SCANSOURCE, INC. 10-Q

Item 1. Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share information) September 30, 2021 June 30, 2021 Assets Current assets: Cash and cash equivalents $ 55,491 $ 62,718 Accounts receivable, less allowance of $ 17,620 at September 30, 2021 and $ 19,341 at June 30, 2021 589,532 568,984 Inventories 493,541 470,081 Prepaid expenses and other current assets 117,849 117,860 Total current assets 1,256,413 1,219,643 Property and equipment, net 40,763 42,836 Goodwill 216,948 218,877 Identifiable intangible assets, net 99,496 104,860 Deferred income taxes 21,806 21,853 Other non-current assets 61,925 63,615 Total assets $ 1,697,351 $ 1,671,684 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 602,229 $ 634,805 Accrued expenses and other current liabilities 72,362 87,790 Income taxes payable 9,039 2,501 Current portion of long-term debt 8,785 7,843 Total current liabilities 692,415 732,939 Deferred income taxes 3,846 3,954 Long-term debt, net of current portion 132,171 135,331 Borrowings under revolving credit facility 56,400 — Other long-term liabilities 66,425 68,269 Total liabilities 951,257 940,493 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, 25,528,551 and 25,499,465 shares issued and outstanding at September 30, 2021 and June 30, 2021, respectively 74,817 71,253 Retained earnings 780,144 758,071 Accumulated other comprehensive loss ( 108,867 ) ( 98,133 ) Total shareholders’ equity 746,094 731,191 Total liabilities and shareholders’ equity $ 1,697,351 $ 1,671,684 June 30, 2021 amounts are derived from audited consolidated financial statements. See accompanying notes to these condensed consolidated financial statements. 5 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED) (In thousands, except per share data) Quarter ended September 30, 2021 2020 Net sales $ 857,311 $ 757,342 Cost of goods sold 756,011 676,563 Gross profit 101,300 80,779 Selling, general and administrative expenses 63,582 62,112 Depreciation expense 2,880 3,396 Intangible amortization expense 4,510 4,853 Restructuring and other charges — 8,268 Change in fair value of contingent consideration — 516 Operating income 30,328 1,634 Interest expense 1,660 1,913 Interest income ( 1,026 ) ( 481 ) Other expense, net 263 364 Income before income taxes 29,431 ( 162 ) Provision for income taxes 7,358 ( 47 ) Net income (loss) from continuing operations 22,073 ( 115 ) Net loss from discontinued operations — ( 11,704 ) Net income (loss) $ 22,073 $ ( 11,819 ) Per share data: Net income (loss) from continuing operations per common share, basic $ 0.87 $ ( 0.01 ) Net loss from discontinued operations per common share, basic — ( 0.46 ) Net income (loss) per common share, basic $ 0.87 $ ( 0.47 ) Weighted-average shares outstanding, basic 25,512 25,361 Net income (loss) from continuing operations per common share, diluted $ 0.86 $ ( 0.01 ) Net loss from discontinued operations per common share, diluted — ( 0.46 ) Net income (loss) per common share, diluted $ 0.86 $ ( 0.47 ) Weighted-average shares outstanding, diluted 25,696 25,361 See accompanying notes to these condensed consolidated financial statements. 6 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Quarter ended September 30, 2021 2020 Net income (loss) $ 22,073 $ ( 11,819 ) Unrealized gain on hedged transaction, net of tax 413 109 Foreign currency translation adjustment ( 11,147 ) 3,511 Comprehensive income (loss) $ 11,339 $ ( 8,199 ) See accompanying notes to these condensed consolidated financial statements. 7 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands, except share information) Common Stock (Shares) Common Stock (Amount) Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2021 25,499,465 $ 71,253 $ 758,071 $ ( 98,133 ) $ 731,191 Net income — — 22,073 — 22,073 Unrealized gain on hedged transaction, net of tax — — — 413 413 Foreign currency translation adjustment — — — ( 11,147 ) ( 11,147 ) Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 29,086 994 — — 994 Share-based compensation — 2,570 — — 2,570 Balance at September 30, 2021 25,528,551 $ 74,817 $ 780,144 $ ( 108,867 ) $ 746,094 See accompanying notes to these condensed consolidated financial statements. 8 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands, except share information) Common Stock (Shares) Common Stock (Amount) Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2020 25,361,298 $ 63,765 $ 747,276 $ ( 132,795 ) $ 678,246 Net loss — — ( 11,819 ) — ( 11,819 ) Unrealized gain on hedged transaction, net of tax — — — 109 109 Foreign currency translation adjustment — — — 3,511 3,511 Share-based compensation — 1,180 — — 1,180 Balance at September 30, 2020 25,361,298 $ 64,945 $ 735,457 $ ( 129,175 ) $ 671,227 See accompanying notes to these condensed consolidated financial statements. 9 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three months ended September 30, 2021 2020 Cash flows from operating activities: Net income (loss) $ 22,073 $ ( 11,819 ) Net loss from discontinued operations — ( 11,704 ) Net income (loss) from continuing operations 22,073 ( 115 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of continuing operations: Depreciation and amortization 7,650 8,710 Amortization of debt issue costs 104 104 Provision for doubtful accounts ( 1,027 ) ( 8 ) Share-based compensation 2,570 1,168 Deferred income taxes ( 183 ) 139 Change in fair value of contingent consideration — 516 Finance lease interest 17 37 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 26,714 ) ( 68,726 ) Inventories ( 25,879 ) 31,155 Prepaid expenses and other assets ( 1,174 ) 2,369 Other non-current assets 691 ( 274 ) Accounts payable ( 26,962 ) 92,419 Accrued expenses and other liabilities ( 14,683 ) 7,827 Income taxes payable 6,558 ( 4,096 ) Net cash (used in) provided by operating activities of continuing operations ( 56,959 ) 71,225 Cash flows from investing activities of continuing operations: Capital expenditures ( 1,090 ) ( 748 ) Net cash used in investing activities of continuing operations ( 1,090 ) ( 748 ) Cash flows from financing activities of continuing operations: Borrowings on revolving credit, net of expenses 526,637 477,381 Repayments on revolving credit, net of expenses ( 470,237 ) ( 545,095 ) Borrowings on long-term debt, net ( 2,218 ) ( 2,214 ) Repayments of finance lease obligations ( 316 ) ( 327 ) Exercise of stock options 994 — Net cash provided by (used in) financing activities of continuing operations 54,860 ( 70,255 ) 10 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), continued (In thousands) Cash flows from discontinued operations: Net cash flows provided by operating activities of discontinued operations — 31,853 Net cash flows used in by investing activities of discontinued operations — ( 36 ) Net cash flows used in financing activities of discontinued operations — ( 9,488 ) Net cash flows provided by discontinued operations — 22,329 Effect of exchange rate changes on cash and cash equivalents ( 4,038 ) ( 1,439 ) (Decrease) increase in cash and cash equivalents ( 7,227 ) 21,112 Cash and cash equivalents at beginning of period 62,718 34,455 Cash and cash equivalents at end of period 55,491 55,567 Cash and cash equivalents of discontinued operations — 5,678 Cash and cash equivalents of continuing operations $ 55,491 $ 49,889 See accompanying notes to these condensed consolidated financial statements. 11 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Business and Summary of Significant Accounting Policies Business Description ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “ScanSource”) is a leading hybrid distributor accelerating growth for partners across hardware, software, connectivity and cloud. The Company brings technology solutions and services from the world’s leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, 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 Company's two operating segments, Specialty Technology Solutions and Modern Communications & Cloud, are based on product and customer type. Segment Changes During the quarter ended September 30, 2021, the Company renamed its operating segments to Specialty Technology Solutions, formerly Worldwide Barcode, Networking & Security, and Modern Communications & Cloud, formerly Worldwide Communications & Services. The Company made changes to the segments to align technologies with its hybrid distribution strategy across hardware, software, connectivity and cloud. The Company moved some North American business with communications and collaboration solutions to the Modern Communications & Cloud segment. With this change, all of the Company's communications and collaboration business is in the Modern Communications & Cloud segment. This technology alignment better represents the operating and financial performance information provided to the Company's Chief Operating Decision Maker. The Company has reclassified certain prior year amounts in the segment results to conform with current year presentation. These reclassifications had no effect on the condensed consolidated financial results. See Note 10 - Segment Information for descriptions of the Company's segments. 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 its employees, where possible, to a fully remote working environment. The Company also deployed teams to monitor the evolving situation and recommend risk mitigation actions. 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 the Company's suppliers' businesses and sales partners' businesses. The negative impacts to net sales from the pandemic, including declines in customer demand and supply chain disruptions, began to recover throughout fiscal year 2021. While the Company is unable to predict the ultimate impact that COVID-19 will have on its business, certain technologies have benefited from the widespread adoption of work-from-home, as well as the accelerated shift to digitize and automate processes. The Company continues to incur 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 in the Company's form 10-K for fiscal year 2021. Basis of Presentation 12 Table of Contents The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("U.S. GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position at September 30, 2021 and June 30, 2021, the results of operations for the quarters ended September 30, 2021 and 2020, the statements of comprehensive income for the quarters ended September 30, 2021 and 2020, the statements of shareholders' equity for the quarters ended September 30, 2021 and 2020 and the statements of cash flows for the three months ended September 30, 2021 and 2020. The results of operations for the quarters ended September 30, 2021 and 2020 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021. Unless otherwise indicated, disclosures provided in the Notes pertain to continuing operations only. Summary of Significant Accounting Policies There have been no material changes to the Company’s significant accounting policies for the three months ended September 30, 2021 from the policies described in the notes to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2021. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021. 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 $ 19.9 million and $ 14.3 million are included in accounts payable on the condensed consolidated balance sheets at September 30, 2021 and June 30, 2021, respectively. Long-lived Assets The Company presents depreciation expense and intangible amortization expense on the Condensed Consolidated Income Statements. The Company's depreciation expense related to selling, general and administrative costs totaled $ 2.9 million for the quarter ended September 30, 2021 and $ 3.4 million for the quarter ended September 30, 2020. Depreciation expense reported as part of cost of goods sold on the Condensed Consolidated Income Statements totaled $ 0.3 million for the quarter ended September 30, 2021 and $ 0.5 million for the quarter ended September 30, 2020. The Company's intangible amortization expense reported on the Condensed Consolidated Income Statements relates to selling, general and administrative costs, not the cost of selling goods. Intangible amortization expense totaled $ 4.5 million for the quarter ended September 30, 2021 and $ 4.9 million for the quarter ended September 30, 2020. Recent Accounting Pronouncements The Company has reviewed newly issued accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on its consolidated financial statements as a result of future adoption. (2) 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 13 Table of Contents are evaluated on an individual basis. Estimates of expected credit losses on trade receivables over the contractual life are recorded at inception. The changes in the allowance for doubtful accounts for the three months ended September 30, 2021 are set forth in the table below. June 30, 2021 Amounts Charged to Expense Write-offs Other (1) September 30, 2021 (in thousands) Trade accounts and current notes receivable allowance $ 19,341 $ ( 1,027 ) $ ( 763 ) $ 69 $ 17,620 (1) "Other" amounts include recoveries and the effect of foreign currency fluctuations for the three months ended September 30, 2021. (3) Revenue Recognition The Company provides technology solutions and services from the world's 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. 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 non-physical products. Principal versus Agent Considerations The Company is the principal for sales of all hardware, certain software and 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. The Intelisys business operates under an agency model. Variable Considerations For certain transactions, products are sold with a right of return and may also provide other rebates or incentives, which are accounted for as variable consideration. The Company estimates 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 or the most likely amount 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 14 Table of Contents where control has not yet passed to the customer. These amounts are immaterial to the consolidated financial statements for the periods presented. Disaggregation of Revenue The following tables represent the Company's disaggregation of revenue: Quarter ended September 30, 2021 (in thousands) Specialty Technology Solutions Modern Communications & Cloud Total Revenue by product/service: Hardware, software and cloud (excluding Intelisys) $ 501,711 $ 338,248 $ 839,959 Intelisys connectivity and cloud — 17,352 17,352 $ 501,711 $ 355,600 $ 857,311 Quarter ended September 30, 2020 (in thousands) Specialty Technology Solutions Modern Communications & Cloud Total Revenue by product/service: Hardware, software and cloud (excluding Intelisys) $ 408,777 $ 333,308 $ 742,085 Intelisys connectivity and cloud — 15,257 15,257 $ 408,777 $ 348,565 $ 757,342 (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. 15 Table of Contents Quarter ended September 30, 2021 2020 (in thousands, except per share data) Numerator: Net income (loss) from continuing operations $ 22,073 $ ( 115 ) Net loss from discontinued operations — ( 11,704 ) Net income (loss) $ 22,073 $ ( 11,819 ) Denominator: Weighted-average shares, basic 25,512 25,361 Dilutive effect of share-based payments 184 — Weighted-average shares, diluted 25,696 25,361 Net income from continuing operations per common share, basic $ 0.87 $ ( 0.01 ) Net loss from discontinued operations per common share, basic — ( 0.46 ) Net income (loss) per common share, basic $ 0.87 $ ( 0.47 ) Net income (loss) from continuing operations per common share, diluted $ 0.86 $ ( 0.01 ) Net loss from discontinued operations per common share, diluted — ( 0.46 ) Net income (loss) per common share, diluted $ 0.86 $ ( 0.47 ) For the quarters ended September 30, 2021 and September 30, 2020, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 590,557 and 1,063,840 , respectively. (5) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss consists of the following: September 30, 2021 June 30, 2021 (in thousands) Foreign currency translation adjustment $ ( 104,708 ) $ ( 93,561 ) Unrealized loss on hedged transaction, net of tax ( 4,159 ) ( 4,572 ) Accumulated other comprehensive loss $ ( 108,867 ) $ ( 98,133 ) The tax effect of amounts in comprehensive loss (income) reflect a tax expense or (benefit) as follows: Quarter ended September 30, 2021 2020 (in thousands) Tax expense (benefit) $ 284 $ 184 (6) Goodwill and Other Identifiable Intangible Assets The changes in the carrying amount of goodwill for the three months ended September 30, 2021, by reporting segment, are set forth in the table below. 16 Table of Contents Specialty Technology Solutions Modern Communications & Cloud Total (in thousands) Balance at June 30, 2021 $ 16,370 $ 202,507 $ 218,877 Foreign currency translation adjustment — ( 1,929 ) ( 1,929 ) Balance at September 30, 2021 $ 16,370 $ 200,578 $ 216,948 The following table shows changes in the amount recognized for net identifiable intangible assets for the three months ended September 30, 2021. Net Identifiable Intangible Assets (in thousands) Balance at June 30, 2021 $ 104,860 Additions — Reductions — Amortization expense ( 4,510 ) Foreign currency translation adjustment ( 854 ) Balance at September 30, 2021 $ 99,496 (7) Short-Term Borrowings and Long-Term Debt The following table presents the Company’s debt at September 30, 2021 and June 30, 2021. September 30, 2021 June 30, 2021 (in thousands) Current portion of long-term debt $ 8,785 $ 7,843 Mississippi revenue bond, net of current portion 3,733 4,081 Senior secured term loan facility, net of current portion 128,438 131,250 Borrowings under revolving credit facility 56,400 — Total debt $ 197,356 $ 143,174 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 (the “Amended Credit Agreement”). 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, 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. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility. At the Company's option, loans 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 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. 17 Table of Contents Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65 % of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement. Under the terms of the revolving credit facility, the payment of cash dividends is restricted. The spread in effect as of September 30, 2021 was 1.25 % for LIBOR-based loans and 0.25 % for alternate base rate loans. The commitment fee rate in effect at September 30, 2021 was 0.20 %. The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 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 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. The Company was in compliance with all covenants under the credit facility at September 30, 2021. The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the three month period ended September 30, 2021 was $ 54.4 million. Including borrowings for both continuing and discontinued operations, the average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the three months ended September 30, 2020 was $ 91.2 million. There was $ 293.6 million and $ 350.0 million available for additional borrowings as of September 30, 2021 and June 30, 2021, respectively. There were no letters of credit issued under the multi-currency revolving credit facility at September 30, 2021 or June 30, 2021. Mississippi Revenue Bond On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate 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 fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100 % of the principal amount outstanding. At September 30, 2021, the Company was in compliance with all covenants under this bond. The interest rates at September 30, 2021 and June 30, 2021 were 0.93 % and 0.94 %, respectively. Debt Issuance Costs At September 30, 2021, net debt issuance costs associated with the credit facility and bond totaled $ 1.1 million and are being amortized through the maturity date of each respective debt instrument. (8) 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, euro, British pound and Canadian dollar. The Company had contracts outstanding for purposes of managing cash flows with notional amounts of $ 33.7 million and $ 27.9 million for the exchange of foreign currencies at September 30, 2021 and June 30, 2021, 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 included in the Condensed Consolidated Income Statements for the quarters ended September 30, 2021 and 2020 are as follows: 18 Table of Contents Quarter ended September 30, 2021 2020 (in thousands) Net foreign exchange derivative contract (gains) losses $ ( 1,651 ) $ 95 Net foreign currency transactional and re-measurement losses 2,136 343 Net foreign currency exchange losses $ 485 $ 438 Net foreign currency exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses and are included in other income and expense. Foreign currency exchange gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, British pound versus the euro 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 the quarters ended September 30, 2021 and 2020. The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive Income for the quarters ended September 30, 2021 and 2020, are as follows: Quarter ended September 30, 2021 2020 (in thousands) Net interest expense recognized as a result of interest rate swap $ 580 $ 560 Unrealized loss in fair value of interest rate swap ( 15 ) ( 402 ) Net increase in accumulated other comprehensive income 565 158 Income tax effect 152 49 Net increase in accumulated other comprehensive income, net of tax $ 413 $ 109 The Company used the following derivative instruments at September 30, 2021 and June 30, 2021, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above: 19 Table of Contents September 30, 2021 June 30, 2021 Balance Sheet Location Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments (in thousands) Derivative assets: Foreign exchange contracts Prepaid expenses and other current assets $ — $ 5 $ — $ — Foreign currency hedge Prepaid expenses and other current assets $ 268 $ — $ 187 $ — Derivative liabilities: Foreign exchange contracts Accrued expenses and other current liabilities $ — $ — $ — $ 5 Interest rate swap agreement Other long-term liabilities $ 5,675 $ — $ 6,280 $ — 20 Table of Contents (9) 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 classifies certain assets and liabilities based on the fair value hierarchy, which aggregates fair value measured assets and liabilities based upon the following levels of inputs: • Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; • Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and • Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The assets and liabilities maintained by the Company that are required to be measured or disclosed at fair value on a recurring basis include the Company’s various debt instruments, deferred compensation plan investments, outstanding forward foreign currency exchange contracts, interest rate swap agreements and contingent consideration owed to the previous owners of Intelisys. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to a variable rate using the market approach (Level 2). The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at September 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 $ 29,883 $ 29,883 $ — $ — Forward foreign currency exchange contracts 5 — 5 — Foreign currency hedge 268 — 268 — Total assets at fair value $ 30,156 $ 29,883 $ 273 $ — Liabilities: Deferred compensation plan investments, current and non-current portion $ 29,883 $ 29,883 $ — $ — Interest rate swap agreement 5,675 — 5,675 — Total liabilities at fair value $ 35,558 $ 29,883 $ 5,675 $ — The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at June 30, 2021: 21 Table of Contents 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 investments in the deferred compensation plan are held in a "rabbi trust" and include mutual funds and cash equivalents for payment of non-qualified benefits for certain retired, terminated and active employees. These investments are recorded to prepaid expenses and other current assets or other non-current assets depending on their corresponding, anticipated distribution dates to recipients, which are reported in accrued expenses and other current liabilities or other long-term liabilities, respectively. Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including LIBOR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Condensed Consolidated Balance Sheets as prepaid expenses and other non-current assets or accrued expenses and other long-term liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 9 - Derivatives and Hedging Activities . The Company recorded a contingent consideration liability at the acquisition date of Intelisys representing the amounts payable to former shareholders, as outlined under the terms of the purchase agreements, based upon the achievement of a projected earnings measure, net of specific pro forma adjustments. The current and non-current portions of these obligations are reported separately on the Condensed 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 Condensed Consolidated Income Statements. 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 quarter ended September 30, 2020. Quarter ended September 30, 2020 Modern Communications & Cloud (in thousands) Fair value at beginning of period $ 46,334 Change in fair value of contingent consideration 516 Fair value at end of period $ 46,850 22 Table of Contents The fair values of amounts owed are recorded in current portion of contingent consideration in the Company’s Condensed 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 Condensed Consolidated Income Statements 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 markets. Intelisys The final earnout payment due to the former owners of Intelisys was paid in October 2020. The Company recognized $ 0.5 million in expense from the change in fair value of the contingent consideration in the Condensed Consolidated Income Statement for the quarter ended September 30, 2020. The change in fair value for the prior-year quarter is due to the recurring amortization of the unrecognized fair value discount. (10) Segment Information The Company is a leading provider of technology solutions and services to customers in specialty technology markets. The Company has two reportable segments, based on product and customer type. Specialty Technology Solutions Segment The Specialty Technology Solutions segment includes the Company’s business in automatic identification and data capture (“AIDC”), point of sale (“POS”), payments, security, and networking technologies. AIDC solutions include mobile computing, barcode scanners and imagers, radio frequency identification devices (“RFID”), barcode printing, and services. POS and payments solutions include POS systems, integrated POS software platforms, self-service kiosks including self-checkout, payment terminals, and mobile payment devices. Security solutions include video surveillance and analytics, video management software, and access control. Networking solutions include switching, routing, and wireless products and software. The Company has business operations within this segment in the United States, Canada, and Brazil. Modern Communications & Cloud Segment The Modern Communications & Cloud segment includes the Company’s business in communications and collaboration, connectivity, and cloud services. Communications and collaboration solutions, delivered in the cloud, on-premise, or hybrid, include voice, video, integration of communication platforms, and contact center solutions. The Intelisys connectivity and cloud marketplace offers telecom, cable, Unified Communications as a Service (“UCaaS”), Contact Center as a Service (“CCaaS”), Infrastructure as a Service (“IaaS”), Software-Defined Wide-Area Network (“SD-WAN”), and other cloud services.This segment includes SaaS and subscription services, which the Company offers using digital tools and platforms. The Company has business operations within this segment in the United States, Canada, Brazil and the UK. Selected financial information for each business segment is presented below: 23 Table of Contents Quarter ended September 30, 2021 2020 (in thousands) Sales: Specialty Technology Solutions $ 501,711 $ 408,777 Modern Communications & Cloud 355,600 348,565 $ 857,311 $ 757,342 Depreciation and amortization: Specialty Technology Solutions $ 2,969 $ 3,545 Modern Communications & Cloud 3,962 4,370 Corporate 719 795 $ 7,650 $ 8,710 Change in fair value of contingent consideration: Modern Communications & Cloud — 516 $ — $ 516 Operating income: Specialty Technology Solutions $ 14,104 $ 1,684 Modern Communications & Cloud 16,307 8,716 Corporate (1) ( 83 ) ( 8,766 ) $ 30,328 $ 1,634 Capital expenditures: Specialty Technology Solutions $ ( 117 ) $ ( 283 ) Modern Communications & Cloud ( 973 ) ( 465 ) $ ( 1,090 ) $ ( 748 ) Sales by Geography Category: United States and Canada $ 771,642 $ 691,080 International 87,812 73,739 Less intercompany sales ( 2,143 ) ( 7,477 ) $ 857,311 $ 757,342 (1) For the quarter ended September 30, 2021, the amounts shown above include divestiture costs. For the quarter ended September 30, 2020, the amounts shown above include restructuring and divestiture costs. September 30, 2021 June 30, 2021 (in thousands) Assets: Specialty Technology Solutions $ 798,750 $ 775,704 Modern Communications & Cloud 876,893 868,752 Corporate 21,708 27,228 $ 1,697,351 $ 1,671,684 Property and equipment, net by Geography Category: United States and Canada $ 37,549 $ 39,930 International 3,214 2,906 $ 40,763 $ 42,836 (11) Leases 24 Table of Contents In accordance with ASC 842, at contract inception the Company determines if a contract contains a lease by assessing whether the contract contains an identified asset and whether the Company has the ability to control the asset. The Company also determines if the lease meets the classification criteria for an operating lease versus a finance lease under ASC 842. Substantially all of the Company's leases are operating leases for real estate, warehouse and office equipment ranging in duration from 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 September 30, 2021 and June 30, 2021. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the net present value of future minimum lease payments over the lease term. The Company generally is not able to determine the rate implicit in its leases and has elected to apply an incremental borrowing rate as the discount rate for the present value determination, which is based on the Company's cost of borrowings for the relevant terms of each lease and geographical economic factors. Certain operating lease agreements contain options to extend or terminate the lease. The lease term used is adjusted for these options when the Company is reasonably certain it will exercise the option. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments not based on a rate or index, such as costs for common area maintenance, are expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable. The following table presents amounts recorded on the Condensed Consolidated Balance Sheet related to operating leases at September 30, 2021 and June 30, 2021: Operating leases Balance Sheet location September 30, 2021 June 30, 2021 (in thousands) Operating lease right-of-use assets Other non-current assets $ 18,242 $ 19,246 Current operating lease liabilities Accrued expenses and other current liabilities 4,217 4,284 Long-term operating lease liabilities Other long-term liabilities 15,589 16,550 The following table presents amounts recorded in operating lease expense as part of selling general and administrative expenses on the Condensed Consolidated Income Statements during the quarters ended September 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. Quarter ended September 30, 2021 2020 (in thousands) Operating lease cost $ 1,243 $ 1,356 Variable lease cost 322 310 $ 1,565 $ 1,666 Supplemental cash flow information related to the Company's operating leases for the quarter ended September 30, 2021 and 2020 are presented in the table below: Quarter ended September 30, 2021 2020 (in thousands) Cash paid for amounts in the measurement of lease liabilities $ 1,294 $ 1,394 Right-of-use assets obtained in exchange for lease obligations 362 — 25 Table of Contents The weighted-average remaining lease term and discount rate at September 30, 2021 are presented in the table below: September 30, 2021 Weighted-average remaining lease term 5.00 years Weighted-average discount rate 4.07 % The following table presents the maturities of the Company's operating lease liabilities at September 30, 2021: Operating leases (in thousands) 2022 $ 3,842 2023 4,790 2024 4,284 2025 3,256 2026 2,721 Thereafter 3,269 Total future payments 22,162 Less: amounts representing interest 2,356 Present value of lease payments $ 19,806 (12) Commitments and Contingencies The Company and 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, results of operations or cash flows. The rapid 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 and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on businesses around the world, including the Company’s business, and on global, regional and national economies. The Company is unable at this time to predict the ultimate impact that COVID-19 will have on its business due to the inability to predict the duration or magnitude of the virus' impact. During the Company's due diligence for the Network1 acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company recorded indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as the funds were escrowed as part of the acquisition. The amount available after the impact of foreign currency translation for future pre-acquisition contingency settlements or to be released to the sellers was $ 3.7 million and $ 4.0 million, at September 30, 2021 and June 30, 2021, 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 Condensed Consolidated Balance Sheets at September 30, 2021 and June 30, 2021: September 30, 2021 June 30, 2021 Network1 (in thousands) Assets Prepaid expenses and other current assets $ 14 $ 16 Other non-current assets $ 3,677 $ 3,998 Liabilities Accrued expenses and other current liabilities $ 14 $ 16 Other long-term liabilities $ 3,677 $ 3,998 26 Table of Contents The decrease in pre-acquisition contingencies and corresponding indemnification receivables is due to a slight decrease in the foreign exchange rate of the Brazilian real against the US dollar. (13) Restructuring 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 are 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 had 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 quarters ended September 30, 2021 and 2020: Quarter ended September 30, 2021 Quarter ended September 30, 2020 (in thousands) Severance and benefit costs $ — $ 8,111 Other — 157 Total restructuring and other charges $ — $ 8,268 For the quarter ended September 30, 2020, all restructuring costs were recognized in the Corporate reporting unit and were not allocated to the Modern Communications & Cloud or Specialty Technology Solutions segment. 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 three months ended September 30, 2021: Accrued Expenses (in thousands) Balance at June 30, 2021 $ 1,199 Charged to expense — Cash payments ( 633 ) Balance at September 30, 2021 $ 566 The remaining balance as of September 30, 2021 of $ 0.6 million , primarily related to Corporate, is expected to be paid through the third quarter of fiscal year 2022. (14) Income Taxes Income taxes for the quarters ended September 30, 2021 and 2020 have been included in the accompanying condensed consolidated financial statements using an estimated annual effective tax rate. In addition to applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall tax provision. There were no material discrete items recognized during the quarters ended September 30, 2021 and September 30, 2020. The Company’s effective tax rate of 25.0 % for the quarter ended September 30, 2021 differs from the current federal statutory rate of 21% primarily as a result of income derived from tax jurisdictions with varying income tax rates, nondeductible expenses and state income taxes. The Company's effective tax rate was 29.0 % for the quarter ended September 30, 2020. As of the quarter ended September 30, 2021, the Company is not permanently reinvested with respect to all earnings generated by foreign operations. The Company has determined that there is no material deferred tax liability related to federal, state and withholding tax related to undistributed earnings. There is no certainty to the timing of the distribution of such earnings to the U.S. in whole or in part. 27 Table of Contents The Company had approximately $ 1.1 million of total gross unrecognized tax benefits at September 30, 2021 and June 30, 2021. Of this total at September 30, 2021, approximately $ 0.9 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At September 30, 2021 and June 30, 2021, the Company had approximately $ 1.1 million accrued for interest and penalties. The Company conducts business globally and one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before June 30, 2016. (15) 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 ("Divestitures") as these businesses had been performing below management's expectations. The Company continues to operate its digital business in these countries. Management determined that the Company did not have sufficient scale in these markets to maximize the value-added model for product distribution, leading the Company to focus and invest in its higher-growth, higher-margin businesses. Results from the Divestitures were included within each reportable segment, which includes the Specialty Technology Solutions and Modern Communications & Cloud segments. 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 quarter ended September 30, 2020, the Company recorded an additional pre-tax loss on disposal group of $ 10.7 million. This additional loss was attributable primarily to a reduction in the net proceeds expected to be realized at closing for the Divestitures. The Company signed an agreement on July 23, 2020 with Intcomex for its businesses located in Latin America, outside of Brazil. The Company finalized the sale of the Latin America businesses on October 30, 2020. Th e Company also finalized the sale of the Europe and 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 quarter ended September 30, 2020 were as follows: Quarter ended September 30, 2020 (in thousands) Net sales $ 145,049 Cost of goods sold 134,534 Gross profit 10,515 Selling, general and administrative expenses 10,913 Operating loss ( 398 ) Interest expense, net 125 Loss on disposal group 10,686 Other (income) expense, net 492 Loss from discontinued operations before taxes ( 11,701 ) Income tax expense 3 Net loss from discontinued operations $ ( 11,704 ) There were no assets or liabilities classified as held-for-sale in the accompanying consolidated balance sheets at September 30, 2021 and June 30, 2021. 28 Table of Contents Significant non-cash operating items and capital expenditures reflected in the cash flows from discontinued operations for the three months ended September 30, 2020 were as follows: Three months ended September 30, 2020 (in thousands) Loss on disposal group $ 10,686 Capital expenditures ( 36 ) 29 Table of Contents