SCANSOURCE, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview 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. Our segments operate in the United States, Canada, Brazil and the UK and consist of the following: • Specialty Technology Solutions • Modern Communications & Cloud We sell hardware, SaaS, connectivity and cloud solutions and services through channel partners to end-customers. We operate distribution facilities that support our United States and Canada business in Mississippi, California and Kentucky. Brazil distribution facilities are located in the Brazilian states of Paraná, Espirito Santo and Santa Catarina. We provide some of our digital products, which include SaaS and subscriptions, through our digital tools and platforms. Our key suppliers include 8x8, AT&T, Aruba/HPE, Avaya, Axis, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Equinix, Extreme, F5, Five9, Fortinet, Genesys, Granite, GTT, Hanwha, Honeywell, Ingenico, Jabra, Lumen, Microsoft, MetTel, Mitel, NCR, NICE CXone, Poly, RingCentral, Spectrum, Toshiba Global Commerce Solutions, Trend Micro, Ubiquiti, Verifone, Verizon, VMWare, Windstream, Zebra Technologies and Zoom. 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 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. ScanSource enables sales partners to deliver solutions for their customers to address changing end-customer buying and consumption patterns. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services. As a trusted adviser to our sales partners, we provide customized solutions through our strong understanding of end-customer needs. 25 Table of Contents Results of Operations Net Sales 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 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: 2022 2021 $ Change % Change (in thousands) Specialty Technology Solutions $ 627,548 $ 496,920 $ 130,628 26.3 % 26.1 % Modern Communications & Cloud 383,693 367,159 16,534 4.5 % 3.3 % 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. Specialty Technology Solutions The Specialty Technology Solutions segment consists of sales to customers in North America and Brazil. 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 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. 26 Table of Contents Quarter ended December 31, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a) Net Sales by Geography: 2022 2021 $ Change % Change (in thousands) United States and Canada $ 909,221 $ 773,660 $ 135,561 17.5 % 17.5 % International 102,020 90,419 11,601 12.8 % 6.6 % 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. Gross Profit 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 (in thousands) Specialty Technology Solutions $ 56,732 $ 52,048 $ 4,684 9.0 % 9.0 % 10.5 % Modern Communications & Cloud 58,602 55,605 2,997 5.4 % 15.3 % 15.1 % 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. 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 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 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 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%. 27 Table of Contents 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 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 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 and six months ended December 31, 2022 and 2021: Quarter ended December 31, % of Net Sales December 31, 2022 2021 $ Change % Change 2022 2021 (in thousands) Selling, general and administrative expenses $ 69,074 $ 69,161 $ (87) (0.1) % 6.8 % 8.0 % Depreciation expense 2,678 2,547 131 5.1 % 0.3 % 0.3 % Intangible amortization expense 4,150 4,447 (297) (6.7) % 0.4 % 0.5 % Operating expenses $ 75,902 $ 76,155 $ (253) (0.3) % 7.5 % 8.8 % 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 and six months ended December 31, 2022 and 2021: 28 Table of Contents Quarter ended December 31, % of Net Sales December 31, 2022 2021 $ Change % Change 2022 2021 (in thousands) Specialty Technology Solutions $ 19,682 $ 16,551 $ 3,131 18.9 % 3.1 % 3.3 % Modern Communications & Cloud 19,750 14,894 4,856 32.6 % 5.1 % 4.1 % Corporate — 53 (53) nm* nm* nm* 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 $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 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 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 and six months ended December 31, 2022 and 2021: 29 Table of Contents Quarter ended December 31, % of Net Sales December 31, 2022 2021 $ Change % Change 2022 2021 (in thousands) Interest expense $ 5,060 $ 1,493 $ 3,567 238.9 % 0.5 % 0.2 % Interest income (2,027) (947) (1,080) 114.0 % (0.2) % (0.1) % Net foreign exchange losses 347 480 (133) (27.7) % 0.0 % 0.1 % Other, net (140) 63 (203) (322.2) % (0.0) % 0.0 % 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 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. 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, and the Canadian dollar versus the U.S. dollar. 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 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. Non-GAAP Financial Information Evaluating Financial Condition and Operating Performance In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating income; non-GAAP pre-tax income; non-GAAP net income; non-GAAP EPS; adjusted earnings before interest expense, income taxes, depreciation, and amortization ("adjusted EBITDA"); adjusted return on invested capital ("adjusted ROIC"); and constant currency. Constant currency is a measure that excludes the translation exchange impact from changes in 30 Table of Contents 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. These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP. Adjusted Return on Invested Capital Adjusted ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of adjusted ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year. Adjusted EBITDA starts with net income and adds back interest expense, income tax expense, depreciation expense, amortization of intangible assets, 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. 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 December 31, 2022 and 2021, respectively: Quarter ended December 31, 2022 2021 Adjusted return on invested capital ratio, annualized (a) 15.6 % 17.6 % (a) The annualized EBITDA amount is divided by days in the quarter times 365 days per year, or 366 days for leap year. There were 92 days in the current and prior-year quarter. The components of this calculation and reconciliation to our financial statements are shown on the following schedule: Quarter ended December 31, 2022 2021 (in thousands) Reconciliation of net income to adjusted EBITDA: Net income (GAAP) $ 25,734 $ 23,152 Plus: Interest expense 5,060 1,493 Plus: Income taxes 10,458 7,257 Plus: Depreciation and amortization 7,057 7,229 EBITDA (non-GAAP) 48,309 39,131 Plus: Tax recovery (a) (2,858) — Plus: Share-based compensation 3,364 3,464 Plus: Acquisition and divestiture costs (b) — (53) Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 48,815 $ 42,542 31 Table of Contents Quarter ended December 31, 2022 2021 (in thousands) Invested capital calculations: Equity – beginning of the quarter $ 827,004 $ 746,094 Equity – end of the quarter 862,386 768,525 Plus: Share-based compensation, net 2,496 2,590 Plus: Acquisition and divestiture costs (b) — (53) Plus: Tax recovery, net (1,886) — Plus: Discontinued operations net loss — (100) Average equity 845,000 758,528 Average funded debt (c) 392,853 200,708 Invested capital (denominator for adjusted ROIC) (non-GAAP) $ 1,237,853 $ 959,236 (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 We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the average foreign exchange rates between reporting periods. Constant currency is calculated by translating current period results from currencies other than the U.S. dollar into U.S. dollars using the comparable average foreign exchange rates from the prior year period. 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 December 31, 2022 2021 $ Change % Change Specialty Technology Solutions: (in thousands) Net sales, reported $ 627,548 $ 496,920 $ 130,628 26.3 % Foreign exchange impact (a) (1,120) — Non-GAAP net sales, constant currency $ 626,428 $ 496,920 $ 129,508 26.1 % Modern Communications & Cloud: Net sales, reported $ 383,693 $ 367,159 $ 16,534 4.5 % Foreign exchange impact (a) (4,497) — Non-GAAP net sales, constant currency $ 379,196 $ 367,159 $ 12,037 3.3 % Consolidated: Net sales, reported $ 1,011,241 $ 864,079 $ 147,162 17.0 % Foreign exchange impact (a) (5,617) — Non-GAAP net sales, constant currency $ 1,005,624 $ 864,079 $ 141,545 16.4 % (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 December 31, 2022 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2021. 32 Table of Contents 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) (1,060) — 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) (3,884) — 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) (4,944) — 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. 33 Table of Contents Net Sales by Geography: Quarter ended December 31, 2022 2021 $ Change % Change United States and Canada: (in thousands) Net sales, as reported $ 909,221 $ 773,660 $ 135,561 17.5 % International: Net sales, reported $ 102,020 $ 90,419 $ 11,601 12.8 % Foreign exchange impact (a) (5,617) — Non-GAAP net sales, constant currency $ 96,403 $ 90,419 $ 5,984 6.6 % Consolidated: Net sales, reported $ 1,011,241 $ 864,079 $ 147,162 17.0 % Foreign exchange impact (a) (5,617) — Non-GAAP net sales, constant currency $ 1,005,624 $ 864,079 $ 141,545 16.4 % (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 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) (4,944) — 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) (4,944) — 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. 34 Table of Contents Operating Income by Segment: Quarter ended December 31, % of Net Sales December 31, 2022 2021 $ Change % Change 2022 2021 Specialty Technology Solutions: (in thousands) GAAP operating income $ 19,682 $ 16,551 $ 3,131 18.9 % 3.1 % 3.3 % Adjustments: Amortization of intangible assets 1,266 1,491 (225) Non-GAAP operating income $ 20,948 $ 18,042 $ 2,906 16.1 % 3.3 % 3.6 % Modern Communications & Cloud: GAAP operating income $ 19,750 $ 14,894 $ 4,856 32.6 % 5.1 % 4.1 % Adjustments: 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 % Corporate: GAAP operating loss $ — $ 53 $ (53) nm* nm* nm* Adjustments: Acquisition and divestiture costs — (53) 53 Non-GAAP operating income $ — $ — $ — nm* nm* nm* Consolidated: GAAP operating income $ 39,432 $ 31,498 $ 7,934 25.2 % 3.9 % 3.6 % Adjustments: 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 35 Table of Contents 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 % Adjustments: 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 % Adjustments: 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 % Corporate: GAAP operating loss $ — $ (30) $ 30 nm* nm* nm* Adjustments: 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 % Adjustments: 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 36 Table of Contents Additional Non-GAAP Metrics To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP SG&A expenses, non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share. Non-GAAP results exclude amortization of intangible assets related to acquisitions, changes in fair value of contingent consideration, acquisition and divestiture costs, restructuring costs, impact of Divestitures and other non-GAAP adjustments. These year-over-year metrics include the translation impact of changes in foreign currency exchange rates. These metrics are useful in assessing and understanding our operating performance, especially when comparing results with previous periods or forecasting performance for future periods. Below we provide a non-GAAP reconciliation of the aforementioned metrics adjusted for the costs and charges mentioned above: 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) SG&A expenses $ 69,074 $ — $ — $ 2,858 $ 71,932 Operating income 39,432 4,150 — (2,858) 40,724 Pre-tax income 36,192 4,150 — (2,858) 37,484 Net income 25,734 3,093 — (1,886) 26,941 Diluted EPS $ 1.01 $ 0.12 $ — $ (0.07) $ 1.06 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) SG&A expenses $ 69,161 $ — $ 53 $ — $ 69,214 Operating income 31,498 4,447 (53) — 35,892 Pre-tax income 30,409 4,447 (53) — 34,803 Net income 23,152 3,347 (53) — 26,446 Diluted EPS $ 0.89 $ 0.13 $ — $ — $ 1.02 (a) Recovery of prior period withholding taxes in Brazil 37 Table of Contents 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 38 Table of Contents Liquidity and Capital Resources Our primary sources of liquidity are cash flows from operations and borrowings under our $350 million revolving credit facility. Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit. In general, as our sales volumes increase, our net investment in working capital increases, which typically results in decreased cash flow from operating activities. 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 $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. We provide for United States income taxes from the earnings of our Canadian and Brazilian subsidiaries. See Note 13 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion. 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 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 December 31, 2022 2021 (in thousands) Cash (used in) provided by: Operating activities $ (75,346) $ (75,378) Investing activities (4,262) 480 Financing activities 108,029 51,365 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 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. 39 Table of Contents 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 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 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 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. 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. We incurred debt issuance costs of $1.4 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 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. 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. The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10% over the applicable SOFR reference rate. 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. 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 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. Specifically, our Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, our Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. 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 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. Summary 40 Table of Contents 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 See Note 1 of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on our consolidated financial position and results of operations. Critical Accounting Policies and Estimates Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. See Management's Discussion and Analysis of Financial Condition and Results from Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 for a complete discussion. 41 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk For a description of our market risks, see Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. No material changes have occurred to our market risks since June 30, 2022. 42 Table of Contents