenses $ 220,990 $ 216,738 $ 4,252 2.0 % 8.6 % 9.4 %
Selling, general and administrative expenses ("SG&A") increased $6.4 million and $16.9 million for the quarter and nine months ended March 31, 2022, respectively, compared to the prior-year periods. The increase is attributable to higher employee costs.
Restructuring and other charges incurred of $0.6 million and $9.3 million for the quarter and nine months ended March 31, 2021, respectively, primarily relate to employee severance and benefit costs in connection with our expense reduction plan implemented at the end of July 2020.
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We recorded expense of $0.5 million for the change in fair value of contingent consideration for the nine months ended March 31, 2021, 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 nine months ended March 31, 2022 and 2021:
Quarter ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Specialty Technology Solutions $ 20,623 $ 8,713 $ 11,910 136.7 % 4.1 % 2.0 %
Modern Communications & Cloud 12,294 11,555 739 6.4 % 3.6 % 3.9 %
Corporate — (832) 832 nm* nm* nm*
Operating income $ 32,917 $ 19,436 $ 13,481 69.4 % 3.9 % 2.7 %
Nine months ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Specialty Technology Solutions $ 51,278 $ 17,558 $ 33,720 192.0 % 3.4 % 1.4 %
Modern Communications & Cloud 43,494 32,085 11,409 35.6 % 4.1 % 3.2 %
Corporate (30) (11,442) 11,412 nm* nm* nm*
Operating income $ 94,742 $ 38,201 $ 56,541 148.0 % 3.7 % 1.7 %
*nm - percentages are not meaningful
Specialty Technology Solutions
For the Specialty Technology Solutions segment, operating income increased $11.9 million and $33.7 million for the quarter and nine months ended March 31, 2022, respectively, compared to the prior-year period. Operating margin increased to 4.1% and 3.4% for the quarter and nine months ended March 31, 2022, respectively. The increase in operating income and margin for both the quarter and nine month period is primarily due to higher gross profits.
Modern Communications & Cloud
For the Modern Communications & Cloud segment, operating income increased $0.7 million for the quarter ended March 31, 2022, compared to the prior-year period. Operating margin for the quarter ended March 31, 2022 decreased to 3.6%, primarily due to higher employee costs, partially offset by increased gross profits. For the nine months ended March 31, 2022, operating income increased $11.4 million and operating margin increased to 4.1%. The increases in operating income and margin for the nine month period is primarily due to higher gross profits.
Corporate
Corporate recognized no restructuring or divestiture expenses for the quarter ended March 31, 2022, compared to $0.8 million in the prior-year quarter. For the nine months ended March 31, 2022 and 2021, corporate incurred restructuring and divestiture expenses of less than $0.1 million and $11.4 million, respectively.
Total Other (Income) Expense
The following tables summarize our total other (income) expense for the quarters and nine months ended March 31, 2022 and 2021:
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Quarter ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Interest expense $ 1,483 $ 1,576 $ (93) (5.9) % 0.2 % 0.2 %
Interest income (1,000) (745) (255) (34.2) % (0.1) % (0.1) %
Net foreign exchange losses 258 (41) 299 (729.3) % 0.0 % (0.0) %
Other, net (394) (261) (133) (51.0) % (0.0) % (0.0) %
Total other expense, net $ 347 $ 529 $ (182) (34.4) % 0.0 % 0.1 %
Nine months ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Interest expense $ 4,637 $ 5,285 $ (648) (12.3) % 0.2 % 0.2 %
Interest income (2,973) (1,756) (1,217) 69.3 % (0.1) % (0.1) %
Net foreign exchange losses 1,223 778 445 57.2 % 0.0 % 0.0 %
Other, net (555) (595) 40 (6.7) % (0.0) % (0.0) %
Total other expense, net $ 2,332 $ 3,712 $ (1,380) (37.2) % 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 income for the quarter and nine months ended March 31, 2022 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents.
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 nine months ended March 31, 2022, income tax expense was $9.0 million and $23.7 million, respectively, reflecting an effective tax rate of 27.8% and 25.6%, respectively. In comparison, for the quarter and nine months ended March 31, 2021, income tax expense totaled $5.1 million and $9.8 million, respectively, reflecting an effective tax rate of 27.1% and 28.3%, respectively. The increase in the effective tax rate for the quarter is primarily due to an increase to forecasted non-deductible expenses for officer compensation. The decrease in the effective tax rate for the nine months ended March 31, 2022 is primarily due to an increase in forecasted tax-exempt income and the benefit from discrete items. We expect the effective tax rate, excluding discrete items, for fiscal year 2022 to be approximately 25.5% to 26.5%. 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 currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.
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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, 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 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 March 31, 2022 and 2021, respectively:
Quarter ended March 31,
2022 2021
Adjusted return on invested capital ratio, annualized (a)
18.0 % 14.7 %
(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 90 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 March 31,
2022 2021
(in thousands)
Reconciliation of net income to adjusted EBITDA:
Net income from continuing operations (GAAP) $ 23,526 $ 13,786
Plus: Interest expense 1,483 1,576
Plus: Income taxes 9,044 5,121
Plus: Depreciation and amortization 7,305 8,358
EBITDA (non-GAAP) 41,358 28,841
Plus: Share-based compensation 2,757 2,537
Plus: Acquisition and divestiture costs (a)
— 272
Plus: Restructuring costs — 349
Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 44,115 $ 31,999
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Quarter ended March 31,
2022 2021
(in thousands)
Invested capital calculations:
Equity – beginning of the quarter $ 768,525 $ 682,139
Equity – end of the quarter 806,654 690,575
Plus: Share-based compensation, net 2,063 1,912
Plus: Acquisition and divestiture costs (a)
— 272
Plus: Restructuring, net — 264
Plus: Discontinued operations net loss — 688
Average equity 788,621 687,925
Average funded debt (b)
205,073 191,996
Invested capital (denominator for adjusted ROIC) (non-GAAP) $ 993,694 $ 879,921
(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 March 31,
2022 2021 $ Change % Change
Specialty Technology Solutions: (in thousands)
Net sales, reported $ 503,072 $ 436,462 $ 66,610 15.3 %
Foreign exchange impact (a)
(915) —
Non-GAAP net sales, constant currency $ 502,157 $ 436,462 $ 65,695 15.1 %
Modern Communications & Cloud:
Net sales, reported $ 342,918 $ 293,411 $ 49,507 16.9 %
Foreign exchange impact (a)
(2,660) —
Non-GAAP net sales, constant currency $ 340,258 $ 293,411 $ 46,847 16.0 %
Consolidated:
Net sales, reported $ 845,990 $ 729,873 $ 116,117 15.9 %
Foreign exchange impact (a)
(3,575) —
Non-GAAP net sales, constant currency $ 842,415 $ 729,873 $ 112,542 15.4 %
(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 March 31, 2022 into U.S. dollars using the average foreign exchange rates for the quarter ended March 31, 2021.
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Net Sales by Segment:
Nine months ended March 31,
2022 2021 $ Change % Change
Specialty Technology Solutions (in thousands)
Net sales, reported $ 1,501,702 $ 1,300,488 $ 201,214 15.5 %
Foreign exchange impact (a)
(372) —
Non-GAAP net sales, constant currency $ 1,501,330 $ 1,300,488 $ 200,842 15.4 %
Modern Communications & Cloud
Net sales, reported $ 1,065,950 $ 997,623 $ 68,327 6.8 %
Foreign exchange impact (a)
(2,668) —
Non-GAAP net sales, constant currency $ 1,063,282 $ 997,623 $ 65,659 6.6 %
Consolidated:
Net sales, reported $ 2,567,652 $ 2,298,111 $ 269,541 11.7 %
Foreign exchange impact (a)
(3,040) —
Non-GAAP net sales, constant currency $ 2,564,612 $ 2,298,111 $ 266,501 11.6 %
(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 nine months ended March 31, 2022 into U.S. dollars using the average foreign exchange rates for the nine months ended March 31, 2021.
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Net Sales by Geography:
Quarter ended March 31,
2022 2021 $ Change % Change
United States and Canada: (in thousands)
Net sales, as reported $ 764,529 $ 665,720 $ 98,809 14.8 %
International:
Net sales, reported $ 81,461 $ 64,153 $ 17,308 27.0 %
Foreign exchange impact (a)
(3,575) —
Non-GAAP net sales, constant currency $ 77,886 $ 64,153 $ 13,733 21.4 %
Consolidated:
Net sales, reported $ 845,990 $ 729,873 $ 116,117 15.9 %
Foreign exchange impact (a)
(3,575) —
Non-GAAP net sales, constant currency $ 842,415 $ 729,873 $ 112,542 15.4 %
(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 March 31, 2022 into U.S. dollars using the average foreign exchange rates for the quarter ended March 31, 2021.
Nine months ended March 31,
2022 2021 $ Change % Change
United States and Canada: (in thousands)
Net sales, as reported $ 2,307,959 $ 2,069,327 $ 238,632 11.5 %
International:
Net sales, reported $ 259,693 $ 228,784 $ 30,909 13.5 %
Foreign exchange impact (a)
(3,040) —
Non-GAAP net sales, constant currency $ 256,653 $ 228,784 $ 27,869 12.2 %
Consolidated:
Net sales, reported $ 2,567,652 $ 2,298,111 $ 269,541 11.7 %
Foreign exchange impact (a)
(3,040) —
Non-GAAP net sales, constant currency $ 2,564,612 $ 2,298,111 $ 266,501 11.6 %
(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 nine months ended March 31, 2022 into U.S. dollars using the average foreign exchange rates for the nine months ended March 31, 2021.
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Operating Income by Segment:
Quarter ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
Specialty Technology Solutions: (in thousands)
GAAP operating income $ 20,623 $ 8,713 $ 11,910 136.7 % 4.1 % 2.0 %
Adjustments:
Amortization of intangible assets 1,491 1,610 (119)
Non-GAAP operating income $ 22,114 $ 10,323 $ 11,791 114.2 % 4.4 % 2.4 %
Modern Communications & Cloud:
GAAP operating income $ 12,294 $ 11,555 $ 739 6.4 % 3.6 % 3.9 %
Adjustments:
Amortization of intangible assets 2,966 3,270 (304)
Non-GAAP operating income $ 15,260 $ 14,825 $ 435 2.9 % 4.5 % 5.1 %
Corporate:
GAAP operating income (loss) $ — $ (832) $ 832 nm* nm* nm*
Adjustments:
Acquisition and divestiture costs — 272 (272)
Restructuring costs — 560 (560)
Non-GAAP operating income $ — $ — $ — nm* nm* nm*
Consolidated:
GAAP operating income $ 32,917 $ 19,436 $ 13,481 69.4 % 3.9 % 2.7 %
Adjustments:
Amortization of intangible assets 4,457 4,880 (423)
Acquisition and divestiture costs — 272 (272)
Restructuring costs — 560 (560)
Non-GAAP operating income $ 37,374 $ 25,148 $ 12,226 48.6 % 4.4 % 3.4 %
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Operating Income by Segment:
Nine months ended March 31, % of Net Sales March 31,
2022 2021 $ Change % Change 2022 2021
Specialty Technology Solutions: (in thousands)
GAAP operating income $ 51,278 $ 17,558 $ 33,720 192.0 % 3.4 % 1.4 %
Adjustments:
Amortization of intangible assets 4,514 4,831 (317)
Non-GAAP operating income $ 55,792 $ 22,389 $ 33,403 149.2 % 3.7 % 1.7 %
Modern Communications & Cloud:
GAAP operating income $ 43,494 $ 32,085 $ 11,409 35.6 % 4.1 % 3.2 %
Adjustments:
Amortization of intangible assets 8,899 9,764 (865)
Change in fair value of contingent consideration — 516 (516)
Non-GAAP operating income $ 52,393 $ 42,365 $ 10,028 23.7 % 4.9 % 4.2 %
Corporate:
GAAP operating loss $ (30) $ (11,442) $ 11,412 nm* nm* nm*
Adjustments:
Acquisition and divestiture costs 30 2,130 (2,100)
Restructuring costs — 9,312 (9,312)
Non-GAAP operating income $ — $ — $ — nm* nm* nm*
Consolidated:
GAAP operating income $ 94,742 $ 38,201 $ 56,541 148.0 % 3.7 % 1.7 %
Adjustments:
Amortization of intangible assets 13,413 14,595 (1,182)
Change in fair value of contingent consideration — 516 (516)
Acquisition and divestiture costs 30 2,130 (2,100)
Restructuring costs — 9,312 (9,312)
Non-GAAP operating income 108,185 64,754 $ 43,431 67.1 % 4.2 % 2.8 %
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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 March 31, 2022
GAAP Measure Intangible amortization expense Acquisition and divestiture costs Restructuring costs Non-GAAP measure
(in thousands, except per share data)
SG&A expenses $ 66,522 $ — $ — $ — $ 66,522
Operating income 32,917 4,457 — — 37,374
Pre-tax income 32,570 4,457 — — 37,027
Net income 23,526 3,353 — — 26,879
Diluted EPS $ 0.91 $ 0.13 $ — $ — $ 1.04
Quarter ended March 31, 2021
GAAP Measure Intangible amortization expense Acquisition and divestiture costs Restructuring costs Non-GAAP measure
(in thousands, except per share data)
SG&A expenses $ 60,099 $ — $ (272) $ — $ 59,827
Operating income 19,436 4,880 272 560 25,148
Pre-tax income 18,907 4,880 272 560 24,619
Net income 13,786 3,697 272 423 18,178
Diluted EPS $ 0.54 $ 0.14 $ 0.01 $ 0.02 $ 0.71
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Nine months ended March 31, 2022
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)
SG&A expenses $ 199,538 $ — $ — $ (30) $ — $ 199,508
Operating income 94,742 13,413 — 30 — 108,185
Pre-tax income 92,410 13,413 — 30 — 105,853
Net income 68,751 10,094 — 30 — 78,875
Diluted EPS $ 2.66 $ 0.39 $ — $ — $ — $ 3.06
Nine months ended March 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)
SG&A expenses $ 182,681 $ — $ — $ (2,130) $ — $ 180,551
Operating income 38,201 14,595 516 2,130 9,312 64,754
Pre-tax income 34,489 14,595 516 2,130 9,312 61,042
Net income 24,732 11,055 390 2,130 7,040 45,347
Diluted EPS $ 0.97 $ 0.43 $ 0.02 $ 0.08 $ 0.28 $ 1.78
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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 $43.5 million at March 31, 2022, compared to $62.7 million at June 30, 2021, including $34.7 million and $52.1 million held outside of the United States at March 31, 2022 and June 30, 2021, respectively. Checks released but not yet cleared in the amounts of $20.0 million and $14.3 million are included in accounts payable at March 31, 2022 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 $120.2 million to $606.9 million at March 31, 2022 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 nine months ended March 31, 2022, our working capital investment increased to support our 11.7% year-over-year net sales growth.
Nine months ended
March 31,
2022 2021
(in thousands)
Cash (used in) provided by:
Operating activities $ (45,671) $ 55,422
Investing activities (201) 32,073
Financing activities 27,730 (62,839)
Net cash used in operating activities was $45.7 million for the nine months ended March 31, 2022, compared to $55.4 million provided by operating activities in the prior-year period. The decrease of $101.1 million was primarily due to increased inventory levels, which were 29% higher than in 2021, to support net sales growth. Also contributing to the decrease in operating cash flows were fluctuations in accrued expenses and other liabilities balances, which were 8% lower than in 2021, and 7% higher than in 2020, attributable to the timing of payments at the end of the reporting period. The decrease in operating cash flows was partially offset by an increase in income from continuing operations, adjusted for non-cash items. Cash provided by operating activities is 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 March 31, 2022, compared to 60 days at June 30, 2021 and 63 days at March 31, 2021. The increase in DSO for the quarter ended March 31, 2022 is primarily due to increased net receivables from timing of sales near the end of the reporting period. Inventory turned 5.1 times during the quarter ended March 31, 2022, compared to 5.7 times for previous quarter ended December 31, 2021 and 5.8 times in the prior-year quarter ended March 31, 2021. The decrease in inventory turns for the quarter ended March 31, 2022 is primarily due to increased average inventory.
Cash used in investing activities for the nine months ended March 31, 2022 was $0.2 million, compared to $32.1 million provided by investing activities in the prior-year period. Cash used in investing activities for the nine months ended March 31, 2022 represents capital expenditures, partially offset by proceeds from the sale of our discontinued operations. Cash provided by investing activities for the nine months ended March 31, 2021 primarily represents proceeds from the sale of our discontinued operations .
Management expects capital expenditures for fiscal year 2022 to range from $4 million to $5 million, primarily for IT investments and facility improvements.
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For the nine months ended March 31, 2022, cash provided by financing activities totaled $27.7 million, compared to $62.8 million used in financing activities for the prior-year period. Cash provided by financing activities for the nine months ended March 31, 2022 is primarily attributable to net borrowings on the revolving credit facility. For the nine months ended March 31, 2021, 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.
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, among other things.
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 March 31, 2022. There was $44.3 million in outstanding borrowings on our revolving credit facility at March 31, 2022. 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 $60.0 million for the nine month period ended March 31, 2022. Including borrowings for both continuing and discontinued operations, the average daily balance for the revolving credit facility, excluding the term loan facility, was $62.1 million for the nine month period ended March 31, 2021. There were no letters of credit issued under the multi-currency revolving credit facility at March 31, 2022 and June 30, 2021, respectively. There was $305.7 million and $350.0 million available for additional borrowings at March 31, 2022 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 March 31, 2022, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $305.7 million available for borrowing. While we were in compliance with the financial covenants contained in the Credit Facility as of March 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
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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.
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.