What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-08 compared with 2021-11-09 · 228 added, 100 removed, 263 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

ScanSource is a leading hybrid distributor accelerating growth for partners across hardware, software, connectivity and cloud.

We provide technology solutions and services from more than 500 leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration (UCaaS, CCaaS), telecom and cloud services to our 30,000-plus sales partners located in the United States, Canada, Brazil, the UK and Europe.

ScanSource is a leading hybrid distributor connecting devices to the cloud and accelerating growth for partners across hardware, software, connectivity and cloud.

We provide technology solutions and services from more than 500 leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration (UCaaS, CCaaS), telecom and cloud services to our more than 30,000 sales partners located in the United States, Canada, Brazil, the UK and Europe.

We operate our business under a management structure that enhances our technology focus and hybrid distribution growth strategy.

During the quarter ended September 30, 2021, we renamed our operating segments and aligned technologies with our hybrid distribution growth strategy by moving some North American business with communications and collaborations solutions to the Modern Communications & Cloud segment.

Our segments each operate in the United States, Canada, Brazil and the UK:

• Specialty Technology Solutions, formerly Worldwide Barcode, Networking & Security

• Modern Communications & Cloud, formerly Worldwide Communications & Services

During the quarter ended September 30, 2021, we aligned technologies with our hybrid distribution growth strategy and renamed our operating segments.

With this change, we moved some North American business with communications and collaborations solutions to the Modern Communications & Cloud segment.

Our segments operate in the United States, Canada, Brazil and the UK:

• Specialty Technology Solutions

• Modern Communications & Cloud

We sell hardware, software, connectivity and cloud solutions and services through channel partners to end-customers.

We operate distribution facilities that support our United States and Canada business in Mississippi, California, and Kentucky.

Brazil distribution facilities are located in the Brazilian states of Parana, Espirito Santo and Santa Catarina.

Brazil distribution facilities are located in the Brazilian states of Paraná, Espirito Santo and Santa Catarina.

We provide some of our digital products, which include Software as a Service (“SaaS”) and subscriptions, through our digital tools and platforms.

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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 pandemic and these containment measures have had a substantial impact on businesses around the world and on global, regional and national economies.

The pandemic and these containment measures have had a substantial impact on businesses around the world and on global, regional and national economies, including labor shortages and heightened supply chain challenges, along with an increase in e-commerce.

More scheduled deals in this quarter pushed out as a result of the supply constrained environment.

We cannot predict the continued impact of the pandemic, including the impact of the proposed U.S.

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We rely on a channel sales model using a hybrid distribution strategy to offer hardware, software, connectivity and cloud from leading technology suppliers to sales partners that solve end customers' challenges.

ScanSource enables sales partners to deliver solutions for their customers to address changing end-customer buying and consumption patterns.

Through our digital tools and platforms, we offer customers SaaS and subscription services from leading technology suppliers.

While we do not manufacture products, we provide technology solutions and services from leading technology suppliers.

Our solutions may include a combination of

offerings from multiple suppliers or give our sales partners access to additional services, such as custom configuration, key injection, integration support, custom development and other services.

Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services, such as custom configuration, key injection, integration support, custom development and other services.

We also offer the flexibility of on-premise, cloud and hybrid solutions.

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Results of Operations

The following tables summarize our net sales results by technology segment and by geographic location for the quarters ended September 30, 2021 and 2020:

Quarter ended September 30, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)

The following tables summarize our net sales results by technology segment and by geographic location for the quarters and six months ended December 31, 2021 and 2020:

Quarter ended December 31, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)

Net Sales by Segment:

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Total net sales $ 864,351 $ 810,897 $ 53,454 6.6 % 7.0 %

Six months ended December 31, % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)

2021 2020 $ Change % Change

(in thousands)

Specialty Technology Solutions $ 998,630 $ 864,026 $ 134,604 15.6 % 15.6 %

Modern Communications & Cloud 723,032 704,212 18,820 2.7 % 2.7 %

Total net sales $ 1,721,662 $ 1,568,238 $ 153,424 9.8 % 9.8 %

(a) A reconciliation of non-GAAP net sales in constant currency is presented at the end of Results of Operations , under Non-GAAP Financial Information.

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The Specialty Technology Solutions segment consists of sales to customers in North America and Brazil.

For the quarter ended September 30, 2021, net sales for the Specialty Technology Solutions segment increased $92.9 million, or 22.7%, compared to the prior-year quarter.

Excluding the foreign exchange negative impact, adjusted net sales increased $92.5 million, or 22.6%, for the quarter ended September 30, 2021 compared to the prior-year quarter.

The increase in net sales and adjusted net sales is primarily due to broad-based growth across our technologies in North America.

For the quarter and six months ended December 31, 2021, net sales for the Specialty Technology Solutions segment increased $41.7 million, or 9.2%, and $134.6 million, or 15.6%, respectively, compared to the prior-year periods.

Excluding the foreign exchange negative impact, adjusted net sales increased $42.7 million, or 9.4%, for the quarter ended December 31, 2021 and $135.1 million, or 15.6% for the six months ended December 31, 2021 compared to the prior-year periods.

The increase in net sales and adjusted net sales for the quarter and six months periods is primarily due to broad-based demand growth across our technologies in North America.

Modern Communications & Cloud

The Modern Communications & Cloud segment consists of sales to customers in North America, Brazil, Europe and the UK.

For the quarter ended September 30, 2021, net sales increased $7.0 million, or 2.0% compared to the prior-year quarter.

Excluding the foreign exchange negative impact, adjusted net sales for the quarter ended September 30, 2021 increased $5.1 million, or 1.5% from the prior-year quarter.

For the quarter ended December 31, 2021, net sales increased $11.8 million, or 3.3% compared to the prior-year quarter.

Excluding the foreign exchange negative impact, adjusted net sales for the quarter ended December 31, 2021 increased $13.7 million, or 3.9%, from the prior-year quarter.

The increase in net sales and adjusted net sales reflects the shift to cloud and subscriptions.

For the Intelisys business, first quarter 2022 net sales increased 13.7% year-over-year.

Quarter ended September 30, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)

For the Intelisys business, second quarter 2022 net sales increased 14.1% year-over-year.

For the six months ended December 31, 2021, net sales and adjusted net sales increased $18.8 million, or 2.7%, primarily from increases in sales volume in Brazil.

Quarter ended December 31, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a)

Net Sales by Geography:

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Total net sales $ 864,351 $ 810,897 $ 53,454 6.6 % 7.0 %

Six months ended December 31, % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)

2021 2020 $ Change % Change

(in thousands)

United States and Canada $ 1,543,431 $ 1,403,607 $ 139,824 10.0 % 10.0 %

International 178,231 164,631 13,600 8.3 % 8.6 %

Total net sales $ 1,721,662 $ 1,568,238 $ 153,424 9.8 % 9.8 %

(a) A reconciliation of non-GAAP net sales in constant currency is presented at the end of Results of Operations in the non-GAAP section.

The following tables summarize our gross profit for the quarters ended September 30, 2021 and 2020:

Quarter ended September 30, % of Net Sales September 30,

The following tables summarize our gross profit for the quarters and six months ended December 31, 2021 and 2020:

Quarter ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

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Gross profit $ 107,925 $ 86,043 $ 21,882 25.4 % 12.5 % 10.6 %

Six months ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

(in thousands)

Specialty Technology Solutions $ 97,742 $ 73,277 $ 24,465 33.4 % 9.8 % 8.5 %

Gross profit dollars and gross profit margin for the Specialty Technology Solutions segment increased for the quarter ended September 30, 2021, primarily from increased sales volume, a higher margin sales mix and higher vendor program recognition, respectively, compared to the prior-year quarter.

Modern Communications & Cloud 111,483 93,546 17,937 19.2 % 15.4 % 13.3 %

Gross profit dollars and gross profit margin increased for the Modern Communications & Cloud segment for the quarter ended September 30, 2021, primarily from a higher sales volume and higher margin sales mix, respectively, compared to the prior-year quarter.

Gross profit $ 209,225 $ 166,823 $ 42,402 25.4 % 12.2 % 10.6 %

Specialty Technology Solutions

Gross profit dollars and gross profit margin for the Specialty Technology Solutions segment increased for the quarter and six months ended December 31, 2021, primarily from higher sales volume, sales mix and higher supplier sales incentives, compared to the prior-year periods.

Modern Communications & Cloud

Gross profit dollars and gross profit margin increased for the Modern Communications & Cloud segment for the quarter and six months ended December 31, 2021, primarily from higher sales volume and sales mix, compared to the prior-year periods.

Operating Expenses

The following tables summarize our operating expenses for the quarters ended September 30, 2021 and 2020:

Quarter ended September 30, % of Net Sales September 30,

The following tables summarize our operating expenses for the quarters and six months ended December 31, 2021 and 2020:

Quarter ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

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Intangible amortization expense 4,447 4,862 (415) (8.5) % 0.5 % 0.6 %

Restructuring and other charges — 8,268 (8,268) *nm 0.0 % 1.1 %

Change in fair value of contingent consideration — 516 (516) *nm 0.0 % 0.1 %

Restructuring and other charges — 484 (484) (100.0) % 0.0 % 0.1 %

Operating expenses $ 76,427 $ 68,913 $ 7,514 10.9 % 8.8 % 8.5 %

*nm - percentages are not meaningful

Selling, general and administrative expenses ("SG&A") increased $1.5 million, or 2.4%, for the quarter ended September 30, 2021 compared to the prior-year quarter.

The increase is attributable to higher employee costs, partially offset by lower bad debt expense.

Restructuring and other charges incurred of $8.3 million for the quarter ended September 30, 2020 primarily relate to employee severance and benefit costs in connection with our expense reduction plan implemented at the end of July 2020.

For the quarter ended September 30, 2020, we recorded a $0.5 million expense from change in fair value of contingent consideration, all of which relates to Intelisys.

Six months ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

(in thousands)

Selling, general and administrative expenses $ 133,016 $ 122,580 $ 10,436 8.5 % 7.7 % 7.8 %

Depreciation expense 5,427 6,494 (1,067) (16.4) % 0.3 % 0.4 %

Intangible amortization expense 8,956 9,716 (760) (7.8) % 0.5 % 0.6 %

Restructuring and other charges — 8,753 (8,753) (100.0) % 0.0 % 0.6 %

Change in fair value of contingent consideration — 516 (516) (100.0) % 0.0 % 0.0 %

Operating expenses $ 147,399 $ 148,059 $ (660) (0.4) % 8.6 % 9.4 %

Selling, general and administrative expenses ("SG&A") increased $9.0 million and $10.4 million for the quarter and six months ended December 31, 2021, respectively, compared to the prior-year periods.

The increase is attributable to higher employee costs and a charge to bad debt expense.

Restructuring and other charges incurred of $0.5 million and $8.8 million for the quarter and six months ended December 31, 2020, respectively, primarily relate to employee severance and benefit costs in connection with our expense reduction plan implemented at the end of July 2020.

We recorded expense of $0.5 million for the change in fair value of contingent consideration for the six months ended December 31, 2020, all of which relates to Intelisys.

The final Intelisys earnout payment was paid in October 2020.

Operating Income

The following tables summarize our operating income for the quarters ended September 30, 2021 and 2020:

Quarter ended September 30, % of Net Sales September 30,

The following tables summarize our operating income for the quarters and six months ended December 31, 2021 and 2020:

Quarter ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

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Operating income $ 31,498 $ 17,130 $ 14,368 83.9 % 3.6 % 2.1 %

Six months ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

(in thousands)

Specialty Technology Solutions $ 30,655 $ 8,845 $ 21,810 246.6 % 3.1 % 1.0 %

Modern Communications & Cloud 31,201 20,529 10,672 52.0 % 4.3 % 2.9 %

Corporate (30) (10,610) 10,580 nm* nm* nm*

Operating income $ 61,826 $ 18,764 $ 43,062 229.5 % 3.6 % 1.2 %

*nm - percentages are not meaningful

Specialty Technology Solutions

For the Specialty Technology Solutions segment, operating income increased $12.4 million for the quarter ended September 30, 2021, compared to the prior-year quarter.

Operating margin increased to 2.8% for the quarter ended September 30, 2021 compared to 0.4% for the quarter ended September 30, 2020.

The increase in operating income and margin for the quarter is primarily due to higher gross profits.

For the Specialty Technology Solutions segment, operating income increased $9.4 million and $21.8 million for the quarter and six months ended December 31, 2021, respectively, compared to the prior-year period.

Operating margin increased to 3.3% and 3.1% for the quarter and six months ended December 31, 2021, respectively.

The increase in operating income and margin for both the quarter and six month period is primarily due to higher gross profits.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, operating income increased $7.6 million for the quarter ended September 30, 2021, compared to the prior-year quarter.

Operating margin increased to 4.6% for the quarter ended September 30, 2021, compared to 2.5% for the quarter ended September 30, 2020.

The increase in operating income and operating margin for the quarter is primarily due to higher gross profits.

Corporate incurred less than $0.1 million in divestiture expenses for the quarter ended September 30, 2021, compared to $8.8 million in restructuring and divestiture expenses for the quarter ended September 30, 2020.

For the Modern Communications & Cloud segment, operating income increased $3.1 million and $10.7 million for the quarter and six months ended December 31, 2021, respectively, compared to the prior-year periods.

Operating margin increased to 4.1% and 4.3% for the quarter and six months ended December 31, 2021, respectively.

The increase in operating income and operating margin for the quarter and six months is primarily due to higher gross profits.

Corporate recognized a less than $0.1 million gain against divestiture expense for the quarter ended December 31, 2021, compared to $1.4 million divestiture expense incurred in the prior-year quarter.

Corporate also incurred $0.5 million in restructuring expense in the prior-year quarter.

Corporate incurred less than $0.1 million in divestiture expenses for the six months ended December 31, 2021, compared to $1.9 million and $8.8 million in restructuring and divestiture expenses, respectively, for the six months ended December 31, 2020.

Total Other (Income) Expense

The following tables summarize our total other (income) expense for the quarters ended September 30, 2021 and 2020:

Quarter ended September 30, % of Net Sales September 30,

The following tables summarize our total other (income) expense for the quarters and six months ended December 31, 2021 and 2020:

Quarter ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

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Interest income (947) (531) (416) (78.3) % (0.1) % (0.1) %

Net foreign exchange losses (gains) 485 438 47 10.7 % 0.1 % 0.1 %

Net foreign exchange losses 480 381 99 26.0 % 0.1 % 0.0 %

Other, net 63 (260) 323 124.2 % 0.0 % (0.0) %

Total other expense, net $ 1,089 $ 1,386 $ (297) (21.4) % 0.1 % 0.2 %

Six months ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

(in thousands)

Interest expense $ 3,153 $ 3,709 $ (556) (15.0) % 0.2 % 0.2 %

Interest income (1,973) (1,011) (962) 95.2 % (0.1) % (0.1) %

Net foreign exchange losses 966 819 147 17.9 % 0.1 % 0.1 %

Other, net (159) (335) 176 (52.5) % (0.0) % (0.0) %

Total other expense, net $ 1,987 $ 3,182 $ (1,195) (37.6) % 0.1 % 0.2 %

Interest expense consists primarily of interest incurred on borrowings, non-utilization fees charged on the revolving credit facility and amortization of debt issuance costs.

Interest expense decreased for the quarter ended September 30, 2021, compared to the prior-year quarter principally from reduced borrowings on our multi-currency revolving credit facility.

Interest income for the quarter ended September 30, 2021 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents.

Interest income increased for the quarter ended September 30, 2021, compared to the prior-year principally from higher interest earned on cash and cash equivalents in Brazil.

Interest expense decreased for the quarter and six months ended December 31, 2021 compared to the prior-year periods, principally from lower borrowing rates on our multi-currency revolving credit facility due to a more favorable leverage ratio achieved.

Interest income for the quarter and six months ended December 31, 2021 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents.

Interest income increased for the quarter and six months ended December 31, 2021 compared to the prior-year periods, principally from higher interest earned on cash and cash equivalents in Brazil.

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.

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dollar versus the Brazilian real and the Canadian dollar versus the U.S.

partially offset foreign currency exposure with the use of foreign exchange forward contracts to hedge against these exposures.

We partially offset foreign currency exposure with the use of foreign exchange forward contracts to hedge against these exposures.

The costs associated with foreign exchange forward contracts are included in the net foreign exchange losses.

Provision for Income Taxes

For the quarter ended September 30, 2021, income tax expense was $7.4 million reflecting an effective tax rate of 25.0%.

In comparison, for the quarter ended September 30, 2020, income tax expense totaled less than $0.1 million, reflecting an effective tax rate of 29.0%.

The decrease in the effective tax rate for the quarter is primarily due to an increase in forecasted tax exempt income.

For the quarter and six months ended December 31, 2021, income tax expense was $7.3 million and $14.6 million, respectively, reflecting an effective tax rate of 23.9% and 24.4%, respectively.

In comparison, for the quarter and six months ended December 31, 2020, income tax expense totaled $4.7 million and $4.6 million, respectively, reflecting an effective tax rate of 29.7% and 29.8%, respectively.

The decrease in the effective tax rate is primarily due to an increase in forecasted tax-exempt income and, for the quarter, the benefit from discrete items.

We expect the effective tax rate, excluding discrete items, for fiscal year 2022 to be approximately 24.5% to 25.5%.

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return on invested capital ("ROIC");

and "constant currency." Constant currency is a measure that excludes the translation exchange impact from changes in foreign currency exchange rates between reporting periods.

and "constant currency." Constant currency is a measure that excludes the translation exchange impact from changes in foreign

currency exchange rates between reporting periods.

We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.

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Since adjusted EBITDA excludes some non-cash costs of investing in our business and people, we believe that adjusted EBITDA shows the profitability from our business operations more clearly.

The presentation for adjusted EBITDA for all periods presented has been recast to reflect this change to enhance comparability between periods.

We calculate ROIC as adjusted EBITDA, divided by invested capital.

Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period.

The following table summarizes annualized ROIC for the quarters ended September 30, 2021 and 2020, respectively:

Quarter ended September 30,

The following table summarizes annualized ROIC for the quarters ended December 31, 2021 and 2020, respectively:

Quarter ended December 31,

Return on invested capital ratio, annualized (a)

17.6 % 13.3 %

(a) The annualized EBITDA amount is divided by days in the quarter times 365 days per year, or 366 days for leap year.

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The components of this calculation and reconciliation to our financial statements are shown on the following schedule:

Quarter ended September 30,

Quarter ended December 31,

(in thousands)

Reconciliation of net income to adjusted EBITDA:

Net income (loss) from continuing operations (GAAP) $ 22,073 $ (115)

Net income from continuing operations (GAAP) $ 23,152 $ 11,061

Interest expense 1,493 1,796

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EBITDA (non-GAAP) 39,131 25,889

Change in fair value of contingent consideration — 516

Share-based compensation 3,464 2,006

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Adjusted EBITDA (numerator for ROIC) (non-GAAP) $ 42,542 $ 29,739

Quarter ended September 30,

Quarter ended December 31,

(in thousands)

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Equity – end of the quarter 768,525 682,139

Change in fair value of contingent consideration, net of tax — 390

Share-based compensation, net 2,590 1,510

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Restructuring, net — 366

Discontinued operations net loss — 11,704

Discontinued operations net (income) loss (100) 25,255

Average equity 758,528 690,929

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Net Sales by Segment:

Quarter ended September 30,

Quarter ended December 31,

2021 2020 $ Change % Change

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(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the quarter ended September 30, 2021 into U.S.

dollars using the average foreign exchange rates for the quarter ended September 30, 2020.

Calculated by translating the net sales for the quarter ended December 31, 2021 into U.S.

dollars using the average foreign exchange rates for the quarter ended December 31, 2020.

Net Sales by Segment:

Six months ended December 31,

2021 2020 $ Change % Change

Specialty Technology Solutions (in thousands)

Net sales, reported $ 998,630 $ 864,026 $ 134,604 15.6 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 999,173 $ 864,026 $ 135,147 15.6 %

Modern Communications & Cloud

Net sales, reported $ 723,032 $ 704,212 $ 18,820 2.7 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 723,024 $ 704,212 $ 18,812 2.7 %

Consolidated:

Net sales, reported $ 1,721,662 $ 1,568,238 $ 153,424 9.8 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,722,197 $ 1,568,238 $ 153,959 9.8 %

(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the six months ended December 31, 2021 into U.S.

dollars using the average foreign exchange rates for the six months ended December 31, 2020.

Net Sales by Geography:

Quarter ended September 30,

Quarter ended December 31,

2021 2020 $ Change % Change

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(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the quarter ended September 30, 2021 into U.S.

dollars using the average foreign exchange rates for the quarter ended September 30, 2020.

Calculated by translating the net sales for the quarter ended December 31, 2021 into U.S.

dollars using the average foreign exchange rates for the quarter ended December 31, 2020.

Six months ended December 31,

2021 2020 $ Change % Change

United States and Canada:

(in thousands)

Net sales, as reported $ 1,543,431 $ 1,403,607 $ 139,824 10.0 %

International:

Net sales, reported $ 178,231 $ 164,631 $ 13,600 8.3 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 178,766 $ 164,631 $ 14,135 8.6 %

Consolidated:

Net sales, reported $ 1,721,662 $ 1,568,238 $ 153,424 9.8 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,722,197 $ 1,568,238 $ 153,959 9.8 %

(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the six months ended December 31, 2021 into U.S.

dollars using the average foreign exchange rates for the six months ended December 31, 2020.

Operating Income by Segment:

Quarter ended September 30, % of Net Sales September 30,

Quarter ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

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Amortization of intangible assets 2,956 3,252 (296)

Non-GAAP operating income $ 17,850 $ 15,065 $ 2,785 18.5 % 4.9 % 4.2 %

GAAP operating income (loss) $ 53 $ (1,844) $ 1,897 nm* nm* nm*

Acquisition and divestiture costs (53) 1,360 (1,413)

Restructuring costs — 484 (484)

Non-GAAP operating income $ — $ — $ — nm* nm* nm*

Consolidated:

GAAP operating income $ 31,498 $ 17,130 $ 14,368 83.9 % 3.6 % 2.1 %

Amortization of intangible assets 4,447 4,862 (415)

Acquisition and divestiture costs (53) 1,360 (1,413)

Restructuring costs — 484 (484)

Non-GAAP operating income $ 35,892 $ 23,836 $ 12,056 50.6 % 4.2 % 2.9 %

Operating Income by Segment:

Six months ended December 31, % of Net Sales December 31,

2021 2020 $ Change % Change 2021 2020

Specialty Technology Solutions:

(in thousands)

GAAP operating income $ 30,655 $ 8,845 $ 21,810 246.6 % 3.1 % 1.0 %

Amortization of intangible assets 3,023 3,220 (197)

Non-GAAP operating income $ 33,678 $ 12,065 $ 21,613 179.1 % 3.4 % 1.4 %

Modern Communications & Cloud:

GAAP operating income $ 31,201 $ 20,529 $ 10,672 52.0 % 4.3 % 2.9 %

Amortization of intangible assets 5,933 6,496 (563)

Change in fair value of contingent consideration — 516 (516)

Non-GAAP operating income $ 37,134 $ 27,541 $ 9,593 34.8 % 5.1 % 3.9 %

GAAP operating income $ (83) $ (8,766) $ 8,683 nm* nm* nm*

GAAP operating loss $ (30) $ (10,610) $ 10,580 nm* nm* nm*

Acquisition and divestiture costs 30 1,857 (1,827)

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Below we provide a non-GAAP reconciliation of the aforementioned metrics adjusted for the costs and charges mentioned above:

Quarter ended September 30, 2021

Quarter ended December 31, 2021

GAAP Measure Intangible amortization expense Acquisition and divestiture costs Restructuring costs Non-GAAP measure

(in thousands, except per share data)

Net sales $ 864,351 $ — $ — $ — $ 864,351

Gross profit 107,925 — — — 107,925

Operating income 31,498 4,447 (53) — 35,892

Other expense, net 1,089 — — — 1,089

Pre-tax income 30,409 4,447 (53) — 34,803

Net income 23,152 3,347 (53) — 26,446

Diluted EPS $ 0.89 $ 0.13 $ — $ — $ 1.02

Quarter ended December 31, 2020

GAAP Measure Intangible amortization expense Acquisition and divestiture costs Restructuring costs Non-GAAP measure

(in thousands, except per share data)

Net sales $ 810,897 $ — $ — $ — $ 810,897

Gross profit 86,043 — — — 86,043

Operating income 17,130 4,862 1,360 484 23,836

Other expense, net 1,386 — — — 1,386

Pre-tax income 15,744 4,862 1,360 484 22,450

Net income 11,061 3,682 1,360 366 16,469

Diluted EPS $ 0.43 $ 0.15 $ 0.06 $ 0.01 $ 0.65

Six months ended December 31, 2021

GAAP Measure Intangible amortization expense Change in fair value of contingent consideration Acquisition and divestiture costs Restructuring costs Non-GAAP measure

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Diluted EPS $ 1.75 $ 0.26 $ — $ — $ — $ 2.01

Quarter ended September 30, 2020

GAAP Measure Intangible amortization expense Change in fair value of contingent consideration Acquisition and divestiture Restructuring costs Non-GAAP measure

Six months ended December 31, 2020

GAAP Measure Intangible amortization expense Change in fair value of contingent consideration Acquisition and divestiture costs Restructuring costs Non-GAAP measure

(in thousands, except per share data)

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Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.

Our cash and cash equivalents balance totaled $55.5 million at September 30, 2021, compared to $62.7 million at June 30, 2021, including $48.4 million and $52.1 million held outside of the United States at September 30, 2021 and June 30, 2021, respectively.

Checks released but not yet cleared in the amounts of $19.9 million and $14.3 million are included in accounts payable at September 30, 2021 and June 30, 2021, respectively.

Our cash and cash equivalents balance totaled $34.1 million at December 31, 2021, compared to $62.7 million at June 30, 2021, including $28.7 million and $52.1 million held outside of the United States at December 31, 2021 and June 30, 2021, respectively.

Checks released but not yet cleared in the amounts of $18.5 million and $14.3 million are included in accounts payable at December 31, 2021 and June 30, 2021, respectively.

We conduct business in many locations throughout the world where we generate and use cash.

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See Note 14 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.

Our net investment in working capital increased $77.3 million to $564.0 million at September 30, 2021 from $486.7 million at June 30, 2021, primarily from increases in accounts receivable and inventory and decreases in accounts payable.

Our net investment in working capital increased $100.9 million to $587.6 million at December 31, 2021 from $486.7 million at June 30, 2021, primarily from increases in accounts receivable and inventory.

Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels and payments to vendors.

Three months ended

September 30,

Cash provided by (used in):

For the six months ended December 31, 2021, our working capital investment increased to support our 9.8% year-over-year net sales growth.

Six months ended

(in thousands)

Cash (used in) provided by:

Operating activities $ (75,378) $ 115,674

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Financing activities 51,365 (109,883)

Net cash used in operating activities was $57.0 million for the three months ended September 30, 2021, compared to $71.2 million provided by operating activities in the prior-year period.

Cash used in operating activities for the three months ended September 30, 2021 is primarily attributable to increases in accounts receivable and inventory, and decreases in accounts payable.

Cash provided by operating activities for the three months ended September 30, 2020 is primarily attributable to increased accounts payable and decreased inventory, partially offset by decreased accounts receivable.

The number of days sales outstanding ("DSO") was 62 days at September 30, 2021, compared to 60 days at June 30, 2021 and 61 days at September 30, 2020.

Inventory turned 6.3 times during the quarter ended September 30, 2021, compared to 6.5 times for previous quarter ended June 30, 2021 and 6.2 times in the prior-year quarter ended September 30, 2020.

Cash used in investing activities for the three months ended September 30, 2021 was $1.1 million, compared to $0.7 million used in the prior-year period.

Cash used in investing activities primarily represents capital expenditures in the three months ended September 30, 2021 and 2020 .

Net cash used in operating activities was $75.4 million for the six months ended December 31, 2021, compared to $115.7 million provided by operating activities in the prior-year period.

Cash used in operating activities for the six months ended December 31, 2021 is primarily attributable to increases in inventory and accounts receivable, partially offset by increases in accounts payable.

Cash provided by operating activities for the six months ended December 31, 2020 is primarily attributable to increased accounts payable, decreased inventory, and earnings from operations adjusted for non-cash items, partially offset by increased accounts receivable.

The number of days sales outstanding ("DSO") was 64 days at December 31, 2021, compared to 60 days at June 30, 2021 and 60 days at December 31, 2020.

Inventory turned 5.7 times during the quarter ended December 31, 2021, compared to 6.3 times for previous quarter ended September 30, 2021 and 6.9 times in the prior-year quarter ended December 31, 2020.

Cash provided by investing activities for the six months ended December 31, 2021 was $0.5 million, compared to $32.9 million in the prior-year period.

Cash provided by investing activities for the six months ended December 31, 2021 represents proceeds from the sale of our discontinued operations, partially offset by capital expenditures.

Cash provided by investing activities for the six months ended December 31, 2020 primarily represents proceeds from the sale of our discontinued operations .

Management expects capital expenditures for fiscal year 2022 to range from $5 million to $8 million, primarily for IT investments and facility improvements.

For the three months ended September 30, 2021, cash provided by financing activities totaled $54.9 million, compared to $70.3 million used in financing activities for the prior-year period.

Cash provided by financing activities for the three months ended September 30, 2021 is primarily attributable to net borrowings on the revolving credit facility.

For the three months ended September 30, 2020 cash used in financing activities was primarily for net repayments on the revolving credit facility.

For the six months ended December 31, 2021, cash provided by financing activities totaled $51.4 million, compared to $109.9 million used in financing activities for the prior-year period.

Cash provided by financing activities for the six months ended December 31, 2021 is primarily attributable to net borrowings on the revolving credit facility.

For the six months ended December 31, 2020, cash used in financing activities was primarily for net repayments on the revolving credit facility and contingent consideration payments to the former shareholders of Intelisys.

Credit Facility

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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.

At our option, loans under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon the our net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash to trailing four-quarter adjusted EBITDA.

Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65% of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement.

Under the terms of the revolving credit facility, the payment of cash dividends is restricted.

At our option, U.S.

dollar loans under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon our net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash to trailing four-quarter adjusted EBITDA.

This spread ranges from 1.00% to 1.75% for LIBOR-based loans and 0.00% to 0.75% for alternate base rate loans.

The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent.

The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR for U.S.

dollar loans, subject to agreement between the Company and the administrative agent.

On December 23, 2021, we amended our credit facility to replace LIBOR as the benchmark rate for non-U.S.

dollar loans.

The Amended Credit Agreement contains customary yield protection provisions.

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The secured term loan facility will amortize based on the percentage of original principal amount with 2.5% in Year 1, 5.0% in Year 2, 5.0% in Year 3, 7.5% in Year 4 and 10.0% in Year 5.

Borrowings under the Amended Credit Agreement are guaranteed by substantially all of our domestic assets 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.

The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants.

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In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates.

We were in compliance with all covenants under the credit facility at September 30, 2021.

There was $56.4 million in outstanding borrowings on our revolving credit facility at September 30, 2021.

We were in compliance with all covenants under the credit facility at December 31, 2021.

There was $57.8 million in outstanding borrowings on our revolving credit facility at December 31, 2021.

There was no outstanding borrowings on our revolving credit facility at June 30, 2021.

The average daily balance for the revolving credit facility, excluding the term loan facility, was $54.4 million for the three month period ended September 30, 2021.

Including borrowings for both continuing and discontinued operations, the average daily balance for the revolving credit facility, excluding the term loan facility, was $91.2 million for the three month period ended September 30, 2020.

There were no letters of credit issued under the multi-currency revolving credit facility at September 30, 2021 and June 30, 2021, respectively.

There was $293.6 million and $350.0 million available for additional borrowings at September 30, 2021 and June 30, 2021, respectively.

The average daily balance for the revolving credit facility, excluding the term loan facility, was $57.1 million for the six month period ended December 31, 2021.

Including borrowings for both continuing and discontinued operations, the average daily balance for the revolving credit facility, excluding the term loan facility, was $70.4 million for the six month period ended December 31, 2020.

There were no letters of credit issued under the multi-currency revolving credit facility at December 31, 2021 and June 30, 2021, respectively.

There was $292.2 million and $350.0 million available for additional borrowings at December 31, 2021 and June 30, 2021, respectively.

Availability to use this borrowing capacity depends upon, among other things, the levels of our Leverage Ratio and Interest Coverage Ratio, which, in turn, will depend upon (1) our Credit Facility Net Debt relative to our Credit Facility EBITDA and (2) Credit Facility EBITDA relative to total interest expense, respectively.

As a result, our availability will increase if EBITDA increases (subject to the limit of the facility) and decrease if EBITDA decreases.

At September 30, 2021, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $293.6 million available for borrowing.

While we were in compliance with the financial covenants contained in the Credit Facility as of September 30, 2021, and currently expect to continue to maintain such compliance, should we encounter difficulties, our historical relationship with our Credit Facility lending group has been strong and we anticipate their continued support of our long-term business.

At December 31, 2021, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $292.2 million available for borrowing.

While we were in compliance with the financial covenants contained in the Credit Facility as of December 31, 2021, and currently expect to continue to maintain such compliance, should we encounter difficulties, our historical relationship with our Credit Facility lending group has been strong and we anticipate their continued support of our long-term business.

We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet the present and future working capital and cash requirements for at least the next twelve months.

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We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect or change on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the company is a party, under which the company has (i) any

obligation arising under a guarantee contract, derivative instrument or variable interest;

or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

10 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis