What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-05-10 · 124 added, 256 removed, 224 unchanged (63% 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 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.

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

We provide technology solutions and services from more than 500 leading suppliers of mobility and barcode, POS and payments, physical security and networking, communications and collaboration, connectivity and cloud services to our approximately 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.

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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 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.

Recent Developments

Impact of the Macroeconomic Environment, Including Inflation and Supply Chain Constraints

The macroeconomic environment, including the economic impacts of supply chain constraints, rising interest rates and inflation continues to create significant uncertainty and may adversely affect our consolidated results of operations.

We are actively monitoring changes to the global macroeconomic environment and assessing the potential impacts these challenges may have on our financial condition, results of operations and liquidity.

We are also mindful of the potential impact these conditions could have on our customers and suppliers.

In spite of these challenges and uncertainties, we believe we have managed the supply chain requirements of our customers and suppliers effectively to date.

While we are unable to predict the ultimate impact these factors will have on our business, certain technologies have benefited from the widespread adoption to a work-from-anywhere business model, as well as the accelerated shift to digitize and automate processes.

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.

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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 and nine months ended March 31, 2022 and 2021:

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

We have two reportable segments, which are based on technology.

The following tables summarize our net sales results by business segment and by geographic location for the quarters ended September 30, 2022 and 2021:

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

Net Sales by Segment:

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Total net sales $ 943,813 $ 857,583 $ 86,230 10.1 % 10.1 %

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

2022 2021 $ Change % Change

(in thousands)

Specialty Technology Solutions $ 1,501,702 $ 1,300,488 $ 201,214 15.5 % 15.4 %

Modern Communications & Cloud 1,065,950 997,623 68,327 6.8 % 6.6 %

Total net sales $ 2,567,652 $ 2,298,111 $ 269,541 11.7 % 11.6 %

(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 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.

For the quarter ended September 30, 2022, net sales for the Specialty Technology Solutions segment increased $74.6 million, or 14.9%, compared to the prior-year period.

The increase in net sales for the quarter is primarily due to strong growth across 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 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)

For the quarter ended September 30, 2022, net sales for the Modern Communications & Cloud segment increased $11.6 million, or 3.3%.

Excluding the foreign exchange negative impact, adjusted net sales increased $12.2 million, or 3.4%, for the quarter ended September 30, 2022 compared to the prior-year period.

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

For our Intelisys business, net sales for the first quarter of fiscal year 2023 increased 7.0% year-over-year.

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

Net Sales by Geography:

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Total net sales $ 943,813 $ 857,583 $ 86,230 10.1 % 10.1 %

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

2022 2021 $ Change % Change

(in thousands)

United States and Canada $ 2,307,959 $ 2,069,327 $ 238,632 11.5 % 11.5 %

International 259,693 228,784 30,909 13.5 % 12.2 %

Total net sales $ 2,567,652 $ 2,298,111 $ 269,541 11.7 % 11.6 %

(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 nine months ended March 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

(in thousands)

Specialty Technology Solutions $ 54,021 $ 39,002 $ 15,019 38.5 % 10.7 % 8.9 %

Modern Communications & Cloud 52,487 49,114 3,373 6.9 % 15.3 % 16.7 %

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

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

The following table summarizes our gross profit for the quarters ended September 30, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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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.

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

Net sales derived from our Intelisys business contribute 100% to our gross profit dollars and margin as they have no associated cost of goods sold.

Specialty Technology Solutions

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

For the quarter ended September 30, 2022, gross profit dollars for the Specialty Technology Solutions segment increased $12.7 million, or 27.8%.

Higher sales volume, after considering the associated cost of goods sold, contributed $6.8 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%.

Gross margin mix positively impacted gross profit by $5.9 million, largely from a more favorable sales mix.

For the quarter ended September 30, 2022, the gross profit margin increased 103 basis points over the prior-year to 10.1%.

Modern Communications & Cloud

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 nine months ended March 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

(in thousands)

Selling, general and administrative expenses $ 66,522 $ 60,099 $ 6,423 10.7 % 7.9 % 8.2 %

Depreciation expense 2,612 3,141 (529) (16.8) % 0.3 % 0.4 %

Intangible amortization expense 4,457 4,880 (423) (8.7) % 0.5 % 0.7 %

Restructuring and other charges — 560 (560) (100.0) % 0.0 % 0.1 %

For the quarter ended September 30, 2022, the Modern Communications & Cloud segment gross profit decreased by $0.8 million, or 1.4%.

Higher sales volume, after considering the associated cost of goods sold, positively contributed $1.8 million to gross profit dollars.

Gross margin mix negatively impacted gross profit by $2.6 million, largely driven by a less favorable sales mix.

For the quarter ended September 30, 2022, the gross profit margin decreased 71 basis points compared to the prior-year to 15.0%.

Operating Expenses

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

The following table summarizes our operating expenses for the quarters ended September 30, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Intangible amortization expense 4,241 4,510 (269) (6.0) % 0.4 % 0.5 %

Restructuring and other charges — 9,312 (9,312) (100.0) % 0.0 % 0.4 %

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

Operating expenses $ 78,597 $ 71,244 $ 7,353 10.3 % 8.3 % 8.3 %

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 nine months ended March 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

(in thousands)

Specialty Technology Solutions $ 20,623 $ 8,713 $ 11,910 136.7 % 4.1 % 2.0 %

Modern Communications & Cloud 12,294 11,555 739 6.4 % 3.6 % 3.9 %

Corporate — (832) 832 nm* nm* nm*

Selling, general and administrative expenses ("SG&A") increased $7.7 million for the quarter ended September 30, 2022 compared to the prior-year period.

The increase is primarily attributable to higher employee costs.

Operating Income

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

The following table summarizes our operating income for the quarters ended September 30, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Specialty Technology Solutions

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.

For the Specialty Technology Solutions segment, operating income increased $7.7 million for the quarter ended September 30, 2022 compared to the prior-year period.

Operating margin increased to 3.8% for the quarter ended September 30, 2022.

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

Modern Communications & Cloud

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.

For the Modern Communications & Cloud segment, operating income decreased $3.3 million for the quarter ended September 30, 2022, compared to the prior-year period.

Operating margin decreased to 3.5% for the quarter ended September 30, 2022.

The decrease in operating income and margin for the quarter is primarily due to higher employee costs.

Corporate recognized no restructuring or divestiture expenses for the quarter ended September 30, 2022, compared to $0.1 million in the prior-year quarter.

Total Other (Income) Expense

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

(in thousands)

Interest expense $ 1,483 $ 1,576 $ (93) (5.9) % 0.2 % 0.2 %

Interest income (1,000) (745) (255) (34.2) % (0.1) % (0.1) %

Net foreign exchange losses 258 (41) 299 (729.3) % 0.0 % (0.0) %

Other, net (394) (261) (133) (51.0) % (0.0) % (0.0) %

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

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

The following table summarizes our total other (income) expense for the quarters ended September 30, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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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 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.

Interest expense increased for the quarter ended September 30, 2022 compared to the prior-year, primarily from higher borrowings and increases in interest rates on our multi-currency revolving credit facility.

Interest income for the quarter ended September 30, 2022 was generated on interest-bearing customer receivables principally 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.

Foreign exchange gains and losses are primarily generated as the result of fluctuations in the value of the U.S.

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

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

Foreign exchange gains and losses are generated as the result of fluctuations in the value of the U.S.

dollar versus the Brazilian real, the U.S.

dollar versus the euro, the British pound versus the euro, the Canadian dollar versus the U.S.

dollar and other currencies versus the U.S.

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 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.

For the quarter ended September 30, 2022, income tax expense was $8.2 million reflecting an effective tax rate of 25.5%.

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

The increase in the effective tax rate for the quarter is primarily due to an increase in non-deductible expenses and a decrease in creditable foreign taxes compared to the prior-year quarter.

A discrete tax benefit of $0.5 million was recognized in the September 30, 2022 quarter, primarily attributable to the notional interest deduction on the net equity of the Company's Brazilian subsidiary.

We expect the effective tax rate, excluding discrete items, for fiscal year 2023 to be approximately 26.4% to 27.4%.

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adjusted earnings before interest expense, income taxes, depreciation, and amortization ("adjusted EBITDA");

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.

adjusted return on invested capital ("adjusted 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.

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

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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.

Effective with the first quarter of fiscal year 2022, non-cash share-based compensation expense is also added back in calculating adjusted EBITDA.

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

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 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 adjusted ROIC for the quarters ended March 31, 2022 and 2021, respectively:

Quarter ended March 31,

The following table summarizes annualized adjusted ROIC for the quarters ended September 30, 2022 and 2021, respectively:

Quarter ended September 30,

Adjusted return on invested capital ratio, annualized (a)

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

Quarter ended March 31,

Quarter ended September 30,

(in thousands)

Reconciliation of net income to adjusted EBITDA:

Net income from continuing operations (GAAP) $ 23,526 $ 13,786

Net income (GAAP) $ 24,042 $ 22,073

Interest expense 3,448 1,660

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Acquisition and divestiture costs (a)

Restructuring costs — 349

Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 45,275 $ 41,394

Quarter ended March 31,

Quarter ended September 30,

(in thousands)

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Acquisition and divestiture costs (a)

Restructuring, net — 264

Discontinued operations net loss — 688

Average equity 817,625 739,645

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dollars using the comparable average foreign exchange rates from the prior year period.

If applicable, we also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date and the impact of Divestitures in order to show net sales results on an organic basis.

This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and, the impact of Divestitures and acquisitions, if applicable.

Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding Divestitures:

We also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date in order to show net sales results on an organic basis.

This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and the impact of acquisitions.

Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding acquisitions:

Net Sales by Segment:

Quarter ended March 31,

Quarter ended September 30,

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 March 31, 2022 into U.S.

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

Net Sales by Segment:

Nine months ended March 31,

2022 2021 $ Change % Change

Specialty Technology Solutions (in thousands)

Net sales, reported $ 1,501,702 $ 1,300,488 $ 201,214 15.5 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,501,330 $ 1,300,488 $ 200,842 15.4 %

Modern Communications & Cloud

Net sales, reported $ 1,065,950 $ 997,623 $ 68,327 6.8 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,063,282 $ 997,623 $ 65,659 6.6 %

Consolidated:

Net sales, reported $ 2,567,652 $ 2,298,111 $ 269,541 11.7 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 2,564,612 $ 2,298,111 $ 266,501 11.6 %

(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 nine months ended March 31, 2022 into U.S.

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

Calculated by translating the net sales for the quarter ended September 30, 2022 into U.S.

dollars using the average foreign exchange rates for the quarter ended September 30, 2021.

Net Sales by Geography:

Quarter ended March 31,

2022 2021 $ Change % Change

United States and Canada:

(in thousands)

Net sales, as reported $ 764,529 $ 665,720 $ 98,809 14.8 %

International:

Net sales, reported $ 81,461 $ 64,153 $ 17,308 27.0 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 77,886 $ 64,153 $ 13,733 21.4 %

Consolidated:

Net sales, reported $ 845,990 $ 729,873 $ 116,117 15.9 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 842,415 $ 729,873 $ 112,542 15.4 %

(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 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,

Quarter ended September 30,

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 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 March 31, % of Net Sales March 31,

2022 2021 $ Change % Change 2022 2021

Specialty Technology Solutions:

(in thousands)

GAAP operating income $ 20,623 $ 8,713 $ 11,910 136.7 % 4.1 % 2.0 %

Amortization of intangible assets 1,491 1,610 (119)

Non-GAAP operating income $ 22,114 $ 10,323 $ 11,791 114.2 % 4.4 % 2.4 %

Modern Communications & Cloud:

GAAP operating income $ 12,294 $ 11,555 $ 739 6.4 % 3.6 % 3.9 %

Amortization of intangible assets 2,966 3,270 (304)

Non-GAAP operating income $ 15,260 $ 14,825 $ 435 2.9 % 4.5 % 5.1 %

GAAP operating income (loss) $ — $ (832) $ 832 nm* nm* nm*

Acquisition and divestiture costs — 272 (272)

Restructuring costs — 560 (560)

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

Consolidated:

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

Amortization of intangible assets 4,457 4,880 (423)

Acquisition and divestiture costs — 272 (272)

Restructuring costs — 560 (560)

Non-GAAP operating income $ 37,374 $ 25,148 $ 12,226 48.6 % 4.4 % 3.4 %

Calculated by translating the net sales for the quarter ended September 30, 2022 into U.S.

dollars using the average foreign exchange rates for the quarter ended September 30, 2021.

Operating Income by Segment:

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

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

2022 2021 $ Change % Change 2022 2021

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Amortization of intangible assets 2,900 2,979 (79)

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

Non-GAAP operating income $ 15,936 $ 19,286 $ (3,350) (17.4) % 4.3 % 5.4 %

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Acquisition and divestiture costs — 83 (83)

Restructuring costs — 9,312 (9,312)

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

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Amortization of intangible assets 4,241 4,510 (269)

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

Acquisition and divestiture costs — 83 (83)

Restructuring costs — 9,312 (9,312)

Non-GAAP operating income $ 39,129 $ 34,921 $ 4,208 12.1 % 4.1 % 4.1 %

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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 March 31, 2022

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

(in thousands, except per share data)

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

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

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

Net income 23,526 3,353 — — 26,879

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

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)

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

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

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

Net income 13,786 3,697 272 423 18,178

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

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

Quarter ended September 30, 2022

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

(in thousands, except per share data)

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Diluted EPS $ 0.94 $ 0.12 $ — $ 1.07

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

Quarter ended September 30, 2021

GAAP Measure Intangible amortization expense Acquisition and divestiture 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 $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.

Our cash and cash equivalents balance totaled $40.5 million at September 30, 2022, compared to $38.0 million at June 30, 2022, including $33.1 million and $35.0 million held outside of the United States at September 30, 2022 and June 30, 2022, respectively.

Checks released but not yet cleared in the amounts of $11.5 million and $18.0 million are included in accounts payable at September 30, 2022 and June 30, 2022, respectively.

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

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See Note 13 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.

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 increased $84.1 million to $793.6 million at September 30, 2022 from $709.5 million at June 30, 2022, 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 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

For the quarter ended September 30, 2022, our working capital investment increased to support our 10.1% year-over-year net sales growth.

Three months ended

September 30,

(in thousands)

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Financing activities 54,044 54,860

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 .

Net cash used in operating activities was $48.5 million for the three months ended September 30, 2022, compared to $57.0 million used in operating activities in the prior-year period.

Cash used in operating activities for the three months ended September 30, 2022 is attributable to increases in inventory and accounts receivable, which increased 10% and 2%, respectively, compared to the beginning of the three month period.

Cash used in operating activities for the three months ended September 30, 2021 is primarily attributable to increases in accounts receivable and inventory, which increased 4% and 5%, respectively, compared to the beginning of the three month period.

Also contributing to the decrease in operating cash flows for the three months ended September 30, 2021 were decreases in accounts payable, which decreased by 5% compared to the beginning of the three month period.

Operating cash flows are 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 71 days at September 30, 2022, compared to 68 days at June 30, 2022 and 62 days at September 30, 2021.

The increase in DSO for the quarter ended September 30, 2022 is primarily due to increased net receivables, driven by project specific customer terms and timing of sales near the end of the reporting period.

Inventory turned 5.1 times during the quarter ended September 30, 2022, compared to 5.6 times for previous quarter ended June 30, 2022 and 6.3 times in the prior-year quarter ended September 30, 2021.

The decrease in inventory turns for the quarter ended September 30, 2022 is primarily due to increased average inventory.

Cash used in investing activities for the three months ended September 30, 2022 was $1.8 million, compared to $1.1 million used in investing activities in the prior-year period.

Cash used in investing activities for the three months ended September 30, 2022 and 2021 represent capital expenditures, primarily for IT investments.

Management expects capital expenditures for fiscal year 2023 to range from $6.5 million to $8.5 million, primarily for IT investments and facility improvements.

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.

For the three months ended September 30, 2022, cash provided by financing activities totaled $54.0 million, compared to $54.9 million provided by financing activities for the prior-year period.

Cash provided by financing activities for the three months ended September 30, 2022 and 2021 is primarily attributable to net borrowings on the revolving credit facility.

Credit Facility

We have a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks.

On April 30, 2019, we amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024.

The Amended Credit Agreement established (i) a five-year $350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility.

Pursuant to an “accordion feature,” we may increase borrowings up to an additional $250 million.

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.

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.

We have a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (as amended, the “Amended Credit Agreement”).

On September 28, 2022, we amended and restated our Amended Credit Agreement, which includes (i) a five-year, $350 million multicurrency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility.

The Amended Credit Agreement extends the credit facility maturity date to September 28, 2027.

In addition, pursuant to an “accordion feature,” we may increase our borrowings up to an additional $250 million, subject to obtaining additional credit commitments from the lenders participating in the increase.

The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit.

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

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 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, among other things.

The Amended Credit Agreement contains customary yield protection provisions.

Additionally, we are assessed commitment fees ranging from 0.15% to 0.30%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans.

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.

We incurred debt issuance costs of $1.5 million in connection with the amendment and restatement of the Amended Credit Agreement.

These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.

Loans denominated in U.S.

dollars, other than swingline loans, shall bear interest at a rate per annum equal to, at our option, (i) the adjusted Term SOFR or daily simple SOFR rate plus a fixed credit spread adjustment of 0.10%, plus an additional margin ranging from 1.00% to 1.75%, depending upon our ratio of (A) total consolidated debt less up to $30 million of unrestricted domestic cash to (B) trailing four-quarter consolidated EBITDA measured as of the end of the most recent year or quarter, as applicable, for which financial statements have been delivered to the Lenders (the “leverage ratio”);

or (ii) the alternate base rate plus an additional margin ranging from 0% to 0.75%, depending upon our leverage ratio, plus, if applicable, certain mandatory costs.

Loans denominated in foreign currencies shall bear interest at a rate per annum equal to the applicable benchmark rate set forth in the New Credit Agreement plus an additional margin ranging from 1.00% to 1.75%, depending upon our leverage ratio, plus, if applicable, certain mandatory costs.

All swingline loans denominated in U.S.

dollars shall bear interest based upon the adjusted daily simple SOFR, floating daily, plus an additional margin ranging from 1.00% to 1.75%, depending upon our leverage ratio, or such other rate as agreed upon with the applicable swingline lender.

During the quarter ended September 30, 2022, our borrowings under the credit facility were U.S.

dollar loans.

The spread in effect as of September 30, 2022 was 1.50% for LIBOR and SOFR-based loans and 0.50% for alternate base rate loans.

The commitment fee rate in effect at September 30, 2022 was 0.25%.

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 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 $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.

We were in compliance with all covenants under the credit facility at September 30, 2022.

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the three month periods ended September 30, 2022 and 2021 was $200.5 million and $54.4 million, respectively.

There was $177.3 million and $214.2 million available for additional borrowings as of September 30, 2022 and June 30, 2022, respectively.

There were no letters of credit issued under the multi-currency revolving credit facility at September 30, 2022 or June 30, 2022.

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 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.

While we were in compliance with the financial covenants contained in the Credit Facility as of September 30, 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 our present and future working capital and cash requirements for at least the next twelve months.

We also believe that our longer-term working capital, planned expenditures and other general funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities.

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