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SEC filingRevenue grew 8.8% in Q3 FY2026 driven by Specialty Technology Solutions, while gross margin contracted 20 bps.
For the quarter ended March 31, 2026, ScanSource reported total net sales of $766.8 million, an increase of 8.8% compared to $704.8 million in the prior-year quarter. The growth was primarily driven by the Specialty Technology Solutions segment, which saw a 9.2% increase in net sales to $740.8 million, fueled by broad-based growth across most technologies in North America. On a constant currency basis excluding acquisitions, total net sales grew 7.6%.
Gross profit increased 6.9% to $107.1 million, but gross margin contracted 20 basis points to 14.0% from 14.2% in the prior-year quarter. The margin compression was largely due to a less favorable sales mix in the Intelisys & Advisory segment, where gross margin declined 46 basis points to 98.8%.
Operating income rose 3.5% to $23.1 million, while operating margin declined 20 basis points to 3.0%. The increase in operating income was driven by higher gross profits, partially offset by a 12.0% increase in SG&A expenses, which rose to $78.1 million due to higher employee-related costs and acquisition-related expenses.
Net income decreased 3.1% to $16.9 million, or $0.78 per diluted share, compared to $17.4 million, or $0.74 per diluted share, in the prior-year quarter. The decline was primarily due to lower other income, including a $0.8 million insurance recovery in the current quarter versus a $1.0 million recovery in the prior year, and higher income tax expense.
Specialty Technology Solutions: Net sales increased 9.2% to $740.8 million, with operating income rising 5.9% to $15.1 million. Operating margin was 2.0%, down slightly from 2.1% in the prior-year quarter. The segment benefited from broad-based growth across most technologies in North America.
Intelisys & Advisory: Net sales decreased 1.5% to $26.0 million, primarily due to lower Resourcive sales. Operating income declined 2.1% to $8.1 million, with operating margin contracting to 31.3% from 31.5%. The segment's high-margin recurring revenue model continues to generate strong profitability.
Management expects the effective tax rate for fiscal year 2026 to be approximately 27.9% to 28.2%, excluding discrete items. Capital expenditures for fiscal year 2026 are expected to range from $8.0 million to $10.0 million, primarily for IT and warehouse investments.
The company remains cautious about the macroeconomic environment, including the impact of tariffs, inflation, and geopolitical tensions. Management expects to pass through supplier price increases to channel partners and is actively monitoring the situation. The company believes its existing sources of liquidity, including cash and credit facilities, will be sufficient to meet working capital and cash requirements for at least the next twelve months.
ScanSource's balance sheet as of March 31, 2026 shows cash of $120.3M, down slightly from $126.2M at June 30, 2025. Total debt decreased to $102.0M from $136.1M, driven by net repayments of $34.1M. Shareholders' equity remained stable at $906.3M. Inventory increased modestly to $486.6M from $483.8M.
The notes disclose no material purchase commitments or contractual obligations beyond operating lease liabilities of $11.8M and pre-acquisition tax contingencies of $3.8M. The contingent consideration liabilities total $29.0M, related to acquisitions of Advantix, Resourcive, and DataXoom.
During the first nine months of fiscal 2026, ScanSource deployed $71.4M on share repurchases (1.79M shares). No dividends were declared. Capital expenditures were $6.8M (0.3% of sales). The company issued $100M of new term loan debt under a new credit facility, while repaying $134.1M, resulting in net debt reduction. Acquisition-related cash outflows totaled $18.2M for DataXoom.
Segment-level data reveals Specialty Technology Solutions generated $740.8M in revenue (97% of total) and $15.1M operating income, while Intelisys & Advisory contributed $26.0M in revenue and $8.1M operating income. Geographically, U.S. sales were $711.1M and Brazil sales were $56.5M for the quarter (intercompany eliminations of $0.8M). All segment operating income figures are per Note 10 and exclude corporate costs.
Operating cash flow (CFO) of $125.4M exceeded net income of $53.3M, indicating strong cash generation relative to earnings. The primary driver was a significant improvement in working capital, notably a $44.9M increase in accounts payable and a $7.3M decrease in accounts receivable, partially offset by a $10.9M increase in prepaid expenses. Depreciation and amortization of $17.9M and share-based compensation of $10.5M were the main non-cash add-backs.
Capital expenditures (capex) of $6.8M were modest, representing a capex intensity of approximately 5.4% of CFO. Free cash flow (CFO minus capex) was approximately $118.6M, providing ample coverage for share repurchases of $71.4M and debt repayments. The company also used $18.2M for business acquisitions.
Anomalies: The large swing in accounts payable (from a $50.4M decrease in the prior period to a $44.9M increase) suggests a change in payment terms or timing. Income taxes payable decreased by $3.7M, while the prior period saw a $5.3M increase, indicating a shift in tax payment patterns. Overall, cash flow quality is robust, with operating cash flows comfortably funding investment and shareholder returns.