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11: R1 Cover HTML 74K
12: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 125K
13: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 38K
(Parenthetical)
14: R4 Condensed Consolidated Income Statements HTML 98K
(Unaudited)
15: R5 Condensed Consolidated Statements of Comprehensive HTML 45K
Income (Unaudited)
16: R6 Condensed Consolidated Statements of Shareholders' HTML 91K
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Policies
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20: R10 Revenue Recognition HTML 74K
21: R11 Earnings Per Share HTML 48K
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23: R13 Goodwill and Other Identifiable Intangible Assets HTML 38K
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26: R16 Fair Value of Financial Instruments HTML 68K
27: R17 Segment Information HTML 96K
28: R18 Leases HTML 104K
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50: R40 Accumulated Other Comprehensive Loss (Details) HTML 42K
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53: R43 Short-Term Borrowings and Long-Term Debt (Schedule HTML 44K
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Contracts and Changes in Underlying Value of the
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol:
Name of exchange on which registered:
iCommon
stock, no par value
iSCSC
iNASDAQ Global Select Market
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. iYes☒ 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). iYes☒ 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.
iLarge accelerated filer
☒
Smaller
reporting company
i☐
Accelerated filer
☐
Emerging growth company
i☐
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 i☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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: 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 attack, a failure of the Company's IT systems, failure to hire and retain quality employees, loss of the Company's major customers, relationships with the Company's key suppliers and sales partners or a termination or a significant modification of the terms under which it operates with such suppliers and sales partners, 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, 2023.
Preferred stock, no par value; ii3,000,000/
shares authorized, iinone/ issued
i—
i—
Common
stock, no par value; ii45,000,000/ shares authorized, ii25,154,469/
and ii24,844,203/ shares issued and outstanding at December 31, 2023 and June 30,
2023, respectively
i63,983
i58,241
Retained
earnings
i984,836
i936,678
Accumulated
other comprehensive loss
(i95,218)
(i89,621)
Total
shareholders’ equity
i953,601
i905,298
Total liabilities
and shareholders’ equity
$
i1,780,805
$
i2,068,169
June 30,
2023 amounts are derived from audited consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)
iBusiness 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, networking, physical security, unified communications and collaboration, telecom and cloud services to market. The Company operates in the United States, Canada, Brazil and the United Kingdom ("UK"). The Company's itwo
operating segments, Specialty Technology Solutions and Modern Communications & Cloud, are based on technology type and are generally related to technology devices and communication, connectivity and cloud services, respectively.
Basis of Presentation
i
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, 2023 and June 30, 2023, the results of operations for the quarters and six months ended December 31, 2023 and 2022, the condensed consolidated statements of
comprehensive income for the quarters and six months ended December 31, 2023 and 2022, the condensed consolidated statements of shareholders' equity for the quarters and six months ended December 31, 2023 and 2022 and the condensed consolidated statements of cash flows for the six months ended December 31, 2023 and 2022. The results of operations for the quarter and six months ended December 31, 2023 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, 2023. Unless otherwise indicated, disclosures provided in the Notes pertain to continuing operations only.
Summary of Significant Accounting Policies
i
There have been no material changes to the Company’s significant accounting policies for the six months ended December 31,
2023 from the policies described in the notes to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2023. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Cash and Cash Equivalents
iThe
Company considers all highly-liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. The Company maintains zero-balance disbursement accounts at various financial institutions at which the Company does not maintain significant depository relationships. Due to the terms of the agreements governing these accounts, the Company generally does not have the right to offset outstanding checks written from these accounts against cash on hand, and the respective institutions are not legally obligated to honor the checks until sufficient funds are transferred to fund the checks. As a result, checks released but not yet cleared from these accounts in the amount of
$ii8.0/ million are included in accounts payable on the condensed consolidated balance sheets at
December 31, 2023 and June 30, 2023.
iThe
Company presents depreciation expense and intangible amortization expense on the condensed consolidated income statements.The Company's depreciation expense related to selling, general and administrative costs totaled $i3.0 million and $i5.8
million for the quarter and six months ended December 31, 2023 and $i2.7 million and $i5.4 million for the quarter and six months ended December 31, 2022. Depreciation expense
reported as part of cost of goods sold on the condensed consolidated income statements totaled $i0.3 million and $i0.5 million for the quarter and six months ended December 31,
2023 and $i0.2 million and $i0.5 million for the quarter and six months ended December 31, 2022. The
Company's intangible amortization expense reported on the condensed consolidated income statements relates to selling, general and administrative costs, not the cost of selling goods. Intangible amortization expense totaled $i4.0 million and $i8.2
million for the quarter and six months ended December 31, 2023 and $i4.2 million and $i8.4 million for the quarter and six months ended December 31,
2022.
Recent Accounting Pronouncements
i
In July 2023, the Securities and Exchange Commission issued final rules that require new and enhanced disclosures on cybersecurity risk management, strategy, governance, and incident reporting. Under the final rules, companies must report material cybersecurity incidents within four business days of determining the incident is material on Form 8-K. As additional information about the material aspects of the previously reported incidents become available,
a Form 8-K/A must be filed with the additional disclosures. These disclosure requirements on Form 8-K were effective beginning December 18, 2023. For fiscal years ending on or after December 15, 2023, companies must disclose their cybersecurity processes, management's role in cybersecurity governance, and cybersecurity oversight by the Board of Directors on Form 10-K.
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss,
an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. This ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. This ASU is applicable to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2025, and subsequent interim periods, with early application permitted. The Company is currently evaluating the impact of the application of this ASU on its consolidated financial statements and disclosures.
In
December 2023, the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. This ASU is effective for annual periods beginning after December 15, 2024 and is applicable to the Company’s fiscal year beginning July 1, 2025, with early application permitted. The Company is currently evaluating the impact of the application of this ASU on its consolidated financial statements and disclosures.
The
Company has reviewed other newly issued accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on its consolidated financial statements as a result of future adoption.
(2) iTrade Accounts and Notes Receivable, Net
i
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.
i
The
changes in the allowance for doubtful accounts for the six months ended December 31, 2023 are set forth in the table below.
Trade accounts and current notes receivable allowance
$
i15,480
$
i4,472
$
(i1,197)
$
i488
$
i19,243
(1)"Other"
amounts include recoveries and the effect of foreign currency fluctuations for the six months ended December 31, 2023.
(3) iRevenue Recognition
i
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
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.
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
i
The
following tables represent the Company's disaggregation of revenue:
Hardware, software and cloud (excluding Intelisys)
$
i1,203,878
$
i712,373
$
i1,916,251
Intelisys
connectivity and cloud
i—
i38,803
i38,803
$
i1,203,878
$
i751,176
$
i1,955,054
(4)
iEarnings 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.
For
the quarter and six months ended December 31, 2023, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were i563,690 and i931,367,
respectively. For the quarter and six months ended December 31, 2022, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were i847,651 and i1,268,455,
respectively.
(5) iAccumulated Other Comprehensive Loss
i
The
components of accumulated other comprehensive loss, net of tax are as follows:
Senior
secured term loan facility, net of current portion
i136,875
i140,625
Borrowings
under revolving credit facility
i20,878
i178,980
Total debt
$
i168,634
$
i329,901
/
Credit
Facility
The Company has a multi-currency senior secured credit facility (as amended, the "Amended Credit Agreement") with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (collectively the "Lenders"). On September 28, 2022, the Company amended and restated the Amended Credit Agreement, which includes (i) a ifive-year, $i350 million
multicurrency senior secured revolving credit facility and (ii) a ifive-year $i150 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 $i250 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 $i50
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 $i1.4 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, bear interest at a rate per annum equal to, at the Company’s option, (i) the adjusted term Secured Overnight Financing Rate ("SOFR") or adjusted daily simple SOFR plus an additional margin ranging from i1.00%
to i1.75% depending upon the Company’s ratio of (A) total consolidated debt less up to $i30 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 i0% to i0.75%,
depending upon the Company’s leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars bear interest based upon the adjusted daily simple SOFR plus an additional margin ranging from i1.00% to i1.75%
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 i0.10% over the applicable SOFR reference rate. Loans denominated in foreign currencies bear interest at a rate per annum equal to the applicable benchmark rate set forth in the Amended Credit Agreement plus an additional margin ranging
from i1.00% to i1.75%, depending upon the Company’s leverage ratio plus, if applicable, certain mandatory costs.
During
the quarter and six months ended December 31, 2023, the Company's borrowings under the credit facility were U.S. dollar loans. The spread in effect as of December 31, 2023 was i1.25%, plus a i0.10%
credit spread adjustment for SOFR-based loans and i0.25% for alternate base rate loans. The commitment fee rate in effect at December 31, 2023 was i0.20%. 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 i3.50 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 i3.00
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, 2023.
The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the six month periods ended December 31, 2023 and 2022 was $i138.7
million and $i219.5 million, respectively. There was $i329.1 million and $i171.0
million available for additional borrowings as of December 31, 2023 and June 30, 2023, respectively. The effective interest rates for the revolving line of credit were i6.70% and i6.74%
as of December 31, 2023 and June 30, 2023, respectively. There were iino/
letters of credit issued under the multi-currency revolving credit facility at December 31, 2023 or June 30, 2023.
Mississippi Revenue Bond
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. The bond accrues interest at the one-month term SOFR plus an adjustment of i0.10% plus a spread of i0.85%. The terms of the bond allow for payment of interest only for the first i10
years of the agreement. 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 i180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at i100%
of the principal amount outstanding. At December 31, 2023, the Company was in compliance with all covenants under this bond. The interest rates at December 31, 2023 and June 30, 2023 were i6.29% and i6.11%,
respectively.
Debt Issuance Costs
At December 31, 2023, net debt issuance costs associated with the credit facility and bond totaled $i1.4 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument.
(8)
iDerivatives 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 $i27.3 million and $i34.3 million for the exchange of foreign currencies at December 31, 2023 and June 30,
2023, 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. iSummarized 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, 2023 and 2022 are as follows:
Net
foreign currency transactional and re-measurement (gains) losses
(i596)
(i524)
i466
(i39)
Net
foreign currency exchange losses
$
i429
$
i347
$
i1,124
$
i1,270
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 to lock into a fixed LIBOR interest rate, which was amended on September 28, 2022, to change the reference rate from LIBOR to SOFR. The swap agreement has a notional amount of $i100.0
million, with a $i50.0 million tranche scheduled to mature on April 30, 2024 and a $i50.0 million tranche scheduled to mature April 30, 2026.
On
March 31, 2023, the Company entered into an interest rate swap agreement to lock into a fixed SOFR interest rate with a notional amount of $i25 million and a maturity date of March 31, 2028.
These interest rate swap agreements are designated as cash flow hedges to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials
paid or received under the swap agreements are recognized as adjustments to interest expense. To the extent the swaps are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps 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, 2023 and 2022.
i
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, 2023 and 2022, are as follows:
Net interest income recognized as a result of interest rate swap
$
(i903)
$
(i345)
$
(i1,781)
$
(i313)
Unrealized
(loss) gain in fair value of interest rate swap
(i1,165)
i349
(i72)
i2,847
Net
(decrease) increase in accumulated other comprehensive income
(i2,068)
i4
(i1,853)
i2,534
Income
tax effect
(i521)
i1
(i458)
i652
Net
(decrease) increase in accumulated other comprehensive income, net of tax
$
(i1,547)
$
i3
$
(i1,395)
$
i1,882
/
i
The
Company used the following derivative instruments at December 31, 2023 and June 30, 2023, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:
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).
i
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, 2023:
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
$
i31,343
$
i31,343
$
i—
Interest
rate swap agreement
i2,834
i—
i2,834
Foreign
currency hedge
i27
i—
i27
Total
assets at fair value
$
i34,204
$
i31,343
$
i2,861
Liabilities:
Deferred
compensation plan investments, current and non-current portion
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, 2023:
Deferred
compensation plan investments, current and non-current portion
$
i28,229
$
i28,229
$
i—
Total
liabilities at fair value
$
i28,229
$
i28,229
$
i—
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 SOFR 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) iSegment
Information
The Company is a leading provider of technology solutions and services to customers in specialty technology markets. The Company has itwo reportable segments, based on technology type.
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 related 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.
i
Selected financial information for each business segment is presented below:
Property
and equipment, net by Geography Category:
United States and Canada
$
i24,703
$
i27,323
International
i11,843
i10,056
$
i36,546
$
i37,379
/
(11)
iiLeases /
In accordance with Accounting Standards Codification ("ASC") 842, at contract
inception the Company determines if a contract contains a lease by assessing whether the contract contains an identified asset and whether the Company has the ability to control the asset. The Company also determines if the lease meets the classification criteria for an operating lease versus a finance lease under ASC 842. Substantially all of the Company's leases are operating leases for real estate, warehouse and office equipment ranging in duration from
i1 year to i10 years. The Company has elected not to record short-term operating
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 2028. Finance leases are recorded as property and equipment, net, accrued expenses and other current liabilities and other long-term liabilities 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,
2023 and the consolidated financial statements at June 30, 2023.
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.
i
The
following table presents amounts recorded on the Condensed Consolidated Balance Sheets related to operating leases at December 31, 2023 and June 30, 2023:
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, 2023 and 2022. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less.
Supplemental
cash flow information related to the Company's operating leases for the six months ended December 31, 2023 and 2022 are presented in the table below:
The Company is, from time to time, party 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 $i3.6
million and $i3.4 million at December 31, 2023 and June 30, 2023.
i
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, 2023 and June 30, 2023:
Income taxes for the quarters and six months ended December 31, 2023 and 2022 have been included in the accompanying condensed consolidated financial statements using an estimated annual effective tax rate. In addition to applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall
tax provision. During the quarter ended December 31, 2023, a discrete net tax benefit of $i3.8 million was recorded, which is primarily attributable to the sale of UK-based intY.
The Company’s effective tax rate of i18.3% and i18.6% for the quarter and six months ended December 31,
2023, differs from the current federal statutory rate of 21% primarily as a result of income derived from tax jurisdictions with varying income tax rates, discrete items, nondeductible expenses and state income taxes. The Company's effective tax rates were i28.9% and i27.3%
for the quarter and six months ended December 31, 2022.
As of December 31, 2023, 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 six months ended December 31, 2023, foreign subsidiaries did not repatriate cash 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 $ii1.2/ million
of total gross unrecognized tax benefits at December 31, 2023 and June 30, 2023. Of this total at December 31, 2023, approximately $i1.0 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, 2023 and June 30, 2023, the Company had approximately $ii1.2/
million accrued for interest and penalties.
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, 2018.
(14) iBusiness Sale
On December 19, 2023, the Company completed the sale of its UK-based intY business. The
Company retained its CASCADE cloud services distribution platform which has been used to grow the Cisco and Microsoft subscription businesses in the United States and Brazil. Under the stock purchase agreement, the Company received proceeds of $i18.0 million in cash for the sale, net of cash transferred. The business sale resulted in a $i14.5
million gain on sale after considering the net assets sold. The impact of this sale was not material to the consolidated financial statements.
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 customers across hardware, SaaS, connectivity
and cloud. We provide technology solutions and services from more than 500 leading suppliers of mobility, barcode, POS, payments, physical security, networking, unified communications, collaboration, connectivity and cloud services to our approximately 30,000 customers located primarily in the United States, Canada and Brazil.
We operate our business under a management structure that enhances our technology focus and hybrid distribution growth strategy. Our segments operate primarily in the United States, Canada and Brazil:
•Specialty Technology Solutions
•Modern Communications & Cloud
We sell hardware, SaaS, connectivity and
cloud services from leading technology suppliers to customers that solve end users' challenges. 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.
On December 19, 2023 we completed the sale of our UK-based intY business. We retained our CASCADE cloud services distribution platform, which has been used to grow the Cisco and Microsoft subscription business in the United States and Brazil.
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 customers, 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 customers that solve end users’ challenges. ScanSource enables customers to deliver solutions for their end users to address changing buying and consumption patterns. Our solutions may include a combination of offerings from multiple suppliers or give our customers access to additional services. As a trusted adviser to our customers, we provide solutions through our strong understanding of end user needs.
We have two reportable segments, which are based on technology type. The following tables summarize our net sales results by business segment and by geographic location for the quarters and six months ended December 31, 2023 and 2022:
(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, 2023, net sales decreased $106.9 million, or 17.0%, and $173.7 million, or 14.4%, respectively, compared to the prior-year period. Excluding the foreign exchange positive impact, adjusted net sales decreased $107.8 million, or 17.2%, and $175.5 million, or 14.6%, for the quarter and six months ended December 31, 2023, compared to the prior-year period. The decrease in net sales and adjusted net sales for the quarter and six-month period is primarily due to lower sales volumes in our mobility and barcoding business, partially
offset by an increase in networking sales.
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, 2023, net sales decreased $19.6 million, or 5.1%, and $20.3 million, or 2.7%, respectively, compared to the prior-year period. Excluding the foreign exchange positive impact and the impact of divestitures, adjusted net sales decreased $23.3 million, or 6.1%, and $28.8 million, or 3.9%, for the quarter and six months ended December 31, 2023, compared to the prior-year period. The decrease in net sales and adjusted net sales for the quarter and six month period is primarily
due to lower sales volumes in our communications hardware, partially offset by growth in Cisco products. Intelisys net billings increased to approximately $2.64 billion annualized. Intelisys net sales for the quarter and six months ended December 31, 2023 increased 7.5% and 8.1%, respectively, year-over-year.
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, 2023, gross profit dollars for the Specialty Technology Solutions segment declined $9.6 million,
or 16.9%, compared to the prior-year quarter. Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $9.7 million. Gross profit margin increased slightly quarter-over-quarter to 9.1% which positively impacted gross profit dollars by less than $0.1 million.
For the six months ended December 31, 2023, gross profit dollars decreased $18.8 million, or 16.3%, compared to the prior-year period. Lower sales volume, after considering the associated cost of goods sold, reduced gross profit by $16.6 million. Gross profit margin decreased 21 basis points year-over-year to 9.3%. Gross margin mix negatively impacted gross profit by $2.2 million largely from lower vendor program recognition.
Modern Communications & Cloud
For
thequarter ended December 31, 2023, gross profit dollars for the Modern Communications & Cloud segment decreased $5.0 million, or 8.5%, compared to the prior-year quarter. Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $3.0 million. Gross profit margin decreased 55 basis points quarter-over-quarter to 14.7%. Gross margin mix negatively impacted gross profit by $2.0 million largely from a less favorable sales mix.
For the six months ended December 31, 2023, gross profit dollars declined $2.7 million, or 2.4%, compared to the prior-year period. Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $3.0 million. Gross profit margin
increased slightly year-over-year to 15.2% which positively impacted gross profit dollars by $0.3 million.
Operating Expenses
The following table summarizes our operating expenses for the quarters and six months ended December 31, 2023 and 2022:
Selling, general and administrative expenses (“SG&A”)
decreased by $2.2 million, or 3.1%, for the quarter ended December 31, 2023, compared to the prior-year period. The decrease for the quarter ended December 31, 2023 is primarily attributable to lower employee costs for the quarter.
For the six months ended December 31, 2023, SG&A expenses increased by $1.7 million, or 1.2%, compared to the prior-year period. The increase for the six months ended December 31, 2023 is primarily attributable to higher bad debt expense as a result of increases in specific customer reserves partially offset by lower employee costs.
Operating
Income
The following table summarizes our operating income for the quarters and six months ended December 31, 2023 and 2022:
For the Specialty Technology Solutions segment, operating income decreased $6.3 million, or 32.1%, and $16.3 million, or 39.2%, respectively, for the quarter and six months ended December 31, 2023, compared to the prior-year period. Operating margin decreased to 2.6% and 2.4% for the quarter and six months ended December 31, 2023, respectively. The decrease in operating income and margin for the quarter is primarily due to lower gross profits.
Modern
Communications & Cloud
For the Modern Communications & Cloud segment, operating income decreased $5.1 million, or 26.1%, and $5.8 million, or 17.6%, respectively, for the quarter and six months ended December 31, 2023 compared to the prior-year period. Operating margin decreased to 4.0% and 3.7% for the quarter and six months ended December 31, 2023, respectively. The decrease in operating income and margin is primarily from lower gross profits and higher bad debt expense, due to increases in specific customer reserves.
Corporate
For the quarter and six months ended December 31,
2023, Corporate operating loss of $1.1 million and $1.3 million, represents costs associated with the sale of our intY business and cyberattack restoration costs.
Total Other (Income) Expense
The following table summarizes our total other (income) expense for the quarters and six months ended December 31, 2023 and 2022:
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 ended December 31, 2023 compared to the prior-year periods, primarily from lower average borrowings on our multi-currency revolving credit facility. Interest expense increased slightly for the six months ended December 31, 2023 as a result of higher interest rates for the six-month period compared to the prior-year.
Interest income for the quarter and six months ended December 31, 2023 was generated on interest-bearing
investments in Brazil and customer receivables in both North America and Brazil.
Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign exchange forward contracts 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 Canadian dollar versus the U.S. dollar, the euro versus the U.S. dollar, and the British pound versus the U.S. dollar. We
partially offset foreign currency exposure with the use of foreign exchange contracts to hedge against these exposures. The costs associated with foreign exchange forward contracts are included in the net foreign exchange losses.
For the quarter and six months ended December 31, 2023, we recognized a $14.5 million gain on the sale of our UK-based intY business.
Provision for Income Taxes
For
the quarter and six months ended December 31, 2023, income tax expense was $7.3 million and $11.0 million, respectively, reflecting an effective tax rate of 18.3% and 18.6%, respectively. In comparison, for the quarter and six months ended December 31, 2022, income tax expense was $10.5 million and $18.7 million, respectively, reflecting an effective tax rate of 28.9% and 27.3%, respectively. The decrease in the effective tax rate for the quarter is due to a $3.8 million discrete tax benefit, which is primarily attributable to the sale of our UK-based intY business. We expect the effective tax rate, excluding discrete items, for fiscal year 2024 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 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, 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, 2023 and 2022, respectively:
(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:
Invested capital (denominator for adjusted ROIC) (non-GAAP)
$
1,156,004
$
1,237,853
(a)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 or divestitures prior to the first full
year of operations from the acquisition or divestiture 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 and divestitures. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency excluding acquisitions and divestitures:
(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, 2023 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2022.
(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, 2023 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2022.
(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, 2023 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2022.
(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, 2023 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2022.
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 divestitures, cyberattack restoration costs 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:
(a)
Reflects gain on the sale of the UK-based intY business. This transaction resulted in a capital loss for tax purposes. The Company did not record a tax provision on the capital loss since there were no offsetting capital gains.
(a)
Reflects gain on the sale of the UK-based intY business. This transaction resulted in a capital loss for tax purposes. The Company did not record a tax provision on the capital loss since there were no offsetting capital gains.
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 volume increases, our net investment in working capital increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volume decreases, 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 $45.0 million at December 31, 2023, compared to
$36.2 million at June 30, 2023, including $38.3 million and $31.0 million held outside of the United States at December 31, 2023 and June 30, 2023, respectively. Checks released but not yet cleared in the amount of $8.0 million are included in accounts payable at December 31, 2023 and June 30, 2023.
We conduct business in North America and Brazil 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 decreased $75.7 million to $794.6 million at December 31, 2023 from $870.3 million at June 30, 2023, primarily from decreases in inventory and accounts receivable, partially offset by lower accounts payable, as a result of lower sales volume and our multi-quarter working capital improvement plan. 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.
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. Net cash provided by operating activities was $156.8 million for the six months ended December 31, 2023, compared to $75.3 million used in operating activities in the prior-year period. Cash provided by operating activities for the six months ended December 31, 2023 is attributable to reductions in inventory and accounts receivable, which decreased 24% and 12%, respectively, compared to June 30, 2023, partially offset by a reduction in accounts payable which decreased 22% comparatively. Cash used in operating activities for the six months ended December 31, 2022 is primarily
attributable to increases in inventory and accounts receivable, which increased 24% and 7%, respectively, compared to June 30, 2022.
Cash provided by investing activities for the six months ended December 31, 2023 was $13.1 million, compared to $4.3 million used in investing activities in the prior-year period. Cash provided by investing activities for the six months ended December 31, 2023 is largely due to cash received from the sale of our intY UK business. Cash used in investing activities for the six months ended December 31, 2022 represents capital expenditures.
Management expects capital expenditures for
fiscal year 2024 to range from $6.0 million to $8.0 million, primarily for IT investments and facility improvements.
For the six months ended December 31, 2023, cash used in financing activities totaled $161.3 million, compared to $108.0 million provided by financing activities for the prior-year period. Cash used in financing activities for the six months ended December 31, 2023 is primarily attributable
to net repayments on the revolving credit facility. Cash provided by financing activities for the six months ended December 31, 2022 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, 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 bear interest based upon the adjusted daily simple SOFR 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 bear interest at a rate per annum equal to the applicable benchmark rate set forth in the Amended 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, 2023, our borrowings under the credit facility were U.S. dollar loans. The
spread in effect as of December 31, 2023 was 1.25% for SOFR-based loans and 0.25% for alternate base rate loans. The commitment fee rate in effect at December 31, 2023 was 0.20%. 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, 2023.
The
average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the quarters ended December 31, 2023 and 2022 was $138.7 million and $219.5 million, respectively. There was $329.1 million and $171.0 million available for additional borrowings as of December 31, 2023 and June 30, 2023, respectively. The effective interest rates for the revolving line of credit were 6.70% and 6.74% as of December 31, 2023 and June 30, 2023, respectively. There were no letters of credit issued under the multi-currency revolving credit facility at December 31,
2023 or June 30, 2023. 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, 2023, 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.
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,
2023 for a complete discussion.
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, 2023. No material changes have occurred to our market risks since June 30, 2023.
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, 2023. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective at December 31, 2023. During the quarter ended December 31, 2023, 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.
The Company is, from time to time, party 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, 2023, which could materially affect our business, financial condition and/or future operating results.
There have been no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
Share Repurchases
In August 2021, our Board of Directors authorized a $100 million share repurchase program. The authorization does not have any time limit.
The following table presents the share-repurchase activity for the quarter ended December 31, 2023 (in thousands except share and per share data):
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, 2023
—
—
—
$
66,163,962
November 1 - 30, 2023
32,567
$ 32.73
—
$ 66,163,962
December 1 - 31, 2023
36,544
$ 34.29
36,305
$ 64,913,399
Total
69,111
36,305
$
64,913,399
(1) Includes 32,806 shares withheld from employees' stock-based awards to satisfy required tax withholding obligations for the months of November and December 2023. There were no shares withheld during the month of October 2023.
Dividends
We have never declared or paid a cash dividend. Under the terms of our credit facility, the payment of cash dividends is restricted.
During the three months ended December 31, 2023, none of our directors or our officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) iiadopted/
or iiterminated/ a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).
The following materials
from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at December 31, 2023 and June 30, 2023; (ii) the Condensed Consolidated Income Statements for the quarters and six months ended December 31, 2023 and 2022; (iii) the Condensed Consolidated Statements of Comprehensive Income for the quarters and six months ended December 31, 2023 and 2022; (iv) the Condensed Consolidated Statements of Shareholder's Equity at December 31, 2023 and 2022;
(v) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2023 and 2022; 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)
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.