What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-07 compared with 2022-11-08 · 234 added, 96 removed, 252 unchanged (57% of the section changed)

18 unchanged sentences

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.

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

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

Our goal is to provide exceptional experiences for our partners, suppliers and employees through 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.

4 unchanged sentences

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)

The following tables summarize our net sales results by business segment and by geographic location for the quarters and six months ended December 31, 2022 and 2021:

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

Net Sales by Segment:

4 unchanged sentences

Total net sales $ 1,011,241 $ 864,079 $ 147,162 17.0 % 16.4 %

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

2022 2021 $ Change % Change

(in thousands)

Specialty Technology Solutions $ 1,203,878 $ 998,630 $ 205,248 20.6 % 20.4 %

Modern Communications & Cloud 751,176 723,032 28,144 3.9 % 3.4 %

Total net sales $ 1,955,054 $ 1,721,662 $ 233,392 13.6 % 13.3 %

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

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

For the quarter ended September 30, 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.

For the quarter and six months ended December 31, 2022, net sales for the Specialty Technology Solutions segment increased $130.6 million, or 26.3%, and $205.2 million, or 20.6%, respectively, compared to the prior-year periods.

Excluding the foreign exchange positive impact, adjusted net sales increased $129.5 million, or 26.1% for the quarter ended December 31, 2022 and $204.2 million, or 20.4%, for the six months ended December 31, 2022, compared to the prior-year periods.

The increase in net sales and adjusted net sales for the quarter and six month periods 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 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)

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

For the quarter and six months ended December 31, 2022, net sales for the Modern Communications & Cloud segment increased $16.5 million, or 4.5%, and $28.1 million, or 3.9%, respectively, compared to the prior-year periods.

Excluding the foreign exchange positive impact, adjusted net sales increased $12.0 million, or 3.3%, for the quarter ended December 31, 2022 and $24.3 million, or 3.4%, for the six months ended December 31, 2022, compared to the prior-year periods.

The increase in net sales and adjusted net sales for the quarter and six month periods is primarily due to increased demand for our Cisco products and growth in Brazil.

For our Intelisys business, net sales for the second quarter and six month period of fiscal year 2023 increased 9.2% and 8.1%, respectively, year-over-year.

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

Net Sales by Geography:

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Total net sales $ 1,011,241 $ 864,079 $ 147,162 17.0 % 16.4 %

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

2022 2021 $ Change % Change

(in thousands)

United States and Canada $ 1,768,760 $ 1,543,431 $ 225,329 14.6 % 14.6 %

International 186,294 178,231 8,063 4.5 % 1.7 %

Total net sales $ 1,955,054 $ 1,721,662 $ 233,392 13.6 % 13.3 %

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

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

The following table summarizes our gross profit for the quarters and six months ended December 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Gross profit $ 115,334 $ 107,653 $ 7,681 7.1 % 11.4 % 12.5 %

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

2022 2021 $ Change % Change 2022 2021

(in thousands)

Specialty Technology Solutions $ 115,135 $ 97,742 $ 17,393 17.8 % 9.6 % 9.8 %

Modern Communications & Cloud 113,683 111,483 2,200 2.0 % 15.1 % 15.4 %

Gross profit $ 228,818 $ 209,225 $ 19,593 9.4 % 11.7 % 12.2 %

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

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Specialty Technology Solutions

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

For the quarter ended December 31, 2022, gross profit dollars for the Specialty Technology Solutions segment increased $4.7 million, or 9.0%.

Higher sales volume, after considering the associated cost of goods sold, contributed $13.7 million to the growth of gross profit dollars.

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%.

Gross margin mix negatively impacted gross profit by $9.0 million, largely from a less favorable sales mix and decreased vendor program recognition.

For the quarter ended December 31, 2022, the gross profit margin decreased 143 basis points over the prior-year to 9.0%.

For the six months ended December 31, 2022, the Specialty Technology Solutions segment achieved gross profit growth of $17.4 million, or 17.8%.

Increases in sales volume, after considering the associated cost of goods sold, contributed $20.1 million to the growth of gross profit dollars.

Gross margin mix negatively impacted gross profit by $2.7 million, primarily from increased freight costs.

For the six months ended December 31, 2022, the gross profit margin decreased 22 basis points over the prior year to 9.6%.

Modern Communications & Cloud

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

For the quarter ended December 31, 2022, the Modern Communications & Cloud segment gross profit increased by $3.0 million, or 5.4%.

Higher sales volume, after considering the associated cost of goods sold, positively contributed $2.5 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%.

Gross margin mix positively impacted gross profit by $0.5 million, largely driven by a more favorable sales mix.

For the quarter ended December 31, 2022, the gross profit margin increased 13 basis points over the prior year to 15.3%.

For the six months ended December 31, 2022, the Modern Communications & Cloud segment achieved gross profit growth of $2.2 million, or 2.0%.

Increases in sales volume, after considering the associated cost of goods sold, contributed $4.3 million to the growth of gross profit dollars.

Gross margin mix negatively impacted gross profit by $2.1 million, primarily from increased freight costs.

For the six months ended December 31, 2022, the gross profit margin decreased 28 basis points over the prior year to 15.1%.

Operating Expenses

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,

The following table summarizes our operating expenses for the quarters and six months ended December 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Operating expenses $ 75,902 $ 76,155 $ (253) (0.3) % 7.5 % 8.8 %

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.

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

2022 2021 $ Change % Change 2022 2021

(in thousands)

Selling, general and administrative expenses $ 140,667 $ 133,016 $ 7,651 5.8 % 7.2 % 7.7 %

Depreciation expense 5,441 5,427 14 0.3 % 0.3 % 0.3 %

Intangible amortization expense 8,391 8,956 (565) (6.3) % 0.4 % 0.5 %

Operating expenses $ 154,499 $ 147,399 $ 7,100 4.8 % 7.9 % 8.6 %

Selling, general and administrative expenses ("SG&A") decreased by less than $0.1 million for the quarter ended December 31, 2022, compared to the prior-year period.

The decrease for the quarter ended December 31, 2022 is primarily attributable to a recovery of prior period withholding taxes in Brazil, which reduced SG&A by $2.9 million, partially offset by higher employee costs.

For the six months ended December 31, 2022, SG&A expenses increased by $7.7 million, or 5.8%, compared to the prior-year period.

The increase for the six months ended December 31, 2022 is primarily attributable to higher employee costs, partially offset by a $2.9 million recovery of prior period withholding taxes in Brazil.

Operating Income

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,

The following table summarizes our operating income for the quarters and six months ended December 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Operating income $ 39,432 $ 31,498 $ 7,934 25.2 % 3.9 % 3.6 %

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

2022 2021 $ Change % Change 2022 2021

(in thousands)

Specialty Technology Solutions $ 41,534 $ 30,655 $ 10,879 35.5 % 3.5 % 3.1 %

Modern Communications & Cloud 32,785 31,201 1,584 5.1 % 4.4 % 4.3 %

Corporate — (30) 30 nm* nm* nm*

Operating income $ 74,319 $ 61,826 $ 12,493 20.2 % 3.8 % 3.6 %

*nm - percentages are not meaningful

Specialty Technology Solutions

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.

For the Specialty Technology Solutions segment, operating income increased $3.1 million and $10.9 million for the quarter and six months ended December 31, 2022, respectively, compared to the prior-year period.

Operating margin decreased to 3.1% for the quarter ended December 31, 2022.

For the six months ended December 31, 2022, operating margin increased to 3.5%.

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

Modern Communications & Cloud

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.

For the Modern Communications & Cloud segment, operating income increased $4.9 million and $1.6 million for the quarter and six months ended December 31, 2022, respectively, compared to the prior-year period.

Operating margin increased to 5.1% and 4.4% for the quarter and six months ended December 31, 2022, respectively.

The increase in operating income and margin for the quarter and six month period is primarily due to higher gross profits and a $2.9 million recovery of prior period withholding taxes in Brazil.

Corporate recognized no restructuring or divestiture expenses for the quarter and six months ended December 31, 2022, compared to less than $0.1 million in the prior-year quarter and six month period.

Total Other (Income) Expense

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,

The following table summarizes our total other (income) expense for the quarters and six months ended December 31, 2022 and 2021:

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

2022 2021 $ Change % Change 2022 2021

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Total other expense, net $ 3,240 $ 1,089 $ 2,151 197.5 % 0.3 % 0.1 %

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

2022 2021 $ Change % Change 2022 2021

(in thousands)

Interest expense $ 8,507 $ 3,153 $ 5,354 169.8 % 0.4 % 0.2 %

Interest income (3,618) (1,973) (1,645) 83.4 % (0.2) % (0.1) %

Net foreign exchange losses 1,270 966 304 31.5 % 0.1 % 0.1 %

Other, net (315) (159) (156) 98.1 % (0.0) % (0.0) %

Total other expense, net $ 5,844 $ 1,987 $ 3,857 194.1 % 0.3 % 0.1 %

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 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.

Interest expense increased for the quarter and six months ended December 31, 2022 compared to the prior-year periods, primarily from higher borrowings and increases in interest rates on our multi-currency revolving credit facility.

Interest income for the quarter and six months ended December 31, 2022 was generated on interest-bearing investments in Brazil and customer receivables.

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.

1 unchanged sentence

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.

dollar versus the euro, the British pound versus the euro, 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.

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

Provision for Income Taxes

For the quarter ended September 30, 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%.

For the quarter and six months ended December 31, 2022, income tax expense was $10.5 million and $18.7 million reflecting an effective tax rate of 28.9% and 27.3%, respectively.

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

The increase in the effective tax rate for the quarter and six months is primarily due to a decrease in forecasted tax exempt income and a decrease in creditable foreign taxes compared to the prior-year quarter.

We expect the effective tax rate for fiscal year 2023 to be approximately 27.0% to 28.0%.

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

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and constant currency.

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

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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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 September 30, 2022 and 2021, respectively:

Quarter ended September 30,

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

Quarter ended December 31,

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 September 30,

Quarter ended December 31,

(in thousands)

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EBITDA (non-GAAP) 48,309 39,131

Tax recovery (a)

Share-based compensation 3,364 3,464

Acquisition and divestiture costs (a)

Acquisition and divestiture costs (b)

Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 48,815 $ 42,542

Quarter ended September 30,

Quarter ended December 31,

(in thousands)

3 unchanged sentences

Share-based compensation, net 2,496 2,590

Acquisition and divestiture costs (a)

Acquisition and divestiture costs (b)

Tax recovery, net (1,886) —

Discontinued operations net loss — (100)

Average equity 845,000 758,528

Average funded debt (b)

Average funded debt (c)

392,853 200,708

Invested capital (denominator for adjusted ROIC) (non-GAAP) $ 1,237,853 $ 959,236

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

(b) Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt.

(a) Recovery of prior period withholding taxes in Brazil.

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

(c) Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt.

Net Sales in Constant Currency, Excluding Acquisitions and Divestitures

7 unchanged sentences

Net Sales by Segment:

Quarter ended September 30,

Quarter ended December 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 September 30, 2022 into U.S.

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

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

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

Net Sales by Segment:

Six months ended December 31,

2022 2021 $ Change % Change

Specialty Technology Solutions (in thousands)

Net sales, reported $ 1,203,878 $ 998,630 $ 205,248 20.6 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,202,818 $ 998,630 $ 204,188 20.4 %

Modern Communications & Cloud

Net sales, reported $ 751,176 $ 723,032 $ 28,144 3.9 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 747,292 $ 723,032 $ 24,260 3.4 %

Consolidated:

Net sales, reported $ 1,955,054 $ 1,721,662 $ 233,392 13.6 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,950,110 $ 1,721,662 $ 228,448 13.3 %

(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, 2022 into U.S.

dollars using the average foreign exchange rates for the six months ended December 31, 2021.

Net Sales by Geography:

Quarter ended September 30,

Quarter ended December 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 quarter ended September 30, 2022 into U.S.

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

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

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

Six months ended December 31,

2022 2021 $ Change % Change

United States and Canada:

(in thousands)

Net sales, as reported $ 1,768,760 $ 1,543,431 $ 225,329 14.6 %

International:

Net sales, reported $ 186,294 $ 178,231 $ 8,063 4.5 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 181,350 $ 178,231 $ 3,119 1.7 %

Consolidated:

Net sales, reported $ 1,955,054 $ 1,721,662 $ 233,392 13.6 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,950,110 $ 1,721,662 $ 228,448 13.3 %

(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, 2022 into U.S.

dollars using the average foreign exchange rates for the six months ended December 31, 2021.

Operating Income by Segment:

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

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

2022 2021 $ Change % Change 2022 2021

7 unchanged sentences

Amortization of intangible assets 2,884 2,956 (72)

Tax recovery (a)

(2,858) — (2,858)

Non-GAAP operating income $ 19,776 $ 17,850 $ 1,926 10.8 % 5.2 % 4.9 %

5 unchanged sentences

Amortization of intangible assets 4,150 4,447 (297)

Tax recovery (a)

(2,858) — (2,858)

Acquisition and divestiture costs — (53) 53

Non-GAAP operating income $ 40,724 $ 35,892 $ 4,832 13.5 % 4.0 % 4.2 %

(a) Recovery of prior period withholding taxes in Brazil

Operating Income by Segment:

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

2022 2021 $ Change % Change 2022 2021

Specialty Technology Solutions:

(in thousands)

GAAP operating income $ 41,534 $ 30,655 $ 10,879 35.5 % 3.5 % 3.1 %

Amortization of intangible assets 2,608 3,023 (415)

Non-GAAP operating income $ 44,142 $ 33,678 $ 10,464 31.1 % 3.7 % 3.4 %

Modern Communications & Cloud:

GAAP operating income $ 32,785 $ 31,201 $ 1,584 5.1 % 4.4 % 4.3 %

Amortization of intangible assets 5,783 5,933 (150)

Tax recovery (a)

(2,858) — (2,858)

Non-GAAP operating income $ 35,710 $ 37,134 $ (1,424) (3.8) % 4.8 % 5.1 %

GAAP operating loss $ — $ (30) $ 30 nm* nm* nm*

Acquisition and divestiture costs — 30 (30)

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

Consolidated:

GAAP operating income $ 74,319 $ 61,826 $ 12,493 20.2 % 3.8 % 3.6 %

Amortization of intangible assets 8,391 8,956 (565)

Tax recovery (a)

(2,858) — (2,858)

Acquisition and divestiture costs — 30 (30)

Non-GAAP operating income 79,852 70,812 $ 9,040 12.8 % 4.1 % 4.1 %

(a) Recovery of prior period withholding taxes in Brazil

Additional Non-GAAP Metrics

4 unchanged sentences

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

Quarter ended September 30, 2022

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

Quarter ended December 31, 2022

GAAP Measure Intangible amortization expense Acquisition and divestiture costs Tax recovery (a)

Non-GAAP measure

(in thousands, except per share data)

4 unchanged sentences

Diluted EPS $ 1.01 $ 0.12 $ — $ (0.07) $ 1.06

Quarter ended September 30, 2021

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

Quarter ended December 31, 2021

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

(in thousands, except per share data)

4 unchanged sentences

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

(a) Recovery of prior period withholding taxes in Brazil

Six months ended December 31, 2022

GAAP Measure Intangible amortization expense Acquisition and divestiture costs Tax recovery (a)

Non-GAAP measure

(in thousands, except per share data)

SG&A expenses $ 140,667 $ — $ — $ 2,858 $ 143,525

Operating income 74,319 8,391 — (2,858) 79,852

Pre-tax income 68,475 8,391 — (2,858) 74,008

Net income 49,776 6,254 — (1,886) 54,144

Diluted EPS $ 1.96 $ 0.25 $ — $ (0.07) $ 2.13

Six months ended December 31, 2021

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

(in thousands, except per share data)

SG&A expenses $ 133,016 $ — $ (30) $ — $ 132,986

Operating income 61,826 8,956 30 — 70,812

Pre-tax income 59,839 8,956 30 — 68,825

Net income 45,225 6,740 30 — 51,995

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

(a) Recovery of prior period withholding taxes in Brazil

Liquidity and Capital Resources

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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 $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.

Our cash and cash equivalents balance totaled $66.4 million at December 31, 2022, compared to $38.0 million at June 30, 2022, including $44.3 million and $35.0 million held outside of the United States at December 31, 2022 and June 30, 2022, respectively.

Checks released but not yet cleared in the amounts of $8.9 million and $18.0 million are included in accounts payable at December 31, 2022 and June 30, 2022, respectively.

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

1 unchanged sentence

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

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 increased $172.8 million to $882.3 million at December 31, 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 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,

For the six months ended December 31, 2022, our working capital investment increased to support our 13.6% year-over-year net sales growth.

Six months ended

(in thousands)

3 unchanged sentences

Financing activities 108,029 51,365

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.

Net cash used in operating activities was $75.3 million for the six months ended December 31, 2022, compared to $75.4 million used in operating activities in the prior-year period.

Cash used in operating activities for the six months ended December 31, 2022 is attributable to increases in inventory and accounts receivable, which increased 24% and 7%, respectively, compared to the beginning of the six month period.

Cash used in operating activities for the six months ended December 31, 2021 is primarily attributable to increases in inventory and accounts receivable, which increased 20% and 8%, respectively, compared to the beginning of the six 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.

The number of days sales outstanding ("DSO") was 69 days at December 31, 2022, compared to 68 days at June 30, 2022 and 64 days at December 31, 2021.

The increase in DSO for the quarter ended December 31, 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 5.0 times during the quarter ended December 31, 2022, compared to 5.1 times for previous quarter ended September 30, 2022 and 5.7 times in the prior-year quarter ended December 31, 2021.

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

Cash used in investing activities for the six months ended December 31, 2022 was $4.3 million, compared to $0.5 million provided by investing activities in the prior-year period.

Cash used in investing activities for the six months ended December 31, 2022 represents capital expenditures, primarily for IT investments.

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.

Management expects capital expenditures for fiscal year 2023 to range from $6.5 million to $9.0 million, primarily for IT investments and facility improvements.

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.

For the six months ended December 31, 2022, cash provided by financing activities totaled $108.0 million, compared to $51.4 million provided by financing activities for the prior-year period.

Cash provided by financing activities for the six months ended December 31, 2022 and 2021 is primarily attributable to net borrowings on the revolving credit facility.

Credit Facility

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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.

The Amended Credit Agreement extended 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.

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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”);

dollars, other than swingline loans, shall bear interest at a rate per annum equal to, at our option, (i) the adjusted Term SOFR or adjusted daily simple SOFR 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.

The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10% over the applicable SOFR reference rate.

During the quarter and six months ended December 31, 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 spread in effect as of December 31, 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 December 31, 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 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.

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

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the six month periods ended December 31, 2022 and 2021 was $219.5 million and $57.1 million, respectively.

There was $120.0 million and $214.2 million available for additional borrowings as of December 31, 2022 and June 30, 2022, respectively.

There were no letters of credit issued under the multi-currency revolving credit facility at December 31, 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.

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.

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

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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