What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2022-02-08 · 141 added, 152 removed, 339 unchanged (46% of the section changed)

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

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

ScanSource is a leading hybrid distributor connecting devices to the cloud and accelerating growth for partners across hardware, Software as a Service ("SaaS"), connectivity and cloud.

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 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:

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

• Specialty Technology Solutions

• Modern Communications & Cloud

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

We sell hardware, SaaS, 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 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.

Our key suppliers include 8x8, ACC Business, AT&T, Aruba/HPE, AudioCodes, Avaya, Axis, Barco, Bematech, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Equinix, Extreme, F5, Five9, Fortinet, Genesys, Hanwha, Honeywell, HID, Ingenico, Intrado, Jabra, LogMeIn, Lumen, March Networks, Masergy, Microsoft, Mitel, NCR, NICE inContact, Oracle, Palo Alto, Panasonic, Poly, RingCentral, Spectralink, Spectrum, Toshiba Global Commerce Solutions, Ubiquiti, Verifone, Verizon, Windstream, Zebra Technologies and Zoom.

We provide some of our digital products, which include SaaS and subscriptions, through our digital tools and platforms.

Our key suppliers include 8x8, AT&T, Aruba/HPE, Avaya, Axis, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Equinix, Extreme, F5, Five9, Fortinet, Genesys, Granite, GTT, Hanwha, Honeywell, Ingenico, Jabra, Lumen, Microsoft, MetTel, Mitel, NCR, NICE CXone, Poly, RingCentral, Spectrum, Toshiba Global Commerce Solutions, Trend Micro, Ubiquiti, Verifone, Verizon, VMWare, Windstream, Zebra Technologies and Zoom.

Unless otherwise indicated, the amounts and analysis provided within Management's Discussion and Analysis of Financial Condition and Results of Operations pertain to our continuing operations only.

Impact of COVID-19 on our Business Environment

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, 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.

vaccine mandate, and the degree to which our business and results of operations may be affected.

Our top priority is protecting the health and safety of our employees.

We have teams monitoring the evolving situation and recommending risk mitigation actions.

All of our distribution facilities have remained open and operational throughout the pandemic.

Our employees are committed to providing the high level of customer service our partners have grown to expect from us in order to achieve positive results.

In July 2020, we announced actions to address the business impacts of the COVID-19 pandemic and prepare for our next phase of growth.

These actions included a $30 million annualized expense reduction plan.

These actions were designed to better align the cost structure for our wholesale distribution business with lower sales volumes as a result of the COVID-19 pandemic.

As part of the plan, we have continued to invest in our higher growth agency business, Intelisys.

Strong growth for the Intelisys business has continued, even with the COVID-19 pandemic.

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.

The spread of COVID-19 continues to disrupt global supply chains.

While we have been able to broadly maintain our operations, we have experienced some disruption in our supply chain caused by product availability, labor scarcity and logistical disruptions, resulting in extended lead-times, unpredictability and higher costs.

We intend to continue to work with our suppliers to implement measures to minimize disruption to the distribution of our products.

However, uncertainty in the duration and scope of the pandemic could result in an unforeseen disruption to our supply chain and impact our operations.

Our strategy is to drive sustainable, profitable growth by orchestrating hybrid technology solutions through a growing ecosystem of partners leveraging our people, processes, and tools.

Our goal is to provide exceptional experiences for our partners, suppliers, and employees, and we strive for operational excellence.

Our hybrid distribution strategy relies on a channel sales model to offer hardware, SaaS, connectivity and cloud services from leading technology suppliers to 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.

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

As a trusted adviser to our sales partners, we provide more complete solutions through a better understanding of end-customer needs.

We drive growth through enhancing our sales partners' capabilities to provide hardware, software, connectivity and cloud solutions.

Our teams deliver value-added support programs and services, including education and training, network assessments, implementation, custom development and marketing to help our sales partners extend their capabilities, develop new technology practices or reach new end customers.

Our objective is to grow profitable sales in the technologies we offer and expand in higher margin and adjacent markets to help our sales partners offer more products and services and increase recurring revenue opportunities.

As part of our strategic plan, we consider strategic acquisitions and alliances to enhance our technology offerings and service capabilities.

Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services.

As a trusted adviser to our sales partners, we provide customized solutions through our strong understanding of end-customer needs.

Results of Operations

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)

The following tables summarize our net sales results by technology segment and by geographic location for the quarters and nine months ended March 31, 2022 and 2021:

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

Net Sales by Segment:

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Total net sales $ 845,990 $ 729,873 $ 116,117 15.9 % 15.4 %

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

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

2022 2021 $ Change % Change

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

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.

For the quarter and nine months ended March 31, 2022, net sales for the Specialty Technology Solutions segment increased $66.6 million, or 15.3%, and $201.2 million, or 15.5%, respectively, compared to the prior-year periods.

Excluding the foreign exchange positive impact, adjusted net sales increased $65.7 million, or 15.1%, for the quarter ended March 31, 2022 and $200.8 million, or 15.4%, for the nine months ended March 31, 2022 compared to the prior-year periods.

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

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 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, 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)

For the quarter and nine months ended March 31, 2022, net sales for the Modern Communications & Cloud segment increased $49.5 million, or 16.9%, and $68.3 million, or 6.8%, respectively, compared to the prior-year periods.

Excluding the foreign exchange positive impact, adjusted net sales increased $46.8 million, or 16.0%, for the quarter ended March 31, 2022 and $65.7 million, or 6.6%, for the nine months ended March 31, 2022 compared to the prior-year periods.

The increase in net sales and adjusted net sales for the quarter and nine months periods is primarily due to increased demand across our communications solutions.

For our Intelisys business, net sales for the third quarter and nine-month period of fiscal year 2022 increased 18.2% and 15.4%, respectively, year-over-year.

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

Net Sales by Geography:

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Total net sales $ 845,990 $ 729,873 $ 116,117 15.9 % 15.4 %

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

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

2022 2021 $ Change % Change

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(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 and six months ended December 31, 2021 and 2020:

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

The following tables summarize our gross profit for the quarters and nine months ended March 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Gross profit $ 106,508 $ 88,116 $ 18,392 20.9 % 12.6 % 12.1 %

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

Nine months ended March 31, % of Net Sales March 31,

2022 2021 $ Change % Change 2022 2021

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Gross profit $ 315,732 $ 254,939 $ 60,793 23.8 % 12.3 % 11.1 %

Our gross profit is primarily affected by sales volume and gross margin mix.

Gross margin mix is impacted by multiple factors, which include sales mix (proportion of sales of higher margin products or services relative to total sales), vendor program recognition (consisting of volume rebates, inventory price changes and purchase discounts) and freight costs.

Increases in vendor programs decrease cost of goods sold, thereby increasing gross profit.

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.

For the quarter ended March 31, 2022, gross profit dollars for the Specialty Technology Solutions segment increased $15.0 million, or 38.5%.

Higher sales volume, after considering the associated cost of goods sold, contributed $6.0 million to the growth of gross profit dollars.

Gross margin mix positively impacted gross profit by $9.0 million, largely from higher vendor program recognition.

For the quarter ended March 31, 2022, the gross profit margin increased 180 basis points over the prior-year to 10.7%.

For the nine months ended March 31, 2022, the Specialty Technology Solutions segment achieved gross profit growth of $39.5 million, or 35.2%.

Increases in sales volume, after considering the associated cost of goods sold, contributed $17.4 million to the growth of gross profit dollars.

Gross margin mix positively impacted gross profit by $22.1 million, largely from higher vendor program recognition.

For the nine months ended March 31, 2022, the gross profit margin increased 150 basis points over the prior-year to 10.1%.

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.

For the quarter ended March 31, 2022, the Modern Communications & Cloud segment achieved gross profit growth of $3.4 million, or 6.9%.

Higher sales volume, after considering the associated cost of goods sold, contributed $8.3 million to the growth of gross profit dollars.

Lower gross margin mix negatively impacted gross profit by $4.9 million, largely driven by a less favorable sales mix in Brazil.

For the quarter ended March 31, 2022, the gross profit margin decreased 140 basis points compared to the prior-year to 15.3%.

For the nine months ended March 31, 2022, the Modern Communications & Cloud segment achieved gross profit growth of $21.3 million, or 14.9%.

Higher sales volume, after considering the associated cost of goods sold, contributed $9.8 million to the growth of gross profit dollars.

Gross margin mix positively impacted gross profit by $11.5 million, driven by a more favorable sales mix, including our higher-margin recurring revenue business, principally from Intelisys connectivity and cloud services and SaaS subscriptions.

For the nine months ended March 31, 2022, the gross profit margin increased 110 basis points over the prior-year to 15.4%.

Operating Expenses

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,

The following tables summarize our operating expenses for the quarters and nine months ended March 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Operating expenses $ 73,591 $ 68,680 $ 4,911 7.2 % 8.7 % 9.4 %

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

Nine months ended March 31, % of Net Sales March 31,

2022 2021 $ Change % Change 2022 2021

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Operating expenses $ 220,990 $ 216,738 $ 4,252 2.0 % 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.

Selling, general and administrative expenses ("SG&A") increased $6.4 million and $16.9 million for the quarter and nine months ended March 31, 2022, respectively, compared to the prior-year periods.

The increase is attributable to higher employee costs.

Restructuring and other charges incurred of $0.6 million and $9.3 million for the quarter and nine months ended March 31, 2021, 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 nine months ended March 31, 2021, 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 and six months ended December 31, 2021 and 2020:

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

The following tables summarize our operating income for the quarters and nine months ended March 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Operating income $ 32,917 $ 19,436 $ 13,481 69.4 % 3.9 % 2.7 %

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

Nine months ended March 31, % of Net Sales March 31,

2022 2021 $ Change % Change 2022 2021

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Specialty Technology Solutions

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.

For the Specialty Technology Solutions segment, operating income increased $11.9 million and $33.7 million for the quarter and nine months ended March 31, 2022, respectively, compared to the prior-year period.

Operating margin increased to 4.1% and 3.4% for the quarter and nine months ended March 31, 2022, respectively.

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

Modern Communications & Cloud

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.

For the Modern Communications & Cloud segment, operating income increased $0.7 million for the quarter ended March 31, 2022, compared to the prior-year period.

Operating margin for the quarter ended March 31, 2022 decreased to 3.6%, primarily due to higher employee costs, partially offset by increased gross profits.

For the nine months ended March 31, 2022, operating income increased $11.4 million and operating margin increased to 4.1%.

The increases in operating income and margin for the nine month period is primarily due to higher gross profits.

Corporate recognized no restructuring or divestiture expenses for the quarter ended March 31, 2022, compared to $0.8 million in the prior-year quarter.

For the nine months ended March 31, 2022 and 2021, corporate incurred restructuring and divestiture expenses of less than $0.1 million and $11.4 million, respectively.

Total Other (Income) Expense

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,

The following tables summarize our total other (income) expense for the quarters and nine months ended March 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Total other expense, net $ 347 $ 529 $ (182) (34.4) % 0.0 % 0.1 %

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

Nine months ended March 31, % of Net Sales March 31,

2022 2021 $ Change % Change 2022 2021

6 unchanged sentences

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 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.

Interest income for the quarter and nine months ended March 31, 2022 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents.

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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Provision for Income Taxes

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.

For the quarter and nine months ended March 31, 2022, income tax expense was $9.0 million and $23.7 million, respectively, reflecting an effective tax rate of 27.8% and 25.6%, respectively.

In comparison, for the quarter and nine months ended March 31, 2021, income tax expense totaled $5.1 million and $9.8 million, respectively, reflecting an effective tax rate of 27.1% and 28.3%, respectively.

The increase in the effective tax rate for the quarter is primarily due to an increase to forecasted non-deductible expenses for officer compensation.

The decrease in the effective tax rate for the nine months ended March 31, 2022 is primarily due to an increase in forecasted tax-exempt income and the benefit from discrete items.

We expect the effective tax rate, excluding discrete items, for fiscal year 2022 to be approximately 25.5% to 26.5%.

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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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Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP.

Return on Invested Capital

ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance.

We believe the calculation of ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.

Adjusted Return on Invested Capital

Adjusted ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance.

We believe the calculation of adjusted ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.

Adjusted EBITDA starts with net income and adds back interest expense, income tax expense, depreciation expense, amortization of intangible assets, changes in fair value of contingent considerations, and other non-GAAP adjustments.

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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.

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

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

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

Quarter ended December 31,

Return on invested capital ratio, annualized (a)

The following table summarizes annualized adjusted ROIC for the quarters ended March 31, 2022 and 2021, respectively:

Quarter ended March 31,

Adjusted return on invested capital ratio, annualized (a)

18.0 % 14.7 %

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

Quarter ended December 31,

Quarter ended March 31,

(in thousands)

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Restructuring costs — 349

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

Quarter ended December 31,

Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 44,115 $ 31,999

Quarter ended March 31,

(in thousands)

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Restructuring, net — 264

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

Discontinued operations net loss — 688

Average equity 788,621 687,925

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205,073 191,996

Invested capital (denominator for ROIC) (non-GAAP) $ 959,236 $ 889,549

Invested capital (denominator for adjusted ROIC) (non-GAAP) $ 993,694 $ 879,921

(a) Acquisition and divestiture costs are generally nondeductible for tax purposes.

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Net Sales by Segment:

Quarter ended December 31,

Quarter ended March 31,

2022 2021 $ 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 December 31, 2021 into U.S.

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

Calculated by translating the net sales for the quarter ended March 31, 2022 into U.S.

dollars using the average foreign exchange rates for the quarter ended March 31, 2021.

Net Sales by Segment:

Six months ended December 31,

Nine months ended March 31,

2022 2021 $ 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 six months ended December 31, 2021 into U.S.

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

Calculated by translating the net sales for the nine months ended March 31, 2022 into U.S.

dollars using the average foreign exchange rates for the nine months ended March 31, 2021.

Net Sales by Geography:

Quarter ended December 31,

Quarter ended March 31,

2022 2021 $ 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 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,

Calculated by translating the net sales for the quarter ended March 31, 2022 into U.S.

dollars using the average foreign exchange rates for the quarter ended March 31, 2021.

Nine months ended March 31,

2022 2021 $ Change % Change

11 unchanged sentences

(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.

Calculated by translating the net sales for the nine months ended March 31, 2022 into U.S.

dollars using the average foreign exchange rates for the nine months ended March 31, 2021.

Operating Income by Segment:

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

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

2022 2021 $ Change % Change 2022 2021

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Operating Income by Segment:

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

Nine months ended March 31, % of Net Sales March 31,

2022 2021 $ Change % Change 2022 2021

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Non-GAAP operating income 108,185 64,754 $ 43,431 67.1 % 4.2 % 2.8 %

Income Statement Non-GAAP Metrics

To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP net sales, non-GAAP gross profit, non-GAAP operating income, non-GAAP net other expense, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share.

Additional Non-GAAP Metrics

To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP SG&A expenses, non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share.

Non-GAAP results exclude amortization of intangible assets related to acquisitions, changes in fair value of contingent consideration, acquisition and divestiture costs, restructuring costs, impact of Divestitures and other non-GAAP adjustments.

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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 December 31, 2021

Quarter ended March 31, 2022

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

SG&A expenses $ 66,522 $ — $ — $ — $ 66,522

Operating income 32,917 4,457 — — 37,374

Other expense, net 1,089 — — — 1,089

Pre-tax income 32,570 4,457 — — 37,027

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Diluted EPS $ 0.91 $ 0.13 $ — $ — $ 1.04

Quarter ended December 31, 2020

Quarter ended March 31, 2021

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

SG&A expenses $ 60,099 $ — $ (272) $ — $ 59,827

Operating income 19,436 4,880 272 560 25,148

Other expense, net 1,386 — — — 1,386

Pre-tax income 18,907 4,880 272 560 24,619

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Diluted EPS $ 0.54 $ 0.14 $ 0.01 $ 0.02 $ 0.71

Six months ended December 31, 2021

Nine months ended March 31, 2022

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)

Net sales $ 1,721,662 $ — $ — $ — $ — $ 1,721,662

Gross profit 209,225 — — — — 209,225

SG&A expenses $ 199,538 $ — $ — $ (30) $ — $ 199,508

Operating income 94,742 13,413 — 30 — 108,185

Other expense, net 1,987 — — — — 1,987

Pre-tax income 92,410 13,413 — 30 — 105,853

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Diluted EPS $ 2.66 $ 0.39 $ — $ — $ — $ 3.06

Six months ended December 31, 2020

Nine months ended March 31, 2021

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)

Net sales $ 1,568,238 $ — $ — $ — $ — $ 1,568,238

Gross profit 166,823 — — — — 166,823

SG&A expenses $ 182,681 $ — $ — $ (2,130) $ — $ 180,551

Operating income 38,201 14,595 516 2,130 9,312 64,754

Other expense, net 3,182 — — — — 3,182

Pre-tax income 34,489 14,595 516 2,130 9,312 61,042

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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 $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.

Our cash and cash equivalents balance totaled $43.5 million at March 31, 2022, compared to $62.7 million at June 30, 2021, including $34.7 million and $52.1 million held outside of the United States at March 31, 2022 and June 30, 2021, respectively.

Checks released but not yet cleared in the amounts of $20.0 million and $14.3 million are included in accounts payable at March 31, 2022 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 $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 increased $120.2 million to $606.9 million at March 31, 2022 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.

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

For the nine months ended March 31, 2022, our working capital investment increased to support our 11.7% year-over-year net sales growth.

Nine months ended

(in thousands)

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Financing activities 27,730 (62,839)

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 .

Net cash used in operating activities was $45.7 million for the nine months ended March 31, 2022, compared to $55.4 million provided by operating activities in the prior-year period.

The decrease of $101.1 million was primarily due to increased inventory levels, which were 29% higher than in 2021, to support net sales growth.

Also contributing to the decrease in operating cash flows were fluctuations in accrued expenses and other liabilities balances, which were 8% lower than in 2021, and 7% higher than in 2020, attributable to the timing of payments at the end of the reporting period.

The decrease in operating cash flows was partially offset by an increase in income from continuing operations, adjusted for non-cash items.

Cash provided by operating activities is subject to variability period over period as a result of the timing of payments related to accounts receivable, accounts payable, and other working capital items.

The number of days sales outstanding ("DSO") was 69 days at March 31, 2022, compared to 60 days at June 30, 2021 and 63 days at March 31, 2021.

The increase in DSO for the quarter ended March 31, 2022 is primarily due to increased net receivables from timing of sales near the end of the reporting period.

Inventory turned 5.1 times during the quarter ended March 31, 2022, compared to 5.7 times for previous quarter ended December 31, 2021 and 5.8 times in the prior-year quarter ended March 31, 2021.

The decrease in inventory turns for the quarter ended March 31, 2022 is primarily due to increased average inventory.

Cash used in investing activities for the nine months ended March 31, 2022 was $0.2 million, compared to $32.1 million provided by investing activities in the prior-year period.

Cash used in investing activities for the nine months ended March 31, 2022 represents capital expenditures, partially offset by proceeds from the sale of our discontinued operations.

Cash provided by investing activities for the nine months ended March 31, 2021 primarily represents proceeds from the sale of our discontinued operations .

Management expects capital expenditures for fiscal year 2022 to range from $4 million to $5 million, primarily for IT investments and facility improvements.

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.

For the nine months ended March 31, 2022, cash provided by financing activities totaled $27.7 million, compared to $62.8 million used in financing activities for the prior-year period.

Cash provided by financing activities for the nine months ended March 31, 2022 is primarily attributable to net borrowings on the revolving credit facility.

For the nine months ended March 31, 2021, 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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On December 23, 2021, we amended our credit facility to replace LIBOR as the benchmark rate for non-U.S.

dollar loans.

dollar loans, among other things.

The Amended Credit Agreement contains customary yield protection provisions.

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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 December 31, 2021.

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

We were in compliance with all covenants under the credit facility at March 31, 2022.

There was $44.3 million in outstanding borrowings on our revolving credit facility at March 31, 2022.

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 $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.

The average daily balance for the revolving credit facility, excluding the term loan facility, was $60.0 million for the nine month period ended March 31, 2022.

Including borrowings for both continuing and discontinued operations, the average daily balance for the revolving credit facility, excluding the term loan facility, was $62.1 million for the nine month period ended March 31, 2021.

There were no letters of credit issued under the multi-currency revolving credit facility at March 31, 2022 and June 30, 2021, respectively.

There was $305.7 million and $350.0 million available for additional borrowings at March 31, 2022 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 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.

At March 31, 2022, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $305.7 million available for borrowing.

While we were in compliance with the financial covenants contained in the Credit Facility as of March 31, 2022, 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.

Off-Balance Sheet Arrangements and Contractual Obligations

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.

Accounting Standards Recently Issued

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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