SCANSOURCE, INC. 10-K

ITEM 8. Financial Statements and Supplementary Data. Index to Financial Statements Page Financial Statements Report of Grant Thornton LLP Independent Registered Public Accounting Firm 43 Report Report of Grant Thornton LLP Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 45 Consolidated Balance Sheets 46 Consolidated Income Statements 47 Consolidated Statements of Comprehensive Income (Loss) 48 Consolidated Statements of Shareholders’ Equity 49 Consolidated Statements of Cash Flows 50 Notes to Consolidated Financial Statements 52 All schedules and exhibits not included are not applicable, not required or would contain information that is shown in the financial statements or notes thereto. 42 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders ScanSource, Inc.: Opinion on the financial statements We have audited the accompanying consolidated balance sheets of ScanSource, Inc. (a South Carolina corporation) and subsidiaries (the “Company”) as of June 30, 2021 and 2020, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 24, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Supplier incentives As described in Note 1 to the consolidated financial statements, the Company has incentive agreements with many of its suppliers. Supplier rebates can be in the form of instant rebates or achievement-based rebates. Instant rebate programs reduce the Company’s inventory cost so that the Company can reduce the ultimate sales price to the customer or provide additional margin to the Company. Achievement-based rebates are earned by achieving certain sales or purchase targets on a periodic basis. We identified supplier incentives as a critical audit matter. We identified supplier incentives as a critical audit matter due to the large volume of transactions subject to rebates that are earned under varying contract terms, and the related estimates made by management. The Company determines whether, among other items, all qualifying sales and purchases are considered in calculating the rebates and cash receipts or credit memos received are appropriately applied. The determination of achievement-based rebates requires management to make estimates about future purchases and sales. For both instant and achievement-based rebates, there is a risk that the rebates are not accounted for consistent with the terms of the current contracts, which requires a high degree of auditor judgment in designing and executing audit procedures to respond to this risk. 43 Table of Contents Index to Financial Statements Our audit procedures related to the supplier incentives included the following, among others. We confirmed a sample of outstanding balances of supplier rebates receivable. For unreturned confirmations, we vouched the related balances to subsequent cash receipts or credit memos received by the Company or obtained the underlying vendor agreements. Using those agreements, we recalculated the receivable based on the stated terms and evaluated the Company’s estimates to determine whether the rebate thresholds were met. We verified the completeness and accuracy of the underlying sales or purchases data used by management in determining whether they qualified for rebates during the period. In addition, we analyzed the rebates receivable collection history to evaluate the overall collectability of the supplier rebates receivable balance. We also tested the design and operating effectiveness of controls relating to supplier incentives including, among others, the Company’s controls over processing new incentive agreements, specifically related to the appropriate recognition of reductions to cost of goods sold for instant rebates and the appropriate amortization of inventory valuation adjustments to cost of goods sold for achievement-based rebates. /s/ Grant Thornton LLP We have served as the Company’s auditor since 2014. Columbia, South Carolina August 24, 2021 44 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders ScanSource, Inc.: Opinion on internal control over financial reporting We have audited the internal control over financial reporting of ScanSource, Inc. (a South Carolina corporation) and subsidiaries (the “Company”) as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2021, and our report dated August 24, 2021 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Grant Thornton LLP Columbia, South Carolina August 24, 2021 45 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share information) June 30, 2021 June 30, 2020 Assets Current assets: Cash and cash equivalents $ 62,718 $ 29,485 Accounts receivable, less allowance of $ 19,341 at June 30, 2021 and $ 21,906 at June 30, 2020 568,984 443,185 Inventories 470,081 454,885 Prepaid expenses and other current assets 117,860 94,681 Current assets held for sale — 181,231 Total current assets 1,219,643 1,203,467 Property and equipment, net 42,836 55,641 Goodwill 218,877 214,288 Identifiable intangible assets, net 104,860 121,547 Deferred income taxes 21,853 24,630 Other non-current assets 63,615 72,521 Total assets $ 1,671,684 $ 1,692,094 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 634,805 $ 454,240 Accrued expenses and other current liabilities 87,790 76,686 Current portion of contingent consideration — 46,334 Income taxes payable 2,501 5,886 Current portion of long-term debt 7,843 7,839 Current liabilities held for sale — 128,022 Total current liabilities 732,939 719,007 Deferred income taxes 3,954 3,884 Long-term debt, net of current portion 135,331 143,175 Borrowings under revolving credit facility — 67,714 Other long-term liabilities 68,269 80,068 Total liabilities 940,493 1,013,848 Commitments and contingencies Shareholders’ equity: Preferred stock, no par value; 3,000,000 shares authorized, none issued — — Common stock, no par value; 45,000,000 shares authorized, 25,499,465 and 25,361,298 shares issued and outstanding at June 30, 2021 and June 30, 2020, respectively 71,253 63,765 Retained earnings 758,071 747,276 Accumulated other comprehensive loss ( 98,133 ) ( 132,795 ) Total shareholders’ equity 731,191 678,246 Total liabilities and shareholders’ equity $ 1,671,684 $ 1,692,094 See accompanying notes to consolidated financial statements. 46 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Income Statements Years Ended June 30, 2021, 2020 and 2019 (in thousands, except per share information) 2021 2020 2019 Net sales $ 3,150,806 $ 3,047,734 $ 3,249,799 Cost of goods sold 2,800,090 2,692,165 2,856,996 Gross profit 350,716 355,569 392,803 Selling, general and administrative expenses 247,438 259,535 244,294 Depreciation expense 12,533 13,033 12,028 Intangible amortization expense 19,488 19,953 17,893 Restructuring and other charges 9,258 604 8,654 Impairment charges — 120,470 — Change in fair value of contingent consideration 516 6,941 15,200 Operating income (loss) 61,483 ( 64,967 ) 94,734 Interest expense 6,929 12,224 13,162 Interest income ( 3,097 ) ( 5,826 ) ( 1,818 ) Other expense (income), net 116 411 ( 247 ) Income (loss) before income taxes 57,535 ( 71,776 ) 83,637 Provision for income taxes 12,146 7,451 18,778 Net income (loss) from continuing operations 45,389 ( 79,227 ) 64,859 Net loss from discontinued operations ( 34,594 ) ( 113,427 ) ( 7,262 ) Net income (loss) $ 10,795 $ ( 192,654 ) $ 57,597 Per share data: Net income (loss) from continuing operations per common share, basic $ 1.79 $ ( 3.12 ) $ 2.53 Net loss from discontinued operations per common share, basic ( 1.36 ) ( 4.47 ) ( 0.28 ) Net income (loss) per common share, basic $ 0.42 $ ( 7.59 ) $ 2.25 Weighted-average shares outstanding, basic 25,423 25,378 25,642 Net income (loss) from continuing operations per common share, diluted $ 1.78 $ ( 3.12 ) $ 2.52 Net loss from discontinued operations per common share, diluted ( 1.36 ) ( 4.47 ) ( 0.28 ) Net income (loss) per common share, diluted $ 0.42 $ ( 7.59 ) $ 2.24 Weighted-average shares outstanding, diluted 25,518 25,378 25,734 See accompanying notes to consolidated financial statements. 47 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) Years Ended June 30, 2021, 2020 and 2019 (in thousands) 2021 2020 2019 Net income (loss) $ 10,795 $ ( 192,654 ) $ 57,597 Unrealized gain (loss) on hedged transaction, net of tax 2,249 ( 4,646 ) ( 3,277 ) Foreign currency translation adjustment 20,778 ( 38,061 ) ( 2,634 ) Realized foreign currency loss from discontinued operations 11,635 — — Comprehensive income (loss) $ 45,457 $ ( 235,361 ) $ 51,686 See accompanying notes to these consolidated financial statements. 48 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity Years Ended June 30, 2021, 2020 and 2019 (in thousands, except share information) Common Stock (Shares) Common Stock (Amount) Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2018 25,593,122 $ 68,220 $ 882,333 $ ( 84,177 ) $ 866,376 Net income — — 57,597 — 57,597 Unrealized loss on hedged transaction, net of tax — — — ( 3,277 ) ( 3,277 ) Foreign currency translation adjustment — — — ( 2,634 ) ( 2,634 ) Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 139,107 103 — — 103 Common stock repurchased ( 323,832 ) ( 10,129 ) — — ( 10,129 ) Share-based compensation — 6,093 — — 6,093 Balance at June 30, 2019 25,408,397 64,287 939,930 ( 90,088 ) 914,129 Net loss — — ( 192,654 ) — ( 192,654 ) Unrealized loss on hedged transaction, net of tax — — — ( 4,646 ) ( 4,646 ) Foreign currency translation adjustment — — — ( 38,061 ) ( 38,061 ) Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 120,969 ( 599 ) — — ( 599 ) Common stock repurchased ( 168,068 ) ( 5,432 ) — — ( 5,432 ) Share-based compensation — 5,509 — — 5,509 Balance at June 30, 2020 25,361,298 63,765 747,276 ( 132,795 ) 678,246 Net income — — 10,795 — 10,795 Unrealized gain on hedged transaction, net of tax — — — 2,249 2,249 Foreign currency translation adjustment — — — 20,778 20,778 Realized foreign currency loss from discontinued operations — — — 11,635 11,635 Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 138,167 ( 585 ) — — ( 585 ) Share-based compensation — 8,073 — — 8,073 Balance at June 30, 2021 25,499,465 $ 71,253 $ 758,071 $ ( 98,133 ) $ 731,191 See accompanying notes to consolidated financial statements. 49 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended June 30, 2021, 2020 and 2019 (in thousands) 2021 2020 2019 Cash flows from operating activities: Net income (loss) $ 10,795 $ ( 192,654 ) $ 57,597 Net loss from discontinued operations ( 34,594 ) ( 113,427 ) ( 7,262 ) Net income (loss) from continuing operations 45,389 ( 79,227 ) 64,859 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Depreciation and amortization 33,507 35,328 33,652 Amortization of debt issue costs 417 417 350 Provision for doubtful accounts 338 1,621 1,712 Share-based compensation 8,039 5,478 6,045 Impairment charges — 120,470 — Deferred income taxes 2,916 ( 12,193 ) ( 2,757 ) Change in fair value of contingent consideration 516 6,941 15,200 Contingent consideration payments excess ( 5,457 ) ( 3,050 ) ( 10,190 ) Finance lease interest 119 85 — Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 118,859 ) 57,477 ( 5,490 ) Inventories ( 12,301 ) 86,177 ( 85,862 ) Prepaid expenses and other assets ( 18,753 ) ( 13,880 ) ( 10,091 ) Other non-current assets 9,948 ( 13,563 ) ( 2,438 ) Accounts payable 175,120 ( 20,846 ) 16,134 Accrued expenses and other liabilities ( 493 ) 11,239 2,377 Income taxes payable ( 3,679 ) ( 441 ) ( 7,469 ) Net cash provided by operating activities of continuing operations 116,767 182,033 16,032 Cash flows from investing activities of continuing operations: Capital expenditures ( 2,363 ) ( 6,387 ) ( 5,797 ) Cash paid for business acquisitions, net of cash acquired — ( 48,921 ) ( 32,161 ) Cash received for business disposal 34,356 — — Net cash provided by (used in) investing activities of continuing operations 31,993 ( 55,308 ) ( 37,958 ) Cash flows from financing activities of continuing operations: Borrowings on revolving credit, net of expenses 1,881,679 2,085,918 2,061,090 Repayments on revolving credit, net of expenses ( 1,949,392 ) ( 2,190,595 ) ( 2,132,702 ) Borrowings on long-term debt, net ( 7,839 ) ( 4,085 ) 149,670 Repayments of finance lease obligations ( 1,294 ) ( 1,765 ) ( 662 ) Debt issuance costs — — ( 1,096 ) Contingent consideration payments ( 41,393 ) ( 35,482 ) ( 35,606 ) Exercise of stock options 451 754 1,509 Taxes paid on settlement of equity awards ( 1,036 ) ( 1,353 ) ( 1,406 ) Repurchase of common stock — ( 6,078 ) ( 9,483 ) Net cash (used in) provided by financing activities of continuing operations ( 118,824 ) ( 152,686 ) 31,314 50 Table of Contents Index to Financial Statements 2021 2020 2019 (continued) Cash flows from discontinued operations: Net cash flows provided by (used in) operating activities of discontinued operations 24,173 44,238 ( 43,159 ) Net cash flows used in investing activities of discontinued operations ( 58 ) ( 77 ) ( 1,416 ) Net cash flows (used in) provided by financing activities of discontinued operations ( 29,494 ) ( 3,921 ) 32,917 Net cash flows (used in) provided by discontinued operations ( 5,379 ) 40,240 ( 11,658 ) Effect of exchange rate changes on cash and cash equivalents 3,706 ( 3,642 ) 558 Increase (decrease) in cash and cash equivalents 28,263 10,637 ( 1,712 ) Cash and cash equivalents at beginning of period 34,455 23,818 25,530 Cash and cash equivalents at end of period 62,718 34,455 23,818 Cash and cash equivalents of discontinued operations — 4,970 4,513 Cash and cash equivalents of continuing operations $ 62,718 $ 29,485 $ 19,305 Supplemental disclosure of consolidated cash flow information: Interest paid during the year $ 6,412 $ 11,959 $ 13,162 Income taxes paid during the year $ 12,002 $ 16,869 $ 30,610 See accompanying notes to consolidated financial statements. 51 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2021 (1) Business and Summary of Significant Accounting Policies Business Description ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “ScanSource”) is at the center of the solution delivery channel, connecting businesses and providing technology solutions. The Company brings technology solutions and services from leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, and telecom and cloud services to market. The Company operates in the United States, Canada, Brazil, and the UK. During the quarter ended December 31, 2020, the Company completed the divestitures of its products distribution business in the UK, Europe, and Latin America, outside of Brazil (the "Divestitures"). See Note 19 - Discontinued Operations for more information regarding the Divestitures. The Company's two operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services, are based on product, customer, and service type. COVID-19 The spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders, business shutdowns, and limitations of in-person gatherings. The Company moved quickly to transition our employees, where possible, to a fully remote working environment. The Company also deployed teams to monitor the evolving situation and recommend risk mitigation actions; The Company is following guidance from authorities and health officials, including implementing travel restrictions and requiring employees to adhere physical distancing protocols. All of the Company's distribution facilities have remained open and operational throughout the pandemic. The pandemic and these containment measures have had an impact on our business, suppliers' businesses and sales partners' businesses. The negative impacts to net sales from the pandemic, including declines in customer demand and supply chain disruptions, were most pronounced during the fourth quarter of fiscal year 2020, and have since recovered throughout fiscal year 2021. While we are unable to predict the ultimate impact that COVID-19 will have on our business, certain technologies have benefited from the widespread adoption of work-from-home, as well as the accelerated shift to digitize and automate processes. We are also incurring higher employee related healthcare and prevention costs as a result of the pandemic. The Company has made adjustments, including implementing an annualized expense reduction plan in fiscal year 2021. For further discussion on the potential future impacts of COVID-19, see the Risk Factors presented in Part I, Item 1A. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated. The Company has reclassified certain prior year amounts for the results of discontinued operations to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only. Related Party Transactions A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. There were no material related party transactions for the fiscal years ended June 30, 2021, 2020 and 2019. Use of Estimates 52 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable, contingent consideration, asset impairments, inventory reserves, purchase price allocations, goodwill and intangibles, and supplier incentives. Management bases its estimates on assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above-described items, are reasonable and that the actual results will not vary significantly from the estimated amounts. The following accounting policies relate to the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements: (a) Allowances for Trade and Notes Receivable The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible 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. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. (b) Inventory Reserves Management determines the inventory reserves required to reduce inventories to the lower of cost or net realizable value based principally on the effects of technological changes, quantities of goods on hand, length of time on hand and other factors. Net realizable value is determined based on continual inquiries of suppliers who are able to provide credible knowledge of the salability and value of the products. An estimate is made of the net realizable value, less cost to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. The estimates used to calculate these reserves are applied consistently. The adjustments are recorded in the period in which the loss of utility of the inventory occurs, which establishes a new cost basis for the inventory. This new cost basis is maintained until the reserved inventory is disposed of, returned to the supplier or sold. To the extent that specifically reserved inventory is sold, cost of goods sold is expensed for the new cost basis of the inventory sold. (c) Purchase Price Allocations The Company accounts for business combinations in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations . For each acquisition, the Company allocates the purchase price to assets acquired, liabilities assumed and goodwill and intangibles. The Company recognizes assets and liabilities acquired at their estimated fair values. Management uses judgment to (i) identify the acquired assets and liabilities assumed, (ii) estimate the fair value of these assets, (iii) estimate the useful life of the assets and (iv) assess the appropriate method for recognizing depreciation or amortization expense over the assets' useful life. See Note 7 - Acquisitions for further discussion of the Company's business combinations. (d) Goodwill and Intangible Asset Fair Value 53 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The Company estimates the fair value of its goodwill reporting units, as well as its finite lived intangible assets primarily based on the income approach utilizing the discounted cash flow method. The Company also utilizes fair value estimates derived from the market approach utilizing the public company market multiple method to validate the results of the discounted cash flow method for fair value of goodwill, which requires it to make assumptions about the applicability of those multiples to its reporting units. The discounted cash flow method requires the Company to estimate future cash flows, using key assumptions such as the weighted average cost of capital, revenue growth rates, projected gross margin and operating margin percentage growth, expected working capital changes and a related cash flow impact from working capital changes, and then discount those amounts at an appropriate discount rate to present value. (e) Supplier Incentives The Company receives incentives from suppliers as achievement-based supplier rebates that require management to make certain estimates about the amount of supplier consideration that will be received. Achievement-based supplier rebates are earned by achieving certain sales or purchase targets on a periodic basis. The Company determines whether, among other items, all qualifying sales and purchases are considered in calculating the rebates and cash receipts or credit memos received are appropriately applied. The determination of achievement-based rebates requires management to make assumptions about future purchases and sales. Estimates are based on the terms of the incentive program and historical experiences. Cash and Cash Equivalents The 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 amounts of $ 14.3 million and $ 17.1 million are classified as accounts payable as of June 30, 2021 and 2020, respectively. The Company maintains its cash with various financial institutions globally that are monitored regularly for credit quality, although it may hold amounts in excess of Federal Deposit Insurance Corporation ("FDIC") or other insured limits. Cash and cash equivalents held outside of the United States for continuing operations totaled $ 52.1 million and $ 23.6 million as of June 30, 2021 and 2020, respectively. Concentration of Credit Risk The Company sells to a large base of customers throughout the United States, Canada, Brazil and the UK. The Company performs ongoing credit evaluations of its customers’ financial condition. In certain cases, the Company will accept tangible assets as collateral to increase the trade credit of its customers. Sales to individual customers were less than 10% of the Company’s net sales for fiscal years 2021, 2020 and 2019. In the event that the Company does not collect payment on accounts receivable within the established trade terms for certain customers, the Company may establish arrangements for longer-term financing. The Company accounts for these arrangements by recording them at their historical cost less specific allowances at balance sheet dates. Interest income is recognized in the period earned and is recorded as interest income in the Consolidated Income Statement. Derivative Financial Instruments The Company uses derivative instruments to manage certain exposures related to fluctuations in foreign currency exchange rates and changes in interest rates in connection with borrowing activities. The Company records all derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value. The Company does not use derivative financial instruments for trading or speculative purposes. 54 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The Company’s exposure to changes in foreign currency exchange rates results from foreign currency denominated assets and liabilities, purchasing and selling internationally in several foreign currencies and from intercompany loans with foreign subsidiaries, including subsidiaries included in discontinued operations. The Company’s objective is to preserve the economic value of non-functional currency denominated cash flows. The Company's foreign currencies are denominated primarily in Brazilian reais, British pounds and Canadian dollars. The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The market risk related to the foreign exchange agreements is offset by changes in the valuation of the underlying items. These contracts are generally for a duration of 90 days or less. The Company has elected not to designate its foreign currency contracts as hedging instruments. They are, therefore, marked-to-market with changes in their fair value recorded in the Consolidated Income Statement each period. Derivative financial instruments related to foreign currency exposure are accounted for on an accrual basis with gains or losses on these contracts recorded in income in the period in which their value changes, with the offsetting entry for unsettled positions reflected in either other assets or other liabilities. The Company's earnings are affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure, the Company has an interest rate swap agreement and has designated this instrument as a hedge of the cash flows on certain variable rate debt. To the extent the derivative instrument was effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative instrument were not included in current earnings, but were reported as other comprehensive income (loss). There was no ineffective portion recorded as an adjustment to earnings for the years ended June 30, 2021 and 2020. Investments The Company has investments that are held in a grantor trust formed by the Company related to the ScanSource, Inc. Nonqualified Deferred Compensation Plan and founder’s Supplemental Executive Retirement Plan. The Company has classified these investments as trading securities, and they are recorded at fair value with unrealized gains and losses included in the accompanying Consolidated Income Statements. The Company’s obligations under this deferred compensation plan change in concert with the performance of the investments along with contributions to and withdrawals from the plan. The fair value of these investments and the corresponding deferred compensation obligation was $ 31.2 million and $ 27.2 million as of June 30, 2021 and June 30, 2020, respectively. These investments are classified as either prepaid expenses and current assets or other non-current assets in the Consolidated Balance Sheets depending on the timing of planned disbursements. The deferred compensation obligation is classified either within accrued expenses and other current liabilities or other long-term liabilities as well. The amounts of these investments classified as current assets with corresponding current liabilities were $ 4.9 million and $ 2.6 million at June 30, 2021 and June 30, 2020, respectively. Inventories Inventories (consisting entirely of finished goods) are stated at the lower of cost (first-in, first-out method) or net realizable value. Supplier Programs The Company receives incentives from suppliers related to cooperative advertising allowances, volume rebates and other incentive programs. These incentives are generally under quarterly, semi-annual or annual agreements with the suppliers. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the supplier. Suppliers generally require that the Company use the suppliers' cooperative advertising allowances for advertising or other marketing programs. Incentives received from suppliers for specifically identified incremental cooperative advertising programs are recorded as adjustments to selling, general and administrative expenses. ASC 606, Revenue from Contracts with Customers addresses accounting for consideration payable to a customer, which the Company interprets and applies as the customer (i.e., the Company) receiving advertising funds from a supplier. The portion of these supplier funds in excess of our costs are reflected as a reduction of inventory. Such funds are recognized as a reduction of the cost of goods sold when the related inventory is sold. 55 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The Company records unrestricted volume rebates received as a reduction of inventory and reduces the cost of goods sold when the related inventory is sold. Amounts received or receivables from suppliers that are not yet earned are deferred in the Consolidated Balance Sheets. Supplier receivables are generally collected through reductions to accounts payable authorized by the supplier. In addition, the Company may receive early payment discounts from certain suppliers. The Company records early payment discounts received as a reduction of inventory, thereby resulting in a reduction of cost of goods sold when the related inventory is sold. Management makes certain estimates of the amounts of supplier consideration that will be received. Estimates are based on the terms of the incentive program and historical experiences. Actual recognition of the supplier consideration may vary from management estimates. Supplier Concentration The Company sells products from many suppliers; however, sales of products supplied by Cisco and Zebra each constituted more than 10 % of the Company's net sales for the year ended June 30, 2021, 2020, and 2019. Product Warranty The Company’s suppliers generally provide a warranty on the products provided by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. In three of its product lines, the Company offers a self-branded warranty program, in which management has determined that the Company is the primary obligor. The Company purchases contracts from unrelated third parties, generally the original equipment manufacturers, to fulfill any obligation to service or replace defective product claimed on these warranty programs. As a result, the Company has not recorded a provision for estimated service warranty costs. To maintain customer relations, the Company facilitates returns of defective products from the Company's customers by accepting for exchange, with the Company's prior approval, most defective products within 30 days of invoicing. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 3 to 10 years for furniture, equipment and computer software, 25 to 40 years for buildings and 15 years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized. Capitalized Software The Company accounts for capitalized software in accordance with ASC 350-40, Computer Software Developed for Internal Use, which provides guidance for computer software developed or obtained for internal use. The Company is required to continually evaluate the stage of the implementation process to determine whether or not costs are expensed or capitalized. Costs incurred during the preliminary project phase or planning and research phase are expensed as incurred. Costs incurred during the development phase, such as material and direct services costs, compensation costs of employees associated with the development and interest cost, are capitalized as incurred. Costs incurred during the post-implementation or operation phase, such as training and maintenance costs, are expensed as incurred. In addition, costs incurred to modify existing software that result in additional functionality are capitalized as incurred. Goodwill The Company accounts for recorded goodwill in accordance with ASC 350, Goodwill and Other Intangible Assets , which requires that goodwill be reviewed annually for impairment or more frequently if impairment indicators exist. Goodwill testing utilizes an impairment analysis, whereby the Company compares the carrying value of each identified reporting unit to its fair value. The Company's goodwill reporting units align directly with its operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services. The fair values of the reporting units are estimated using the net present value of discounted cash flows generated by each reporting unit. Considerable judgment is necessary in estimating future cash flows, discount rates and other factors affecting the estimated fair value of the reporting units, including operating and 56 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 macroeconomic factors. Historical financial information, internal plans and projections and industry information are used in making such estimates. Under Accounting Standards Update ("ASU") 2017-04, if fair value of goodwill is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting units' fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, the Company would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company also assesses the recoverability of goodwill if facts and circumstances indicate goodwill may be impaired. In its most recent annual test, the Company estimated the fair value of its reporting units primarily based on the income approach utilizing the discounted cash flow method. The Company also corroborated the fair value estimates derived from the income approach by considering the implied market multiples of comparable transactions and companies. The discounted cash flow method required the Company to estimate future cash flows and discount those amounts to present value. The key assumptions utilized in determining fair value included: • Industry weighted-average cost of capital ("WACC"): The Company utilized a WACC relative to each reporting unit's respective geography and industry as the discount rate for estimated future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant in each respective geography. • Operating income: The Company utilized historical and expected revenue growth rates, gross margins and operating expense percentages, as well as the expected impact of COVID-19 and the Company's annualized expense reduction plan, which varied based on the projections of each reporting unit being evaluated. • Other cash flow adjustments: The Company utilized a projected cash flow impact pertaining to depreciation, capital expenditures and expected changes in working capital as each of its goodwill reporting units grow. No goodwill impairment charges were recognized for the fiscal years ended June 30, 2021 and 2019. Goodwill impairment charges totaled $ 119.0 million for the Worldwide Barcode, Networking and Security segment reporting units for the fiscal year ended June 30, 2020 and are included in the impairment charges line item in the Consolidated Income Statements . See Note 8 - Goodwill and Other Identifiable Intangible Assets for more information regarding goodwill and the results of our testing. Intangible Assets Intangible assets consist of customer relationships, trade names, distributor agreements, supplier partner programs, developed technology, non-compete agreements and an encryption key library. Customer relationships, trade names, supplier partner programs, developed technology and the encryption key library are amortized using the straight-line method over their estimated useful lives, which range from 3 to 19 years. Non-compete agreements are amortized over their contract life. These assets are shown in detail in Note 8 - Goodwill and Other Identifiable Intangible Assets. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Tests for recoverability of a long-lived asset to be held and used are measured by comparing the carrying amount of the long-lived asset to the sum of the estimated future undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows, the Company uses projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. If it is determined that a long-lived asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value . No intangible asset or other long-lived asset impairment charges were recognized for the fiscal years ended June 30, 2021 and 2019. Intangible asset impairment charges totaled $ 1.4 million for our continuing operations for the fiscal year ended June 30, 2020 and are included in the impairment charges line item in the Consolidated Income Statements . See Note 8 - Goodwill and Other Identifiable Intangible Assets for more information regarding intangible asset impairment charges. Fair Value of Financial Instruments 57 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable, accrued liabilities, borrowings under the revolving credit facility and subsidiary lines of credit approximate fair value based upon either short maturities or variable interest rates of these instruments. For additional information related to the fair value of derivatives, please see Note 11 - Fair Value of Financial Instruments . Liability for Contingent Consideration In addition to the initial cash consideration paid to former shareholders of Intelisys and Network1, the Company agreed to make additional earnout payments based on future results through a specified date based on a multiple of the subsidiary’s pro forma earnings as defined in the respective purchase agreements. Future payments are to be paid in the functional currency of the acquired entity. The Company paid the final earnout payment to the former shareholders of Intelisys during fiscal year 2021. The Company also paid the final earnout payment to the former shareholders of Network1 during fiscal year 2019. Contingencies The Company accrues for contingent obligations, including estimated legal costs, when it is probable that a liability is incurred and the amount is reasonably estimable. As facts concerning contingencies become known, management reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal and other regulatory matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process. Revenue Recognition The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers . 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 the Company's warehouse, (ii) drop-shipment directly from the supplier, or (iii) electronic delivery for software licenses. For more detailed disclosures on the Company's revenue recognition policies, see Note 3 - Revenue Recognition . Advertising Costs The Company defers advertising-related costs until the advertising is first run in trade or other publications or, in the case of brochures, until the brochures are printed and available for distribution or posted online. Advertising costs, net of supplier reimbursement, are included in selling, general and administrative expenses and were not significant in any of the three fiscal years ended June 30, 2021, 2020 and 2019. Deferred advertising costs for each of these three fiscal years were also not significant. Foreign Currency The currency effects of translating the financial statements of the Company’s foreign entities that operate in their local currency are included in the cumulative currency translation adjustment component of accumulated other comprehensive income or loss. The Company's continuing operations functional currencies include U.S. dollars, Brazilian reais, British pounds, and Canadian dollars. The assets and liabilities of these foreign entities are translated into U.S. dollars using the exchange rate at the end of the respective period. Sales, costs and expenses are translated at average exchange rates effective during the respective period. Foreign currency transactional and re-measurement gains and losses are included in other expense (income) in the Consolidated Income Statements. Such amounts are not significant to any of the periods presented. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. In accordance with 58 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 ASC 740, Accounting for Income Taxes, valuation allowances are provided against deferred tax assets when it is more likely than not that an asset will not be realized . Additionally, the Company maintains reserves for uncertain tax provisions. See Note 14 - Income Taxes for further discussion and the impact of the Tax Cut and Jobs Act (the "Tax Act") enacted by the U.S. government on December 22, 2017. Share-Based Payments The Company accounts for share-based compensation using the provisions of ASC 718, Accounting for Stock Compensation , which requires the recognition of the fair value of share-based compensation. Furthermore, the Company adopted ASU 2016-09, which simplified several aspects of the accounting for share-based compensation, including income tax effects, forfeitures, statutory withholding requirements and cash flow statement classifications. Share-based compensation is estimated at the grant date based on the fair value of the awards. Since this compensation cost is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASU 2016-09 allows companies to elect an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. The Company has elected to maintain its current accounting policy, estimate the total number of awards expected to be forfeited at the time of grant and revise such estimates, if necessary, in subsequent periods if actual forfeitures differ. The Company has elected to expense grants of awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting portion of the award. Common stock repurchases Repurchases of common stock are accounted for at cost, which includes brokerage fees, and are included as a component of shareholder's equity on the Consolidated Balance Sheets. Comprehensive Income ASC 220, Comprehensive Income , defines comprehensive income as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive income for the Company include net income, unrealized gains or losses on hedged transactions, net of tax and foreign currency translation adjustments arising from the consolidation of the Company’s foreign subsidiaries. Recent Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842) requiring lessees to reflect most leases on their balance sheets and recognize expenses on their income statements in a manner similar to current guidance. Under the new guidance, lessees are required to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs. For leases with a lease term of 12 months or less, as long as the lease does not include options to purchase the underlying assets, lessees can elect not to recognize a lease liability and right-of-use asset. Under the new guidance, lessor accounting is largely unchanged, and the accounting for sale and leaseback transactions is simplified. This ASU was effective for the Company beginning in the first quarter of fiscal 2020. Entities are required to use the modified retrospective approach of adoption, with the option of applying the requirements of the standard either (1) retrospectively to each prior comparative reporting period presented or (2) retrospectively at the beginning of the period of adoption. The Company adopted the standard on July 1, 2019 and applied it at the beginning of the period of adoption. Therefore, upon adoption, financial information and disclosures are not updated for comparative reporting periods under the new standard. Additionally, the Company has elected the transition package of practical expedients upon adoption which, among other things, allows an entity to not reassess the historical lease classification. Upon adoption, the Company recognized right-of-use assets and corresponding lease liabilities for both operating and finance leases of approximately $ 37 million on the Condensed Consolidated Balance Sheets. The adoption of this standard was not material to the Company's Condensed Consolidated Income Statements. See Note 14 - Leases for additional lease disclosures. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326: Financial Instruments - Credit Losses, which provides 59 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 supplemental guidance and clarification to ASU 2016-13 and must be adopted concurrently . The pronouncement revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The Company adopted this standard effective July 1, 2020, and it did not have a material impact on the Company's consolidated financial statements. See Note 2 - Trade Accounts and Notes Receivable for disclosures related to the adoption of ASU 2016-13. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC Topic 820) Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard effective July 1, 2020, and it had no impact on the Company's consolidated financial statements. 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. 60 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 (2) Trade Accounts and Notes Receivable, Net The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due to the Company. The Company has notes receivable with certain customers, which are included in “Accounts receivable, less allowance” in the Condensed Consolidated Balance Sheets. Management determines the estimate of the allowance for doubtful accounts receivable by considering a number of factors, including: (i) historical experience, (ii) aging of the accounts receivable, (iii) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country-specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables are recorded at inception and adjusted over the contractual life. The changes in the allowance for doubtful accounts for the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 are set forth in the tables below. Description Balance at Beginning of Period Amounts Charged to Expense Write-offs Other (1) Balance at End of Period Allowance for bad debt: Year ended June 30, 2019 $ 33,843 1,712 ( 9,005 ) 971 $ 27,521 Trade and current note receivable allowance $ 27,521 Year ended June 30, 2020 $ 27,521 1,621 ( 5,176 ) ( 2,060 ) $ 21,906 Trade and current note receivable allowance $ 21,906 Year ended June 30, 2021 $ 21,906 338 ( 4,556 ) 1,653 $ 19,341 Trade and current note receivable allowance $ 19,341 (1) "Other" amounts include recoveries and the effect of foreign currency fluctuations for the fiscal years ended June 30, 2021, 2020, and 2019, respectively. 61 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 (3) Revenue Recognition The Company provides technology solutions and services from the leading suppliers of mobility and barcode, POS, payments, physical security, unified communications and collaboration and telecom and cloud services. This includes hardware, related accessories and device configuration as well as software licenses, professional services and hardware support programs. Significant Judgments: Principal versus Agent Considerations The Company is the principal for sales of all hardware, software and certain services, including self-branded warranty programs. The Company considers itself the principal in these transactions as it has control of the product or service before it is transferred to the customer. When the Company provides self-branded warranty programs, it engages a third party, generally the original equipment manufacturer, to cover the fulfillment of any obligations arising from these contracts. These revenues and associated third-party costs are amortized over the life of the contract on a straight-line basis. The Company recognizes the previously described 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. Related to the Company’s Intelisys business, the Company acts as a master agent connecting independent sales partners with service providers or suppliers who offer telecom and cloud services to end-customers. Intelisys’ sales partners earn commission payments from those service providers or suppliers on end-customer sales. Intelisys provides commission processing services to sales partners, earning a percentage of the commission stream. Because the Company acts as an agent, revenue is recognized on a net basis. Variable Considerations For certain transactions, products are sold with a right of return, and the Company may also provide other rebates or incentives, which are accounted for as variable consideration. The Company estimates returns allowance based on historical experience and reduces revenue accordingly. The Company estimates the amount of variable consideration for rebates and incentives by using the expected value to be given to the customer and reduces the revenue by those estimated amounts. These estimates are reviewed and updated as necessary at the end of each reporting period. Contract Balances The Company records contract assets and liabilities for payments received from customers in advance of services performed. These assets and liabilities are the result of the sales of the Company's self-branded warranty programs and other transactions where control has not yet passed to the customer. These amounts are immaterial to the consolidated financial statements for the periods presented. Practical Expedients & Accounting Policy Elections • Incremental costs of obtaining a contract - These costs are included in selling, general and administrative expenses as the amortization period is generally one year or less. The Company expenses costs associated with obtaining and fulfilling contracts as incurred. • Shipping costs - The Company accounts for certain shipping and handling activities as fulfillment costs and expenses them as incurred. • Significant financing components - The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between 62 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less. • Sales tax and other related taxes - Sales and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue. Disaggregation of Revenue The following tables represent the Company's disaggregation of revenue: Fiscal year ended June 30, 2021 (in thousands) Worldwide Barcode, Networking & Security Segment Worldwide Communications & Services Segment Total Revenue by product/service: Technology solutions $ 2,175,141 $ 910,722 $ 3,085,863 Intelisys — 64,943 64,943 $ 2,175,141 $ 975,665 $ 3,150,806 Fiscal year ended June 30, 2020 (in thousands) Worldwide Barcode, Networking & Security Segment Worldwide Communications & Services Segment Total Revenue by product/service: Technology solutions $ 2,093,217 $ 897,096 $ 2,990,313 Intelisys — 57,421 57,421 $ 2,093,217 $ 954,517 $ 3,047,734 Fiscal year ended June 30, 2019 (in thousands) Worldwide Barcode, Networking & Security Segment Worldwide Communications & Services Segment Total Revenue by product/service: Technology solutions $ 2,141,896 $ 1,058,176 $ 3,200,072 Intelisys — 49,727 49,727 $ 2,141,896 $ 1,107,903 $ 3,249,799 63 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 (4) Earnings per Share Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding. Fiscal year ended June 30, 2021 2020 2019 (in thousands, except per share data) Numerator: Net income (loss) from continuing operations $ 45,389 $ ( 79,227 ) $ 64,859 Net loss from discontinued operations ( 34,594 ) ( 113,427 ) ( 7,262 ) Net income (loss) $ 10,795 $ ( 192,654 ) $ 57,597 Denominator: Weighted-average shares, basic 25,423 25,378 25,642 Dilutive effect of share-based payments 95 — 92 Weighted-average shares, diluted (1) 25,518 25,378 25,734 Net income (loss) from continuing operations per common share, basic $ 1.79 $ ( 3.12 ) $ 2.53 Net loss from discontinued operations per common share, basic ( 1.36 ) ( 4.47 ) ( 0.28 ) Net income (loss) per common share, basic $ 0.42 $ ( 7.59 ) $ 2.25 Net income (loss) from continuing operations per common share, diluted $ 1.78 $ ( 3.12 ) $ 2.52 Net loss from discontinued operations per common share, diluted ( 1.36 ) ( 4.47 ) ( 0.28 ) Net income (loss) per common share, diluted $ 0.42 $ ( 7.59 ) $ 2.24 (1) The Company calculates weighted average shares of common stock in accordance with ASC 260, Earnings per Share . The Company's diluted weighted average shares for the year ended June 30, 2020 are the same as basic weighted average shares due to net loss from continuing operations. For the years ended June 30, 2021, 2020 and 2019, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would have been antidilutive were 1,297,214 , 1,040,226 and 582,856 , respectively. (5) Property and Equipment Property and equipment is comprised of the following: 64 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 June 30, 2021 2020 (in thousands) Land $ 3,319 $ 3,331 Buildings and leasehold improvements 20,947 21,791 Computer software and equipment 74,432 75,008 Furniture, fixtures and equipment 15,359 17,775 Construction in progress 123 476 Rental equipment 9,379 10,207 123,559 128,588 Less accumulated depreciation ( 80,723 ) ( 72,947 ) $ 42,836 $ 55,641 Depreciation expense recorded as selling, general and administrative costs in the accompanying Consolidated Income Statements was $ 12.5 million, $ 13.0 million and $ 12.0 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. Depreciation expense recorded as cost of goods sold in the accompanying Consolidated Income Statements was $ 1.5 million, $ 2.3 million and $ 3.7 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. (6) Other Assets and Liabilities, Current The table below details prepaid expenses and other current assets. June 30, 2021 2020 (in thousands) Other receivables $ 73,113 $ 56,266 Prepaid expense 23,641 16,660 Other taxes receivable 9,473 5,258 Other current assets 11,633 16,497 $ 117,860 $ 94,681 The table below details accrued expenses and other current liabilities. June 30, 2021 2020 (in thousands) Deferred warranty revenue $ 9,752 $ 12,101 Accrued compensation 27,340 13,616 Other taxes payable 15,183 15,756 Accrued marketing expense 5,536 5,667 Accrued freight 3,528 2,886 Short-term operating lease liability 4,284 4,476 Other accrued liabilities 22,167 22,184 $ 87,790 $ 76,686 65 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The table below details other long-term liabilities. June 30, 2021 2020 (in thousands) Long-term deferred warranty revenue $ 2,958 $ 4,031 Long-term deferred compensation liability 26,229 24,572 Interest rate swap 6,280 9,433 Long-term income taxes payable 5,971 6,674 Long-term operating lease liability 16,550 20,760 Other long-term liabilities 10,281 14,598 $ 68,269 $ 80,068 (7) Acquisitions intY On July 1, 2019, the Company acquired all of the outstanding shares of intY and its CASCADE cloud services distribution platform. The purchase price of this acquisition, net of cash acquired, was approximately $ 48.9 million. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date. Intangible assets acquired include trade names, customer relationships, and developed technology. Goodwill recognized on this acquisition is not deductible for tax purposes. See Note 8 - Goodwill and Other Identifiable Intangible Assets for the amounts of goodwill and intangible assets recog nized in connection with this acquisition. The impact of this acquisition was not material to the consolidated financial statements. The Company recognized $ 0.3 million for each of the fiscal years ended June 30, 2020 and 2019 in acquisition-related costs included in selling, general and administrative expenses on the Condensed Consolidated Income Statements in connection with this acquisition. This acquisition is included in the Worldwide Communications & Services segment. 66 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 (8) Goodwill and Other Identifiable Intangible Assets In accordance with ASC 350, Intangibles - Goodwill and Other Intangible Assets , the Company performs its annual goodwill impairment test during the fourth quarter of each fiscal year, or whenever indicators of impairment are present. The reporting units utilized for goodwill impairment tests align directly with our operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services. The testing includes the determination of each reporting unit's fair value using a discounted cash flows model compared to each reporting unit's carrying value. Key assumptions used in determining fair value include projected growth and operating margin, working capital requirements and discount rates. During fiscal years ended June 30, 2021 and 2019, no impairment charges related to goodwill were recorded. For the fiscal year ended June 30, 2020, the Company's projected growth and operating margins were impacted by the worldwide economic hardships created by COVID-19 and as such recognized a goodwill impairment charge of $ 119.0 million for our Worldwide, Barcode, Networking and Security reporting unit, which is recorded to the impairment charges line item in the Consolidated Income Statements. Changes in the carrying amount of goodwill for the years ended June 30, 2021 and 2020, by reportable segment, are set forth in the table below. Additions to goodwill for fiscal year 2020 are due to the recent acquisitions. Worldwide Barcode, Networking & Security Segment Worldwide Communications & Services Segment Total (in thousands) Balance at June 30, 2019 $ 135,965 $ 174,750 $ 310,715 Additions — 30,445 30,445 Goodwill impairment charges ( 119,037 ) — ( 119,037 ) Unrealized loss on foreign currency translation ( 558 ) ( 7,277 ) ( 7,835 ) Balance at June 30, 2020 $ 16,370 $ 197,918 $ 214,288 Unrealized gain on foreign currency translation — 4,589 4,589 Balance at June 30, 2021 $ 16,370 $ 202,507 $ 218,877 The following table shows the Company’s identifiable intangible assets as of June 30, 2021 and 2020, respectively. June 30, 2021 June 30, 2020 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (in thousands) Amortized intangible assets: Customer relationships $ 139,262 $ 68,716 $ 70,546 $ 137,146 $ 56,107 $ 81,039 Trade names 19,750 10,102 9,648 19,509 7,617 11,892 Non-compete agreements 2,410 2,271 139 2,410 1,711 699 Supplier partner program 4,085 1,621 2,464 4,085 1,191 2,894 Encryption key library 19,900 9,743 10,157 19,900 7,255 12,645 Developed technology 15,165 3,259 11,906 14,004 1,626 12,378 Total intangibles $ 200,572 $ 95,712 $ 104,860 $ 197,054 $ 75,507 $ 121,547 During fiscal year 2020, the Company acquired customer relationships, trade names and developed technology related to the acquisition of intY. Also during fiscal year 2020, the Company recorded $ 1.4 million in impairment charges in customer relationships, trade names and non-compete agreements related to the acquisition of Canpango. This charge is included in the impairment charges line item in the Consolidated Income Statements. The Company also disposed of fully amortized trade names and non-compete agreements from prior acquisitions. No impairment charges were recognized in fiscal years ended June 30, 2021 and June 30, 2019. 67 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The weighted-average amortization period for all intangible assets was approximately 10 years for the year ended June 30, 2021, compared to 10 years for the year ended June 30, 2020 and 9 years for the year ended June 30, 2019. Amortization expense for continuing operations for the years ended June 30, 2021, 2020 and 2019 was $ 19.5 million, $ 20.0 million and $ 17.9 million, respectively, all of which relates to selling, general and administrative costs, not the cost of selling goods, and has been presented as such in the accompanying Consolidated Income Statements. Estimated future amortization expense is as follows: Amortization Expense (in thousands) Year Ended June 30, 2022 $ 17,962 2023 17,021 2024 16,917 2025 16,917 2026 13,032 Thereafter 23,011 Total $ 104,860 (9) Short Term Borrowings and Long Term Debt The following table shows the Company’s short-term and long-term debt as of June 30, 2021 and 2020, respectively. June 30, 2021 2020 (in thousands) Current portion of long-term debt $ 7,843 $ 7,839 Mississippi revenue bond, net of current portion 4,081 4,425 Senior secured term loan facility, net of current portion 131,250 138,750 Borrowings under revolving credit facility (a) — 67,714 Total debt $ 143,174 $ 218,728 (a) Borrowing under the revolving credit facility classified as held for sale in the Consolidated Balance Sheets for our discontinued operations totaled $ 24.7 million for the fiscal year ended June 30, 2020. Credit Facility The Company has a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks. On April 30, 2019, the Company amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. The Amended Credit Agreement includes (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,” the Company may increase its borrowings up to an additional $ 250 million for a total of up to $ 750 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, subject to obtaining additional credit commitments from the lenders participating in the increase. The Company incurred debt issuance costs of $ 1.1 million in connection with the amendments to the Amended Credit Agreement on April 30, 2019. These costs were capitalized to other non-current assets on the Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility. At the Company's option, loans denominated in U.S. dollars under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the LIBOR or alternate base rate depending upon the Company's net leverage ratio, calculated as total debt less up to $ 15 million of unrestricted domestic cash ("Credit Facility Net Debt") to trailing four -quarter adjusted earnings before interest expense, taxes, depreciation and amortization ("Credit Facility EBITDA") (the "Leverage 68 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Ratio"). This spread ranges from 1.00 % to 1.75 % for LIBOR-based loans and 0.00 % to 0.75 % for alternate base rate loans. Additionally, the Company is charged commitment fees ranging from 0.15 % to 0.30 %, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent. Borrowings under the Amended Credit Agreement are secured 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. The spread in effect as of June 30, 2021 was 1.50 % for LIBOR-based loans and 0.50 % for alternate base rate loans. The commitment fee rate in effect as of June 30, 2021 was 0.25 %. The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, the Company’s Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to1.00 as of 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 Amended Credit Agreement as of June 30, 2021. Including borrowings for both continuing and discontinued operations, the average daily balance on the revolving credit facility, excluding the term loan facility, during the fiscal years ended June 30, 2021 and 2020 was $ 54.6 million and $ 235.4 million, respectively. Taking into consideration outstanding borrowings on the multi-currency revolving credit facility for both continuing and discontinued operations, there was $ 350.0 million and $ 257.3 million available for additional borrowings as of June 30, 2021 and 2020, respectively. At June 30, 2021, based upon the Leverage Ratio calculations, there was $ 281.6 million available for additional borrowings. There were no letters of credit issued under the multi-currency revolving credit facility as of June 30, 2021. There were letters of credit issued of $ 0.3 million as of June 30, 2020. Mississippi Revenue Bond On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi facility through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at a rate equal to 30-day LIBOR plus a spread of 0.85 %. The terms of the bond allow for payment of interest only for the first 10 years of the agreement and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each 5 th anniversary of the agreement, requiring the Company to pay back the bonds at 100 % of the principal amount outstanding. As of June 30, 2021, the Company was in compliance with all covenants under this bond. The interest rate at June 30, 2021 and 2020 was 0.94 % and 1.03 %, respectively. Scheduled maturities of the Company’s short-term borrowings, revolving credit facility from continuing operations and long-term debt at June 30, 2021 are as follows: Revolving Credit Facility Term Loan Facility Mississippi Bond (in thousands) Fiscal year: 2022 $ — $ 7,500 $ 343 2023 — 11,250 348 2024 — 120,000 352 2025 — — 357 2026 — — 361 Thereafter — — 2,663 Total principal payments $ — $ 138,750 $ 4,424 Debt Issuance Costs 69 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 As of June 30, 2021, net debt issuance costs associated with the credit facility and bonds totaled $ 1.2 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument. (10) Derivatives and Hedging Activities The Company’s results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the 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, British pound and Canadian dollar for continuing operations. S ee Note 1- Business and Summary of Significant Accounting Policies for more information regarding the Company's policy on derivative financial instruments. The Company had contracts outstanding with notional amounts of $ 27.9 million and $ 16.6 million for the exchange of foreign currencies as of June 30, 2021 and 2020, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures are as follows: Fiscal year ended June 30, 2021 2020 2019 (in thousands) Net foreign exchange derivative contract losses (gains) $ 3,462 $ ( 3,975 ) $ 235 Net foreign currency transactional and re-measurement (gains) losses ( 2,617 ) 4,500 400 Net foreign currency losses $ 845 $ 525 $ 635 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 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, and other currencies 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. The Company entered into an interest rate swap agreement, which was subsequently settled, and entered into a new amended agreement on April 30, 2019. The swap agreement has a notional amount of $ 100.0 million, with a $ 50.0 million tranche scheduled to mature on April 30, 2024 and a $ 50.0 million tranche scheduled to mature April 30, 2026. This swap agreement is designated as a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for fiscal years ended June 30, 2021 and 2020. The components of the cash flow hedge included in accumulated other comprehensive (loss) income, net of income taxes, in the Consolidated Statements of Shareholders’ Equity, are as follows: 70 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Net interest expense (income) recognized as a result of interest rate swap $ 2,250 $ 799 $ ( 233 ) Unrealized gain (loss) in fair value of interest swap rates 731 ( 6,900 ) ( 4,159 ) Net increase in accumulated other comprehensive income (loss) 2,981 ( 6,101 ) ( 4,392 ) Income tax effect ( 732 ) 1,455 1,115 Net increase (decrease) in accumulated other comprehensive income, net of tax $ 2,249 $ ( 4,646 ) $ ( 3,277 ) The Company has the following derivative instruments for continuing operations located on the Consolidated Balance Sheets as of June 30, 2021, utilized for the risk management purposes detailed above: June 30, 2021 Balance Sheet Location Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments (in thousands) Derivative assets: Foreign currency hedge Other current assets $ 187 $ — Derivative liabilities: Foreign exchange contracts Accrued expenses and other current liabilities $ — $ 5 Interest rate swap agreement Other current liabilities $ 6,280 $ — The Company has the following derivative instruments located on the Consolidated Balance Sheets as of June 30, 2020, utilized for the risk management purposes detailed above: June 30, 2020 Balance Sheet Location Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments (in thousands) Derivative liabilities: Foreign exchange contracts Accrued expenses and other current liabilities $ — $ 26 Interest rate swap agreement Other current liabilities $ 9,433 $ — (11) Fair Value of Financial Instruments Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the fair value hierarchy, which groups fair value-measured assets and liabilities based upon the following levels of inputs: 71 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 • 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; • 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, interest rate swap agreements and contingent consideration owed to the previous owners of Intelisys. The carrying value of debt listed in Note 8 - Short-Term Borrowings and Long Term 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 criteria). The following table summarizes the valuation of the Company's remaining assets and liabilities measured at fair value on a recurring basis as of June 30, 2021: Total Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) (in thousands) Assets: Deferred compensation plan investments, current and non-current portion $ 31,168 $ 31,168 $ — $ — Foreign currency hedge 187 — 187 — Total assets at fair value $ 31,355 $ 31,168 $ 187 $ — Liabilities: Deferred compensation plan investments, current and non-current portion $ 31,168 $ 31,168 $ — $ — Forward foreign currency exchange contracts 5 — 5 — Interest rate swap agreement 6,280 — 6,280 — Total liabilities at fair value $ 37,453 $ 31,168 $ 6,285 $ — The following table presents assets and liabilities measured at fair value on a recurring basis as of June 30, 2020: 72 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Total Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) (in thousands) Assets: Deferred compensation plan investments, current and non-current portion $ 27,159 $ 27,159 $ — $ — Total assets at fair value $ 27,159 $ 27,159 $ — $ — Liabilities: Deferred compensation plan investments, current and non-current portion $ 27,159 $ 27,159 $ — $ — Forward foreign currency exchange contracts 26 — 26 — Interest rate swap agreement 9,433 — 9,433 — Liability for contingent consideration, current and non-current 46,334 — — 46,334 Total liabilities at fair value $ 82,952 $ 27,159 $ 9,459 $ 46,334 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 or active employees. These investments are recorded to prepaid and other current assets or other non-current assets depending on their corresponding, anticipated distributions to recipients, which are reported in accrued expenses and other current liabilities or other long-term liabilities, respectively. Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including LIBOR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Consolidated Balance Sheet as prepaid expenses and other current assets or accrued expenses and other current liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 10 - Derivatives and Hedging Activities . The Company recorded contingent consideration liabilities at the acquisition date of Network1 and Intelisys representing the amounts payable to former shareholders, as outlined under the terms of the applicable purchase agreements, based upon the achievement of a projected earnings measure, net of specific pro forma adjustments. Network1 and Intelisys are part of the Company's Worldwide Communications & Services segment. The current and non-current portions of these obligations are reported separately on the Consolidated Balance Sheets. The fair value of the contingent considerations (Level 3) are determined using a form of a probability weighted discounted cash flow model. Subsequent changes in the fair value of the contingent consideration liabilities are recorded to the change in fair value of contingent consideration line item in the Consolidated Income Statements. Fluctuations due to foreign currency translation are captured in other comprehensive income through the changes in foreign currency translation adjustments line item as seen in Note 18 - Accumulated Other Comprehensive (Loss) Income . The table below provides a summary of the changes in fair value of the Company's contingent considerations for the Intelisys earnout, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the fiscal year ended June 30, 2021. The final earnout payment due to former shareholders of Intelisys was paid during the fiscal year ended June 30, 2021. 73 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 June 30, 2021 Worldwide Communications & Services Segment (in thousands) Fair value at beginning of period $ 46,334 Payments ( 46,850 ) Change in fair value 516 Fair value at end of period $ — The table below provides a summary of the changes in fair value of the Company's contingent consideration for the Network1 and Intelisys earnouts for the fiscal year ended June 30, 2020. June 30, 2020 Worldwide Communications & Services Segment (in thousands) Fair value at beginning of period $ 77,925 Payments ( 38,532 ) Change in fair value 6,941 Fair value at end of period $ 46,334 The fair values of amounts owed are recorded in the current portion of contingent consideration and the long-term portion of contingent consideration in the Company's Consolidated Balance Sheets. In accordance with ASC 805, the Company will revalue the contingent consideration liability at each reporting date through the last payment, with changes in the fair value of the contingent consideration reflected in the change in fair value of contingent consideration line item on the Company's Consolidated Income Statement that is included in the calculation of operating income. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including: • estimated future results, net of pro forma adjustments set forth in the purchase agreements; • the probability of achieving these results; and • a discount rate reflective of the Company's creditworthiness and market risk premium associated with the United States market. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Valuation techniques and significant observable inputs used in recurring Level 3 fair value measurements for our contingent consideration liabilities as of June 30, 2021 and 2020 were as follows. The measurement period for the Intelisys earnout ended on June 30, 2020. Reporting Period Valuation Technique Significant Unobservable Inputs Weighted Average Rates (a) June 30, 2020 Discounted cash flow Weighted average cost of capital 3.0 % (a) Weighted average rates identified for each significant unobservable input relate to the valuation of the Intelisys contingent consideration. Since the earnout period for Intelisys closed on June 30, 2020 the weighted average cost of capital represents the cost the debt. There is no EBITDA growth to report in the current year. Intelisys The final earnout payment was paid to the former shareholders of Intelisys during the fiscal year ended June 30, 2021. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $ 0.5 million for the fiscal year ended June 30, 2021. The change in fair value for the fiscal year is due to the recurring amortization of the unrecognized fair value discount. 74 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The fair value of the liability for the contingent consideration related to Intelisys recognized at June 30, 2020 was $ 46.3 million, all of which is classified as current. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements totaled $ 6.9 million for the fiscal year ended June 30, 2020. The change in fair value for the fiscal year was primarily driven by the recurring amortization of the unrecognized fair value discount and a reduction in the discount rate. Network1 The final earnout payment was paid to the former shareholders of Network1 during the fiscal year ended June 30, 2019. The change in fair value of the contingent consideration for the fiscal year ended June 30, 2019 recognized in the Condensed Consolidated Income Statements contributed a loss of $ 2.5 million for agreed upon adjustments in the final payments. (12) Share-Based Compensation Share-Based Compensation Plans The Company has awards outstanding from two share-based compensation plans (the 2002 Long-Term Incentive Plan and the 2013 Long-Term Incentive Plan). Awards are currently only being granted under the 2013 Long-Term Incentive Plan. As of June 30, 2021, there were 879,660 shares available for future grant under the 2013 Long-Term Incentive Plan. All of the Company’s share-based compensation plans are shareholder approved, and it is the Company’s belief that such awards align the interests of its employees and directors with those of its shareholders. Under the plans, the Company is authorized to award officers, employees, consultants and non-employee members of the Board of Directors various share-based payment awards, including options to purchase common stock and restricted stock. Restricted stock can be in the form of a restricted stock award ("RSA"), restricted stock unit ("RSU") or a performance unit ("PU"). An RSA is common stock that is subject to risk of forfeiture or other restrictions that lapse upon satisfaction of specified conditions. An RSU represents the right to receive shares of common stock in the future with the right to future delivery of the shares subject to risk of forfeiture or other restrictions that lapse upon satisfaction of specified conditions. The Company accounts for its share-based compensation awards in accordance with ASC 718, Stock Compensation, which requires all share-based compensation to be recognized in the income statement based on fair value and applies to all awards granted, modified, canceled or repurchased after the effective date. Total share-based compensation included as a component of selling, general and administrative expenses in our Consolidated Income Statements was as follows: Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Share-based compensation related to: Equity classified stock options $ 1,332 $ 508 $ 868 Equity classified restricted stock 6,707 4,970 5,177 Total share-based compensation $ 8,039 $ 5,478 $ 6,045 Stock Options During the fiscal year ended June 30, 2021, the Company granted stock options for 640,782 shares. The Company did no t grant stock options during the fiscal year ended June 30, 2020. Stock options granted in fiscal year ended June 30, 2021 and 2019 vest annually over 3 years and have a 10 -year contractual life. These options were granted with an exercise price that is no less than 100 % of the fair market value of the underlying shares on the date of the grant. The fair value of each option (for purposes of calculation of share-based compensation) was estimated on the date of grant using the Black-Scholes-Merton option pricing formula that uses assumptions determined at the date of grant. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them ("expected term"), the estimated volatility of the Company's common stock price over the expected term ("expected volatility") and the number of options that will ultimately not complete 75 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 their vesting requirements ("forfeitures"). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Consolidated Income Statements. The Company used the following weighted-average assumptions for the options granted in fiscal years ended June 30, 2021 and 2019: Fiscal Year Ended June 30, 2021 2019 Expected term 5 years 4 years Expected volatility 42.78 % 32.93 % Risk-free interest rate 0.36 % 2.84 % Dividend yield 0.00 % 0.00 % Weighted-average fair value per option $ 9.01 $ 11.86 The weighted-average expected term of the options represents the period of time the options are expected to be outstanding based on historical trends and behaviors of certain groups and individuals receiving these awards. The expected volatility is predominantly based on the historical volatility of our common stock for a period approximating the expected term. The risk-free interest rate reflects the interest rate at grant date on zero-coupon United States governmental bonds that have a remaining life similar to the expected option term. The dividend yield assumption was based on the Company's dividend payment history and management's expectations of future dividend payments. A summary of activity under our stock option plans is presented below: Fiscal Year Ended June 30, 2021 Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life Aggregate Intrinsic Value Outstanding, beginning of year 816,297 $ 37.99 Granted during the period 640,782 25.09 Exercised during the period ( 14,725 ) 29.80 Canceled, forfeited, or expired during the period ( 206,785 ) 35.35 Outstanding, end of year 1,235,569 31.84 6.78 $ 1,917,584 Vested and expected to vest at June 30, 2021 1,218,365 31.95 6.74 $ 1,852,340 Exercisable, end of year 601,987 $ 38.94 4.03 $ — The aggregate intrinsic value was calculated using the market price of the Company's stock on June 30, 2021, and the exercise price for only those options that have an exercise price that is less than the market price of our stock. This amount will change as the market price per share changes. The aggregate intrinsic value of options exercised during the fiscal years ended June 30, 2021, 2020 and 2019 was less than $ 0.1 million, $ 0.2 million and $ 0.4 million, respectively. A summary of the status of the Company’s shares subject to unvested options is presented below: 76 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Fiscal Year Ended June 30, 2021 Options Weighted Average Exercise Price Weighted Average Grant Date Fair Value Unvested, beginning of year 34,914 $ 34.19 $ 10.58 Granted 640,782 25.09 9.01 Vested ( 32,371 ) 34.17 10.58 Canceled or forfeited ( 9,743 ) 26.89 8.84 Unvested, end of year 633,582 $ 25.10 $ 9.02 As of June 30, 2021, there was approximately $ 4.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans in the form of stock options. This cost is expected to be recognized over a weighted-average period of 1.37 years. The total fair value of options vested during the fiscal years ended June 30, 2021, 2020 and 2019 is $ 0.3 million, $ 0.7 million and $ 1.1 million, respectively. The following table summarizes information about stock options outstanding and exercisable as of June 30, 2021: Options Outstanding Options Exercisable Range of Exercise Prices Shares Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 22.27 - $ 26.38 490,757 9.38 24.51 — — $ 26.38 - $ 30.49 142,825 9.40 27.14 — — $ 30.49 - $ 34.60 113,869 5.08 34.11 113,869 34.11 $ 34.60 - $ 38.71 208,669 4.84 37.71 208,669 37.71 $ 38.71 - $ 42.82 279,449 3.02 41.82 279,449 41.83 1,235,569 6.74 $ 31.84 601,987 $ 38.94 The Company issues shares to satisfy the exercise of options. Restricted Stock Grants of Restricted Shares During the fiscal year ended June 30, 2021, the Company granted 419,227 shares of restricted stock to employees and non-employee directors, all of which were issued in the form of RSUs: Fiscal Year Ended June 30, 2021 Shares granted Date granted Grant date fair value Vesting period Employees Certain employees based on performance 224,409 November 12, 2020 $ 24.26 Annually over 3 years Certain employees based on performance 123,636 November 19, 2020 $ 24.68 Annually over 3 years Certain employee based upon hire 27,482 March 1, 2021 $ 29.11 Annually over 3 years Non-Employee Directors Certain Directors 43,700 November 19, 2020 $ 24.68 6 months A summary of the status of the Company’s outstanding restricted stock is presented below: 77 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Fiscal Year Ended June 30, 2021 Shares Weighted-Average Grant Date Fair Value Outstanding, beginning of year 438,456 $ 35.98 Granted during the period 419,227 24.75 Vested during the period ( 163,146 ) 31.89 Cancelled, forfeited, or expired during the period ( 156,554 ) 35.47 Outstanding, end of year 537,983 $ 27.12 As of June 30, 2021, there was approximately $ 10.8 million of unrecognized compensation cost related to unvested restricted stock awards and restricted stock units granted, which is expected to be recognized over a weighted-average period of 1.21 years. The Company withheld 39,704 shares for income taxes during the fiscal year ended June 30, 2021. (13) Employee Benefit Plans The Company maintains defined contribution plans that cover all employees located in the United States that meet certain eligibility requirements and provides a matching contribution equal to one-half of each participant’s contribution, up to a maximum matching contribution per participant of $ 800 . Employer contributions are vested based upon tenure over a five-year period. Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Matching contributions $ 1,262 $ 1,214 $ 1,262 Discretionary contributions — — 1,536 Total contributions $ 1,262 $ 1,214 $ 2,798 Internationally, the Company contributes to either plans required by local governments or to various employee annuity plans. Additionally, the Company maintains a non-qualified, unfunded deferred compensation plan that allows eligible members of management to defer a portion of their compensation in addition to receiving discretionary matching contributions from the Company. Employer contributions are vested over a five-year period. (14) Income Taxes In the fourth quarter of the fiscal year ended June 30, 2021, following a review of its operations, liquidity and funding, tax implications of cash repatriation and investment opportunities, the Company determined that the ability to access the earnings of foreign earnings that were previously indefinitely reinvested could provide greater investment returns and meet other working capital needs if available to repatriate to the U.S. Accordingly, in the quarter ended June 30, 2021, the Company withdrew the permanent reinvestment assertion only with respect to all earnings generated by foreign operations. As a result of this change in the permanent reinvestment assertion, the Company considered recording a deferred tax liability related to federal, state and withholding tax and determined that no liability should be recorded. There is no certainty as to the timing of the distribution of such earnings to the U.S. in whole or in part. Income tax expense (benefit) consists of: 78 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Current: Federal $ 9,132 $ 13,892 $ 18,223 State 1,261 3,244 4,459 Foreign 874 1,188 ( 2,342 ) Total current 11,267 18,324 20,340 Deferred: Federal 207 ( 8,526 ) ( 4,913 ) State ( 1,297 ) ( 2,667 ) ( 945 ) Foreign 1,969 320 4,296 Total deferred 879 ( 10,873 ) ( 1,562 ) Provision for income taxes $ 12,146 $ 7,451 $ 18,778 A reconciliation is provided below of the U.S. Federal income tax expense for the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 with the applicable statutory rate of 21%. Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) U.S. statutory rate 21.0 % 21.0 % 21.0 % U.S. Federal income tax at statutory rate $ 12,082 $ ( 15,073 ) $ 17,564 Increase (decrease) in income taxes due to: State and local income taxes, net of Federal benefit 996 1,316 2,864 Tax credits ( 170 ) ( 1,419 ) ( 1,324 ) Valuation allowance 3,472 1,699 57 Effect of varying statutory rates in foreign operations, net 1,051 1,374 1,938 Stock compensation 1,094 41 35 Capitalized acquisition costs — 59 69 Disallowed interest 86 1,639 1,600 Earnings from foreign subsidiaries 124 1,661 50 Net favorable recovery — ( 6,517 ) ( 3,112 ) Losses on dispositions ( 2,897 ) — — Global intangible low taxed income (GILTI) tax ( 45 ) ( 128 ) 365 Non-deductible goodwill impairment — 20,180 — Nontaxable income ( 1,628 ) — ( 822 ) U.S. Tax Reform transition tax — — ( 827 ) Notional interest deduction on net equity ( 568 ) — — Other jurisdictions impact of rate change on deferred taxes — — ( 20 ) Other ( 1,451 ) 2,619 341 Provision for income taxes $ 12,146 $ 7,451 $ 18,778 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below: 79 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 June 30, 2021 2020 (in thousands) Deferred tax assets derived from: Allowance for accounts receivable $ 5,557 $ 6,466 Inventories 5,577 3,226 Nondeductible accrued expenses 8,024 11,109 Net operating loss carryforwards 892 3,083 Tax credits 7,138 6,734 Timing of amortization deduction from goodwill — 12,516 Deferred compensation 7,893 7,247 Stock compensation 2,977 3,034 Capital loss carryforwards 7,633 — Timing of amortization deduction from intangible assets 4,880 4,145 Total deferred tax assets 50,571 57,560 Valuation allowance ( 13,996 ) ( 9,195 ) Total deferred tax assets, net of allowance 36,575 48,365 Deferred tax liabilities derived from: Timing of depreciation and other deductions from building and equipment ( 3,749 ) ( 3,347 ) Timing of amortization deduction from goodwill ( 582 ) ( 7,390 ) Timing of amortization deduction from intangible assets ( 14,345 ) ( 16,882 ) Total deferred tax liabilities ( 18,676 ) ( 27,619 ) Net deferred tax assets $ 17,899 $ 20,746 The components of pretax earnings are as follows: Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Domestic $ 39,511 $ ( 83,517 ) $ 68,675 Foreign 18,024 11,741 14,962 Worldwide pretax earnings $ 57,535 $ ( 71,776 ) $ 83,637 As of June 30, 2021, there were (i) gross net operating loss carryforwards of approximately $ 1.7 million for U.S. federal income tax purposes; (ii) gross state net operating loss carryforwards of approximately $ 7.3 million; (iii) foreign gross net operating loss carryforwards of approximately $ 1.6 million; (iv) state income tax credit carryforwards of approximately $ 2.1 million that began to expire in the 2020 tax year; (v) withholding tax credits of approximately $ 4.9 million; (vi) foreign tax credits of $ 0.2 million, and (vii) gross capital loss carryovers of $ 30.5 million. The Company maintains a valuation allowance of $ 0.6 million for U.S. federal income tax purposes, $ 7.6 million for capital loss carryforwards, $ 0.3 million for foreign net operating losses, a less than $ 0.2 million valuation allowance for state net operating losses, a $ 4.9 million valuation allowance for withholding tax credits, a $ 0.1 million valuation allowance for foreign tax credits, and $ 0.3 million valuation allowance for state income tax credits, where it was determined that, in accordance with ASC 740, it is more likely than not that they cannot be utilized. The Company adopted ASU 2016-09 during fiscal year 2018 which required the Company to recognize excess tax benefits and tax deficiencies as income tax expense or benefit for stock award settlements that were previously recognized as additional paid-in-capital. As a result of these changes, the Company recognized net tax expense of $ 1.1 million for the fiscal year ended June 30, 2021, and less than $ 0.1 million for the fiscal years ended June 30, 2020 and 2019. 80 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 As of June 30, 2021, the Company had gross unrecognized tax benefits of $ 1.1 million, $ 0.9 million of which, if recognized, would affect the effective tax rate. This reflects a decrease of less than $ 0.1 million on a gross basis over the prior fiscal year. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Income Statement. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet. The total amount of interest and penalties accrued, but excluded from the table below, were $ 1.1 million, $ 1.1 million and $ 1.0 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: June 30, 2021 2020 2019 (in thousands) Beginning Balance $ 1,156 $ 1,234 $ 1,703 Additions based on tax positions related to the current year 68 137 69 Reduction for tax positions of prior years ( 103 ) ( 215 ) ( 538 ) Ending Balance $ 1,121 $ 1,156 $ 1,234 A Supplemental Law in Brazil affirms that Brazilian state-provided benefits are not subject to income tax. The Company recorded, discrete to the June 30, 2021 quarter, an income tax benefit of $ 2.8 million related to the confirmation of the recovery of state-provided tax benefits. Discrete to the June 30, 2021 quarter, the Company recorded a tax ben efit of $ 2.1 million for tax exempt income related to nonrecurring cancellation of indebtedness in a subsidiary. The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the United States federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With certain exceptions, the Company is no longer subject to state and local, or non-United States income tax examinations by tax authorities for tax years before June 30, 2016. (15) Leases In accordance with ASC 842, Leases , 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 1 year to 10 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 2024. 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 financial statements at June 30, 2021 and 2020. 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 81 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable. The following table presents amounts recorded on the Condensed Consolidated Balance Sheet related to operating leases at June 30, 2021 and 2020: Operating leases Balance Sheet location June 30, 2021 June 30, 2020 (in thousands) Operating lease right-of-use assets Other non-current assets $ 19,246 $ 23,581 Current operating lease liabilities Accrued expenses and other current liabilities 4,284 4,476 Long-term operating lease liabilities Other long-term liabilities 16,550 20,760 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 fiscal years ended June 30, 2021 and 2020. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less. Fiscal year ended June 30, 2021 2020 (in thousands) Operating lease cost $ 5,256 $ 6,135 Variable lease cost 1,068 1,485 $ 6,324 $ 7,620 Supplemental cash flow information related to the Company's operating leases for the fiscal year ended June 30, 2021 are presented in the table below: Fiscal year ended June 30, 2021 2020 (in thousands) Cash paid for amounts in the measurement of lease liabilities $ 5,456 $ 5,773 Right-of-use assets obtained in exchange for lease obligations — 1,672 The weighted-average remaining lease term and discount rate at June 30, 2021 are presented in the table below: June 30, 2021 Weighted-average remaining lease term 5.22 Weighted-average discount rate 4.11 % The following table presents the maturities of the Company's operating lease liabilities at June 30, 2021: 82 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Operating leases (in thousands) 2022 $ 5,040 2023 4,680 2024 4,158 2025 3,256 2026 2,721 Thereafter 3,269 Total future payments 23,124 Less: amounts representing interest 2,290 Present value of lease payments $ 20,834 (16) Commitments and Contingencies A majority of the Company’s net revenues in fiscal years 2021, 2020 and 2019 were received from the sale of products purchased from the Company’s ten largest suppliers. The Company has entered into written agreements with substantially all of its major suppliers. While the Company’s agreements with most of its suppliers contain standard provisions for periodic renewals, these agreements generally permit termination by either party without cause upon 30 to 120 days' notice. The Company or its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition or results of operations. Capital Projects The Company expects total capital expenditures to range from $ 5.0 million to $ 8.0 million during fiscal year 2022 primarily for rental equipment investments, IT investments and facility improvements. Pre-Acquisition Contingencies 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. There were no deposits into the escrow account and $ 1.1 million was released from the escrow account during the fiscal year ended June 30, 2021. There were no deposits into, or releases from the escrow account for the fiscal year ended June 30, 2020. The amount available after the impact of foreign currency translation, as of June 30, 2021 and 2020, for future pre-acquisition contingency settlements or to be released to the sellers was $ 4.0 million and $ 4.8 million, respectively. The table below summarizes the balances and line item presentation of Network1's pre-acquisition contingencies and corresponding indemnification receivables in the Company's consolidated balance sheet: 83 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 June 30, 2021 June 30, 2020 (in thousands) Assets Prepaid expenses and other assets (current) $ 16 $ 14 Other assets (noncurrent) $ 3,998 $ 3,652 Liabilities Other current liabilities $ 16 $ 14 Other long-term liabilities $ 3,998 $ 3,652 The net decline in the value of pre-acquisition contingencies for Network1 is primarily due to the expiration of the statute of limitations for identified pre-acquisition contingencies. The amount of reasonably possible undiscounted pre-acquisition contingencies as of June 30, 2021 is estimated to range from $ 4.0 million to $ 16.2 million at this time, of which all exposures are indemnifiable under the share purchase agreement. 84 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 (17) Segment Information The Company is a leading provider of technology products and solutions to customers in specialty technology markets. The Company has two reportable segments, based on product, customer and service type. Worldwide Barcode, Networking & Security Segment The Worldwide Barcode, Networking & Security segment includes a portfolio of solutions primarily for enterprise mobile computing, data capture, barcode printing, POS, payments, networking, electronic physical security, cyber security and other technologies. We have business operations within this segment in the United States, Canada and Brazil. We see adjacencies among these technologies in helping our customers develop solutions. Data capture and POS solutions interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling, warehouse management and health care applications. Electronic physical security products include identification, access control, video surveillance, intrusion-related and wireless and networking infrastructure products. Worldwide Communications & Services Segment The Worldwide Communications & Services segment includes a portfolio of solutions primarily for communications technologies and services and includes our Intelisys and intY businesses. We have business operations within this segment in the United States, Canada, Brazil and the UK. These offerings include voice, video conferencing, wireless, data networking, cable, unified communications and collaboration, cloud and technology services. As these solutions come together on IP networks, new opportunities are created to move into adjacent solutions for all vertical markets, such as education, healthcare and government. 85 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 Selected financial information for each business segment is presented below: Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Sales: Worldwide Barcode, Networking & Security $ 2,175,141 $ 2,093,217 $ 2,141,896 Worldwide Communications & Services 975,665 954,517 1,107,903 $ 3,150,806 $ 3,047,734 $ 3,249,799 Depreciation and amortization: Worldwide Barcode, Networking & Security $ 15,557 $ 16,910 $ 17,274 Worldwide Communications & Services 14,923 15,239 12,891 Corporate 3,027 3,179 3,488 $ 33,507 $ 35,328 $ 33,653 Change in fair value of contingent consideration: Worldwide Barcode, Networking & Security $ — $ — $ — Worldwide Communications & Services 516 6,941 15,200 $ 516 $ 6,941 $ 15,200 Operating income: Worldwide Barcode, Networking & Security $ 28,402 $ ( 83,515 ) $ 57,019 Worldwide Communications & Services 44,715 22,548 38,933 Corporate (1) ( 11,634 ) ( 4,000 ) ( 1,218 ) $ 61,483 $ ( 64,967 ) $ 94,734 Capital expenditures: Worldwide Barcode, Networking & Security $ 1,251 $ 3,632 $ 3,660 Worldwide Communications & Services 1,098 2,755 2,133 Corporate 14 — 4 $ 2,363 $ 6,387 $ 5,797 Sales by Geography Category: United States $ 2,854,178 $ 2,787,475 $ 2,949,725 International 310,075 292,600 332,019 Less intercompany sales ( 13,447 ) ( 32,341 ) ( 31,945 ) $ 3,150,806 $ 3,047,734 $ 3,249,799 (1) For the year ended June 30, 2021, the amounts shown above include acquisition, divestiture, and restructuring costs. For the year ended June 30, 2020, the amounts shown above include acquisition and divestiture costs. For the year ended June 30, 2019, the amounts shown above include acquisition costs. 86 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 June 30, 2021 June 30, 2020 (in thousands) Assets: Worldwide Barcode, Networking & Security $ 858,215 $ 875,882 Worldwide Communications & Services 786,241 757,148 Corporate 27,228 59,064 $ 1,671,684 $ 1,692,094 Property and equipment, net by Geography Category: United States $ 39,930 $ 53,083 International 2,906 2,558 $ 42,836 $ 55,641 (18) Accumulated Other Comprehensive Income The components of accumulated other comprehensive loss, net of tax, are as follows: Fiscal Years Ended June 30, 2021 2020 2019 (in thousands) Currency translation adjustment $ ( 93,561 ) $ ( 125,974 ) $ ( 87,913 ) Unrealized loss on fair value of interest rate swap, net of tax ( 4,572 ) ( 6,821 ) ( 2,175 ) Accumulated other comprehensive loss $ ( 98,133 ) $ ( 132,795 ) $ ( 90,088 ) The tax effect of amounts in comprehensive loss reflect a tax expense or benefit as follows: Fiscal years ended June 30, 2021 2020 2019 (in thousands) Tax expense (benefit) $ 2,084 $ 1,025 $ ( 1,117 ) (19) Discontinued Operations On August 20, 2019, the Company announced plans to divest the product distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and the Miami-based export operations, as these businesses have been performing below management's expectations. The Company will continue to operate its digital business in these countries. Management determined that the Company did not have sufficient scale in these markets to maximize our value-added model for product distribution, leading us to focus and invest in our higher-growth, higher margin businesses. Results from the Divestitures were included within each of our reportable segments; Worldwide Barcode, Networking & Security segment and Worldwide Communications & Services segment. During the quarter ended June 30, 2020, the Company recorded a pre-tax loss on sale classification of $ 88.9 million to reduce the carrying value of the Divestitures to its estimate of fair value (the net proceeds received at closing), less estimated costs to sell. As this loss was determined not to be attributable to any individual components in the Divestitures' net assets, it was reflected as a valuation allowance against the total assets of the Divestitures. During the fiscal year ended June 30, 2021, the Company recorded an additional pre-tax loss on disposal group of $ 34.6 million. This loss includes the realization of cumulative translation adjustments of $ 11.6 million for the fiscal year ended June 30, 2021. Additional losses for the fiscal year ended June 30, 2021 are primarily attributable to a reduction in the net proceeds received for the Divestitures. 87 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 The Company finalized the sale of the Latin America businesses, outside of Brazil, on October 30, 2020. The Company also finalized the sale of the Europe and the UK business on November 12, 2020. Total cash received for the sale of divestitures was $ 34.4 million. Major components of net loss from discontinued operations for the years ended June 30, 2021, 2020 and 2019 were as follows: Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Net sales $ 213,373 $ 561,496 $ 623,312 Cost of goods sold 198,512 513,003 563,543 Gross profit 14,861 48,493 59,769 Selling, general and administrative expenses 17,291 53,946 61,574 Depreciation expense — 975 1,127 Intangible amortization expense — 1,403 1,839 Impairment charges — 13,747 — Operating loss ( 2,430 ) ( 21,578 ) ( 4,771 ) Interest expense, net 394 1,399 195 Loss on held for sale classification 34,597 88,923 — Other expense, net 310 1,124 763 Loss from discontinued operations before taxes ( 37,731 ) ( 113,024 ) ( 5,729 ) Income tax (benefit) expense ( 3,137 ) 403 1,533 Net loss from discontinued operations $ ( 34,594 ) $ ( 113,427 ) $ ( 7,262 ) For fiscal year ended June 30, 2020, the Company allocated goodwill to discontinued operations based on relative fair value of the discontinued operations compared to the consolidated reporting units and impaired such goodwill totaling $ 1.0 million for the Worldwide Barcode, Networking & Security segment and $ 7.5 million for the Worldwide Communications & Services segment. Identifiable intangible assets, including customer relationships and distributor agreements, were impaired for discontinued operations totaling $ 5.2 million for fiscal year ended June 30, 2020. The impairment charges are included in net loss from discontinued operations in the Consolidated Income Statements. The major classes of assets and liabilities classified as held-for-sale in the accompanying consolidated balance sheets, were as follows as of June 30, 2021 and 2020: 88 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 June 30, 2021 June 30, 2020 (in thousands) Assets Current assets: Cash and cash equivalents $ — $ 4,970 Accounts receivable, net — 117,200 Inventories, net — 106,779 Prepaid expenses and other current assets — 23,808 Total current assets — 252,757 Property and equipment, net — 1,833 Goodwill — — Identifiable intangible assets, net — — Deferred income taxes — 9,349 Other non-current assets — 6,215 Total assets, before valuation allowance — 270,154 Less: valuation allowance — ( 88,923 ) Total assets, net of valuation allowance (1) $ — $ 181,231 Liabilities Current liabilities: Accounts payable $ — $ 56,098 Accrued expenses and other current liabilities — 14,815 Other taxes payable — 20,378 Short-term borrowings — 3,524 Income tax payable — 1,085 Total current liabilities — 95,900 Borrowings under revolving credit facility — 24,704 Other long-term liabilities — 7,418 Total liabilities (1) $ — $ 128,022 (1) Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company's consolidated balance sheet as of June 30, 2020. The discontinued operations were disposed of during the quarter ended December 31, 2020. Significant non-cash operating items and capital expenditures reflected in the cash flows from discontinued operations for the fiscal years ended June 30, 2021, 2020 and 2019 were as follows: Fiscal Year Ended June 30, 2021 2020 2019 (in thousands) Loss on held for sale classification $ 34,597 $ 88,923 $ — Impairment charges — 13,747 — Depreciation and amortization — 2,378 2,966 Capital expenditures ( 58 ) ( 77 ) ( 1,416 ) (20) Restructuring 89 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2021 In July 2020, as part of a strategic review of organizational structure and operations, the Company announced a global cost reduction and restructuring program. These actions were designed to better align the cost structure for the wholesale distribution business with lower sales volumes as a result of the COVID-19 pandemic. The Company also initiated the closure of its Canpango business, its salesforce implementation and consulting business. There has been limited adoption by the Company's partner community of the services Canpango offers. These actions include entering into severance and termination agreements with employees, legal fees to execute the reduction in force and costs associated with lease terminations. The following table presents the restructuring and severance costs incurred for the fiscal year ended June 30, 2021: Fiscal year ended June 30, 2021 (in thousands) Severance and benefit costs $ 8,824 Other 434 Total restructuring and other charges $ 9,258 For the fiscal year ended June 30, 2021, all restructuring costs are recognized in the Corporate reporting unit and have not been allocated to the Worldwide Communications & Services or Worldwide Barcode, Networking & Security segment. The Company incurred restructuring charges in the prior year that were immaterial to the condensed consolidated financial statements and unrelated to the program described above. Accrued restructuring and severance costs are included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The following table represents activity for the fiscal year ended June 30, 2021: Accrued Expenses (in thousands) Balance at July 1, 2020 — Charged to expense $ 9,258 Cash payments ( 8,059 ) Balance at June 30, 2021 $ 1,199 The remaining balance as of June 30, 2021 of $ 1.2 million , primarily related to Corporate, is expected to be paid through the first quarter of fiscal year 2022. (21) Subsequent Events Share Repurchases In August 2021, our Board of Directors authorized a $ 100 million share repurchase program. The authorization does not have any time limit. 90 Table of Contents Index to Financial Statements ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.