SCANSOURCE, INC. 10-Q

Item 1. Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share information) March 31, 2023 June 30, 2022 Assets Current assets: Cash and cash equivalents $ 37,374 $ 37,987 Accounts receivable, less allowance of $ 14,236 at March 31, 2023 and $ 16,806 at June 30, 2022 684,458 729,442 Inventories 752,763 614,814 Prepaid expenses and other current assets 102,946 141,562 Total current assets 1,577,541 1,523,805 Property and equipment, net 36,486 37,477 Goodwill 215,326 214,435 Identifiable intangible assets, net 72,192 84,427 Deferred income taxes 14,300 15,668 Other non-current assets 64,537 61,616 Total assets $ 1,980,382 $ 1,937,428 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 656,688 $ 714,177 Accrued expenses and other current liabilities 77,045 88,455 Income taxes payable 4,441 34 Current portion of long-term debt 5,977 11,598 Total current liabilities 744,151 814,264 Deferred income taxes 3,202 3,144 Long-term debt, net of current portion 145,881 123,733 Borrowings under revolving credit facility 159,194 135,839 Other long-term liabilities 49,059 53,920 Total liabilities 1,101,487 1,130,900 Commitments and contingencies Shareholders’ equity: Preferred stock, no par value; 3,000,000 shares authorized, none issued — — Common stock, no par value; 45,000,000 shares authorized, 25,007,396 and 25,187,351 shares issued and outstanding at March 31, 2023 and June 30, 2022, respectively 60,475 64,297 Retained earnings 917,866 846,869 Accumulated other comprehensive loss ( 99,446 ) ( 104,638 ) Total shareholders’ equity 878,895 806,528 Total liabilities and shareholders’ equity $ 1,980,382 $ 1,937,428 June 30, 2022 amounts are derived from audited consolidated financial statements. See accompanying notes to these condensed consolidated financial statements. 5 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED) (In thousands, except per share data) Quarter ended Nine months ended March 31, March 31, 2023 2022 2023 2022 Net sales $ 885,519 $ 845,990 $ 2,840,573 $ 2,567,652 Cost of goods sold 773,757 739,482 2,499,992 2,251,920 Gross profit 111,762 106,508 340,581 315,732 Selling, general and administrative expenses 70,669 66,522 211,337 199,538 Depreciation expense 2,644 2,612 8,085 8,039 Intangible amortization expense 4,170 4,457 12,561 13,413 Operating income 34,279 32,917 108,598 94,742 Interest expense 5,715 1,483 14,223 4,637 Interest income ( 1,710 ) ( 1,000 ) ( 5,327 ) ( 2,973 ) Other expense, net 361 ( 136 ) 1,314 668 Income before income taxes 29,913 32,570 98,388 92,410 Provision for income taxes 8,692 9,044 27,391 23,659 Net income from continuing operations 21,221 23,526 70,997 68,751 Net income from discontinued operations — — — 100 Net income $ 21,221 $ 23,526 $ 70,997 $ 68,851 Per share data: Net income from continuing operations per common share, basic $ 0.84 $ 0.92 $ 2.81 $ 2.69 Net income from discontinued operations per common share, basic — — — — Net income per common share, basic $ 0.84 $ 0.92 $ 2.81 $ 2.69 Weighted-average shares outstanding, basic 25,196 25,635 25,228 25,577 Net income from continuing operations per common share, diluted $ 0.83 $ 0.91 $ 2.79 $ 2.66 Net income from discontinued operations per common share, diluted — — — — Net income per common share, diluted $ 0.83 $ 0.91 $ 2.79 $ 2.67 Weighted-average shares outstanding, diluted 25,439 25,853 25,436 25,812 See accompanying notes to these condensed consolidated financial statements. 6 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Quarter ended Nine months ended March 31, March 31, 2023 2022 2023 2022 Net income $ 21,221 $ 23,526 $ 70,997 $ 68,851 Unrealized (loss) gain on hedged transaction, net of tax ( 1,165 ) 3,144 718 4,730 Foreign currency translation adjustment 4,291 17,186 4,474 3,279 Comprehensive income $ 24,347 $ 43,856 $ 76,189 $ 76,860 See accompanying notes to these condensed consolidated financial statements. 7 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands, except share information) Common Stock (Shares) Common Stock (Amount) Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2022 25,187,351 $ 64,297 $ 846,869 $ ( 104,638 ) $ 806,528 Net income — — 24,042 — 24,042 Unrealized gain on hedged transaction, net of tax — — — 1,879 1,879 Foreign currency translation adjustment — — — ( 7,217 ) ( 7,217 ) Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 38,551 ( 586 ) — — ( 586 ) Share-based compensation — 2,358 — — 2,358 Balance at September 30, 2022 25,225,902 $ 66,069 $ 870,911 $ ( 109,976 ) $ 827,004 Net income — — 25,734 — 25,734 Unrealized gain on hedged transaction, net of tax — — — 3 3 Foreign currency translation adjustment — — — 7,401 7,401 Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 117,112 ( 1,112 ) — — ( 1,112 ) Share-based compensation — 3,356 — — 3,356 Balance at December 31, 2022 25,343,014 $ 68,313 $ 896,645 $ ( 102,572 ) $ 862,386 Net income — — 21,221 — 21,221 Unrealized loss on hedged transaction, net of tax — — — ( 1,165 ) ( 1,165 ) Foreign currency translation adjustment — — — 4,291 4,291 Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 20,851 118 — — 118 Common stock repurchased ( 356,469 ) ( 10,906 ) — — ( 10,906 ) Share-based compensation — 2,950 — — 2,950 Balance at March 31, 2023 25,007,396 $ 60,475 $ 917,866 $ ( 99,446 ) $ 878,895 See accompanying notes to these condensed consolidated financial statements. 8 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands, except share information) Common Stock (Shares) Common Stock (Amount) Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2021 25,499,465 $ 71,253 $ 758,071 $ ( 98,133 ) $ 731,191 Net income — — 22,073 — 22,073 Unrealized gain on hedged transaction, net of tax — — — 413 413 Foreign currency translation adjustment — — — ( 11,147 ) ( 11,147 ) Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 29,086 994 — — 994 Share-based compensation — 2,570 — — 2,570 Balance at September 30, 2021 25,528,551 $ 74,817 $ 780,144 $ ( 108,867 ) $ 746,094 Net income — — 23,252 — 23,252 Unrealized gain on hedged transaction, net of tax — — — 1,172 1,172 Foreign currency translation adjustment — — — ( 2,759 ) ( 2,759 ) Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 134,897 ( 2,513 ) — — ( 2,513 ) Common stock repurchased ( 5,903 ) ( 183 ) — — ( 183 ) Share-based compensation — 3,462 — — 3,462 Balance at December 31, 2021 25,657,545 $ 75,583 $ 803,396 $ ( 110,454 ) $ 768,525 Net income — — 23,526 — 23,526 Unrealized gain on hedged transaction, net of tax — — — 3,144 3,144 Foreign currency translation adjustment — — — 17,186 17,186 Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 46,549 383 — — 383 Common stock repurchased ( 274,852 ) ( 8,886 ) — — ( 8,886 ) Share-based compensation — 2,776 — — 2,776 Balance at March 31, 2022 25,429,242 $ 69,856 $ 826,922 $ ( 90,124 ) $ 806,654 See accompanying notes to these condensed consolidated financial statements. 9 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine months ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 70,997 $ 68,851 Net income from discontinued operations — 100 Net income from continuing operations 70,997 68,751 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 21,359 22,184 Amortization of debt issue costs 481 313 Provision for doubtful accounts 1,852 156 Share-based compensation 8,633 8,792 Deferred income taxes 1,409 1,995 Finance lease interest 31 32 Changes in operating assets and liabilities: Accounts receivable 46,652 ( 67,404 ) Inventories ( 136,257 ) ( 118,349 ) Prepaid expenses and other assets 39,178 ( 15,002 ) Other non-current assets ( 1,772 ) ( 2,791 ) Accounts payable ( 60,717 ) 67,535 Accrued expenses and other liabilities ( 16,780 ) ( 12,745 ) Income taxes payable 4,426 862 Net cash used in operating activities ( 20,508 ) ( 45,671 ) Cash flows from investing activities: Capital expenditures ( 6,549 ) ( 3,326 ) Proceeds from the sale of discontinued operations — 3,125 Net cash used in investing activities ( 6,549 ) ( 201 ) Cash flows from financing activities: Borrowings on revolving credit, net of expenses 1,871,909 1,597,270 Repayments on revolving credit, net of expenses ( 1,848,554 ) ( 1,552,976 ) Borrowings (repayments) on long-term debt, net 16,527 ( 5,968 ) Repayments on finance lease obligation ( 612 ) ( 932 ) Debt issuance costs ( 1,407 ) — Exercise of stock options 853 1,592 Taxes paid on settlement of equity awards ( 2,433 ) ( 2,729 ) Common stock repurchased ( 10,718 ) ( 8,527 ) Net cash provided by financing activities 25,565 27,730 Effect of exchange rate changes on cash and cash equivalents 879 ( 1,037 ) Decrease in cash and cash equivalents ( 613 ) ( 19,179 ) Cash and cash equivalents at beginning of period 37,987 62,718 Cash and cash equivalents at end of period $ 37,374 $ 43,539 See accompanying notes to these condensed consolidated financial statements. 10 Table of Contents SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Business and Summary of Significant Accounting Policies Business Description ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “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. The Company brings technology solutions and services from the world’s leading suppliers of mobility and barcode, point-of-sale ("POS"), payments, physical security, unified communications and collaboration, telecom and cloud services to market. The Company operates in the United States, Canada, Brazil and the UK. The Company's two operating segments, Specialty Technology Solutions and Modern Communications & Cloud, are based on technology type and are generally related to technology devices and communication, connectivity and cloud services, respectively. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("U.S. GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position at March 31, 2023 and June 30, 2022, the results of operations for the quarters and nine months ended March 31, 2023 and 2022, the statements of comprehensive income for the quarters and nine months ended March 31, 2023 and 2022, the statements of shareholders' equity for the quarters and nine months ended March 31, 2023 and 2022 and the statements of cash flows for the nine months ended March 31, 2023 and 2022. The results of operations for the quarters and nine months ended March 31, 2023 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Unless otherwise indicated, disclosures provided in the Notes pertain to continuing operations only. The Company has reclassified certain prior-year amounts in the segment results to conform with current year presentation. The reclassifications had no effect on the condensed consolidated financial results. Summary of Significant Accounting Policies There have been no material changes to the Company’s significant accounting policies for the nine months ended March 31, 2023 from the policies described in the notes to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2022. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Cash and Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. The Company maintains zero-balance disbursement accounts at various financial institutions at which the Company does not maintain significant depository relationships. Due to the terms of the agreements governing these accounts, the Company generally does not have the right to offset outstanding checks written from these accounts against cash on hand, and the respective institutions are not legally obligated to honor the checks until sufficient funds are transferred to fund the checks. As a result, checks released but not yet cleared from these accounts in the amounts of $ 7.4 million and $ 18.0 million are included in accounts payable on the condensed consolidated balance sheets at March 31, 2023 and June 30, 2022, respectively. Long-lived Assets 11 Table of Contents The Company presents depreciation expense and intangible amortization expense on the Condensed Consolidated Income Statements. The Company's depreciation expense related to selling, general and administrative costs totaled $ 2.6 million and $ 8.1 million for the quarter and nine months ended March 31, 2023 and $ 2.6 million and $ 8.0 million for the quarter and nine months ended March 31, 2022. Depreciation expense reported as part of cost of goods sold on the Condensed Consolidated Income Statements totaled $ 0.3 million and $ 0.7 million for the quarter and nine months ended March 31, 2023 and $ 0.2 million and $ 0.7 million for the quarter and nine months ended March 31, 2022. The Company's intangible amortization expense reported on the Condensed Consolidated Income Statements relates to selling, general and administrative costs, not the cost of selling goods. Intangible amortization expense totaled $ 4.2 million and $ 12.6 million for the quarter and nine months ended March 31, 2023 and $ 4.5 million and $ 13.4 million for the quarter and nine months ended March 31, 2022. Recent Accounting Pronouncements The Company has reviewed newly issued accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on its consolidated financial statements as a result of future adoption. (2) Trade Accounts and Notes Receivable, Net The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due to the Company. The Company has notes receivable with certain customers, which are included in “Accounts receivable, less allowance” in the Condensed Consolidated Balance Sheets. Management determines the estimate of the allowance for doubtful accounts receivable by considering a number of factors, including: (i) historical experience, (ii) aging of the accounts receivable, (iii) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country-specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables over the contractual life are recorded at inception and adjusted over the contractual life. The changes in the allowance for doubtful accounts for the nine months ended March 31, 2023 are set forth in the table below. June 30, 2022 Amounts Charged to Expense Write-offs Other (1) March 31, 2023 (in thousands) Trade accounts and current notes receivable allowance $ 16,806 $ 1,852 $ ( 3,595 ) $ ( 827 ) $ 14,236 (1) "Other" amounts include recoveries and the effect of foreign currency fluctuations for the nine months ended March 31, 2023. (3) Revenue Recognition The Company provides technology solutions and services from the world's leading suppliers of mobility, barcode, POS, payments, physical security, unified communications, collaboration, telecom and cloud services. This includes hardware, related accessories and device configuration as well as software licenses, professional services and hardware support programs. In determining the appropriate amount of revenue to recognize, the Company applies the following five-step model: (i) identify contracts with customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company recognizes revenue as control of products and services are transferred to customers, which is generally at the point of shipment. The Company delivers products to customers in several ways, including: (i) shipment from a Company warehouse, (ii) drop-shipment directly from the supplier, or (iii) electronic delivery for non-physical products. Principal versus Agent Considerations The Company is the principal for sales of all hardware and certain software and services. The Company considers itself the principal in those transactions where it has control of the product or service before it is transferred to the customer. The Company recognizes the principal-associated revenue and cost of goods sold on a gross basis. 12 Table of Contents The Company is the agent for third-party service contracts, including product warranties and supplier-hosted software. These service contracts are sold separately from the products, and the Company often serves as the agent for the contract on behalf of the original equipment manufacturer. The Company's responsibility is to arrange for the provision of the specified service by the original equipment manufacturer, and the Company does not control the specified service before it is transferred to the customer. Because the Company acts as an agent, revenue is recognized net of cost at the time of sale. The Intelisys business operates under an agency model. Variable Considerations For certain transactions, products are sold with a right of return and may also provide other rebates or incentives, which are accounted for as variable consideration. The Company estimates a returns allowance based on historical experience and reduces revenue accordingly. The Company estimates the amount of variable consideration for rebates and incentives by using the expected value to be given to the customer and reduces the revenue by those estimated amounts. These estimates are reviewed and updated as necessary at the end of each reporting period. Contract Balances The Company records contract assets and liabilities for payments received from customers in advance of services performed. These assets and liabilities are the result of the sales of the Company's self-branded warranty programs and other transactions where control has not yet passed to the customer. These amounts are immaterial to the consolidated financial statements for the periods presented. Disaggregation of Revenue The following tables represent the Company's disaggregation of revenue: Quarter ended March 31, 2023 Specialty Technology Solutions Modern Communications & Cloud Total (in thousands) Revenue by product/service Hardware, software and cloud (excluding Intelisys) $ 565,652 $ 299,803 $ 865,455 Intelisys connectivity and cloud — 20,064 20,064 $ 565,652 $ 319,867 $ 885,519 Nine months ended March 31, 2023 Specialty Technology Solutions Modern Communications & Cloud Total (in thousands) Revenue by product/service: Hardware, software and cloud (excluding Intelisys) $ 1,769,530 $ 1,012,176 $ 2,781,706 Intelisys connectivity and cloud — 58,867 58,867 $ 1,769,530 $ 1,071,043 $ 2,840,573 13 Table of Contents Quarter ended March 31, 2022 Specialty Technology Solutions Modern Communications & Cloud Total (in thousands) Revenue by product/service Hardware, software and cloud (excluding Intelisys) $ 503,072 $ 323,684 $ 826,756 Intelisys connectivity and cloud — 19,234 19,234 $ 503,072 $ 342,918 $ 845,990 Nine months ended March 31, 2022 Specialty Technology Solutions Modern Communications & Cloud Total (in thousands) Revenue by product/service: Hardware, software and cloud (excluding Intelisys) $ 1,501,702 $ 1,010,825 $ 2,512,527 Intelisys connectivity and cloud — 55,125 55,125 $ 1,501,702 $ 1,065,950 $ 2,567,652 (4) Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding. Quarter ended Nine months ended March 31, March 31, 2023 2022 2023 2022 (in thousands, except per share data) Numerator: Net income from continuing operations $ 21,221 $ 23,526 $ 70,997 $ 68,751 Net income from discontinued operations — — — 100 Net income $ 21,221 $ 23,526 $ 70,997 $ 68,851 Denominator: Weighted-average shares, basic 25,196 25,635 25,228 25,577 Dilutive effect of share-based payments 243 218 208 235 Weighted-average shares, diluted 25,439 25,853 25,436 25,812 Net income from continuing operations per common share, basic $ 0.84 $ 0.92 $ 2.81 $ 2.69 Net income from discontinued operations per common share, basic — — — — Net income per common share, basic $ 0.84 $ 0.92 $ 2.81 $ 2.69 Net income from continuing operations per common share, diluted $ 0.83 $ 0.91 $ 2.79 $ 2.66 Net income from discontinued operations per common share, diluted — — — — Net income per common share, diluted $ 0.83 $ 0.91 $ 2.79 $ 2.67 14 Table of Contents For the quarter and nine months ended March 31, 2023, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 779,688 and 1,152,714 , respectively. For the quarter and nine months ended March 31, 2022, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 1,004,992 and 969,871 , respectively. (5) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss consists of the following: March 31, 2023 June 30, 2022 (in thousands) Foreign currency translation adjustment $ ( 101,425 ) $ ( 105,899 ) Unrealized gain on hedged transaction, net of tax 1,979 1,261 Accumulated other comprehensive loss $ ( 99,446 ) $ ( 104,638 ) The tax effect of amounts in comprehensive loss reflect a tax (benefit) expense as follows: Quarter ended March 31, Nine months ended March 31, 2023 2022 2023 2022 (in thousands) Tax (benefit) expense $ ( 354 ) $ 590 $ 225 $ 1,390 (6) Goodwill and Other Identifiable Intangible Assets The changes in the carrying amount of goodwill for the nine months ended March 31, 2023, by reporting segment, are set forth in the table below. Specialty Technology Solutions Modern Communications & Cloud Total (in thousands) Balance at June 30, 2022 $ 16,370 $ 198,065 $ 214,435 Foreign currency translation adjustment — 891 891 Balance at March 31, 2023 $ 16,370 $ 198,956 $ 215,326 The following table shows changes in the amount recognized for net identifiable intangible assets for the nine months ended March 31, 2023. Net Identifiable Intangible Assets (in thousands) Balance at June 30, 2022 $ 84,427 Amortization expense ( 12,561 ) Foreign currency translation adjustment 326 Balance at March 31, 2023 $ 72,192 (7) Short-Term Borrowings and Long-Term Debt The following table presents the Company’s debt at March 31, 2023 and June 30, 2022. 15 Table of Contents March 31, 2023 June 30, 2022 (in thousands) Current portion of long-term debt $ 5,977 $ 11,598 Mississippi revenue bond, net of current portion 3,381 3,733 Senior secured term loan facility, net of current portion 142,500 120,000 Borrowings under revolving credit facility 159,194 135,839 Total debt $ 311,052 $ 271,170 Credit Facility The Company has a multi-currency senior secured credit facility (as amended, the "Amended Credit Agreement") with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (collectively the "Lenders"). On September 28, 2022, the Company amended and restated the 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,” the Company may increase its 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 the domestic assets of the Company and its domestic subsidiaries. Under the terms of the revolving credit facility, the payment of cash dividends is restricted. The Company 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, bear interest at a rate per annum equal to, at the Company’s option, (i) the adjusted term Secured Overnight Financing Rate ("SOFR") or adjusted daily simple SOFR plus an additional margin ranging from 1.00 % to 1.75 % depending upon the Company’s 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 the Company’s leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars bear interest based upon the adjusted daily simple SOFR plus an additional margin ranging from 1.00 % to 1.75 % depending upon the Company's leverage ratio, or such other rate as the Company and the applicable swingline lender may agree. 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 bear interest at a rate per annum equal to the applicable benchmark rate set forth in the Amended Credit Agreement plus an additional margin ranging from 1.00 % to 1.75 %, depending upon the Company’s leverage ratio plus, if applicable, certain mandatory costs. During the quarter and nine months ended March 31, 2023, the Company's borrowings under the credit facility were U.S. dollar loans. The spread in effect as of March 31, 2023 was 1.50 %, plus a 0.10 % credit spread adjustment for SOFR-based loans and 0.50 % for alternate base rate loans. The commitment fee rate in effect at March 31, 2023 was 0.25 %. The Amended Credit Agreement includes customary representations, warranties and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, the Company’s 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. The Company was in compliance with all covenants under the credit facility at March 31, 2023. The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the nine month periods ended March 31, 2023 and 2022 was $ 227.2 million and $ 60.0 million, respectively. There was $ 190.8 million and $ 214.2 million available for additional borrowings as of March 31, 2023 and June 30, 2022, respectively. There were no letters of credit issued under the multi-currency revolving credit facility at March 31, 2023 or June 30, 2022. Mississippi Revenue Bond 16 Table of Contents On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032. The bond accrued interest at the 30-day LIBOR rate plus a spread of 0.85 %, until March 31, 2023. An April 1, 2023 amendment changed the benchmark interest rate from LIBOR to SOFR. Effective April 1, 2023, the bond accrues interest at the one-month term SOFR plus an adjustment of 0.10 % plus a spread of 0.85 %. The terms of the bond allow for payment of interest only for the first 10 years of the agreement. Starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100 % of the principal amount outstanding. At March 31, 2023, the Company was in compliance with all covenants under this bond. The interest rates at March 31, 2023 and June 30, 2022 were 5.52 % and 1.97 %, respectively. Debt Issuance Costs At March 31, 2023, net debt issuance costs associated with the credit facility and bond totaled $ 1.7 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument. (8) Derivatives and Hedging Activities The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the Condensed Consolidated Balance Sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense. Foreign Currency Derivatives – The Company conducts a portion of its business internationally in a variety of foreign currencies and is exposed to market risk for changes in foreign currency exchange rates. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and once these opportunities have been exhausted the Company uses currency options and forward contracts or other hedging instruments with third parties. These contracts will periodically hedge the exchange of various currencies, including the U.S. dollar, Brazilian real, euro, British pound and Canadian dollar. The Company had contracts outstanding for purposes of managing cash flows with notional amounts of $ 37.9 million and $ 34.5 million for the exchange of foreign currencies at March 31, 2023 and June 30, 2022, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures included in the Condensed Consolidated Income Statements for the quarters and nine months ended March 31, 2023 and 2022 are as follows: Quarter ended Nine months ended March 31, March 31, 2023 2022 2023 2022 (in thousands) Net foreign exchange derivative contract losses $ 564 $ 3,464 $ 1,873 $ 1,289 Net foreign currency transactional and re-measurement gains ( 59 ) ( 3,206 ) ( 98 ) ( 66 ) Net foreign currency exchange losses $ 505 $ 258 $ 1,775 $ 1,223 Net foreign currency exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses and are included in other income and expense. 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. Interest Rates - The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. The Company manages its exposure to changes in interest rates by using interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating rate debt. 17 Table of Contents On April 30, 2019, the Company entered into an interest rate swap agreement to lock into a fixed LIBOR interest rate, which was amended on September 28, 2022, to change the reference rate from LIBOR to SOFR. The swap agreement has a notional amount of $ 100.0 million, with a $ 50.0 million tranche scheduled to mature on April 30, 2024 and a $ 50.0 million tranche scheduled to mature April 30, 2026. On March 31, 2023, the Company entered into an interest rate swap agreement to lock into a fixed SOFR interest rate with a notional amount of $ 25 million and a maturity date of March 31, 2028. These interest rate swap agreements are designated as cash flow hedges to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreements are recognized as adjustments to interest expense. To the extent the swaps are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for the quarters and nine months ended March 31, 2023 and 2022. The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive Income for the quarters and nine months ended March 31, 2023 and 2022, are as follows: Quarter ended Nine months ended March 31, March 31, 2023 2022 2023 2022 (in thousands) Net interest (income) expense recognized as a result of interest rate swap $ ( 556 ) $ 532 $ ( 869 ) $ 1,689 Unrealized (loss) gain in fair value of interest rate swap ( 1,013 ) 3,675 1,837 4,658 Net (decrease) increase in accumulated other comprehensive income ( 1,569 ) 4,207 968 6,347 Income tax effect ( 404 ) 1,063 250 1,617 Net (decrease) increase in accumulated other comprehensive income, net of tax $ ( 1,165 ) $ 3,144 $ 718 $ 4,730 The Company used the following derivative instruments at March 31, 2023 and June 30, 2022, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above: March 31, 2023 June 30, 2022 Balance Sheet Location Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments (in thousands) Derivative assets: Interest rate swap agreement Other non-current assets $ 2,654 — $ 1,686 — Derivative liabilities: Foreign exchange contracts Accrued expenses and other current liabilities — $ 24 — $ 5 Foreign currency hedge Accrued expenses and other current liabilities $ 230 — $ 93 — 18 Table of Contents (9) Fair Value of Financial Instruments Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company classifies certain assets and liabilities based on the fair value hierarchy, which aggregates fair value measured assets and liabilities based upon the following levels of inputs: • Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; • Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and • Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The assets and liabilities maintained by the Company that are required to be measured at fair value on a recurring basis include deferred compensation plan investments, forward foreign currency exchange contracts, foreign currency hedge agreements and interest rate swap agreements. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to a variable rate using the market approach (Level 2). The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at March 31, 2023: Total Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) (in thousands) Assets: Deferred compensation plan investments, current and non-current portion $ 27,226 $ 27,226 $ — Interest rate swap agreement 2,654 — 2,654 Total assets at fair value $ 29,880 $ 27,226 $ 2,654 Liabilities: Deferred compensation plan investments, current and non-current portion $ 27,226 $ 27,226 $ — Forward foreign currency exchange contracts 24 — 24 Foreign currency hedge 230 230 230 Total liabilities at fair value $ 27,480 $ 27,456 $ 254 The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at June 30, 2022: 19 Table of Contents Total Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) (in thousands) Assets: Deferred compensation plan investments, current and non-current portion $ 25,178 $ 25,178 $ — Interest rate swap agreement 1,686 — 1,686 Total assets at fair value $ 26,864 $ 25,178 $ 1,686 Liabilities: Deferred compensation plan investments, current and non-current portion $ 25,178 $ 25,178 $ — Forward foreign currency exchange contracts 5 — 5 Foreign currency hedge 93 — 93 Total liabilities at fair value $ 25,276 $ 25,178 $ 98 The investments in the deferred compensation plan are held in a "rabbi trust" and include mutual funds and cash equivalents for payment of non-qualified benefits for certain retired, terminated and active employees. These investments are recorded to prepaid expenses and other current assets or other non-current assets depending on their corresponding, anticipated distribution dates to recipients, which are reported in accrued expenses and other current liabilities or other long-term liabilities, respectively. Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including SOFR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Condensed Consolidated Balance Sheets as prepaid expenses and other non-current assets or accrued expenses and other long-term liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 8 - Derivatives and Hedging Activities . (10) Segment Information The Company is a leading provider of technology solutions and services to customers in specialty technology markets. The Company has two reportable segments, based on technology type. Specialty Technology Solutions Segment The Specialty Technology Solutions segment includes the Company’s business in mobility and barcode, POS, payments, security and networking technologies. Mobility and barcode solutions include mobile computing, barcode scanners and imagers, radio frequency identification devices, barcode printing and related services. POS and payments solutions include POS systems, integrated POS software platforms, self-service kiosks including self-checkout, payment terminals and mobile payment devices. Security solutions include video surveillance and analytics, video management software and access control. Networking solutions include switching, routing and wireless products and software. The Company has business operations within this segment in the United States, Canada and Brazil. Modern Communications & Cloud Segment The Modern Communications & Cloud segment includes the Company’s business in communications and collaboration, connectivity and cloud services. Communications and collaboration solutions, delivered in the cloud, on-premise or hybrid, include voice, video, integration of communication platforms and contact center solutions. The Intelisys connectivity and cloud marketplace offers telecom, cable, Unified Communications as a Service (“UCaaS”), Contact Center as a Service (“CCaaS”), Infrastructure as a Service, Software-Defined Wide-Area Network and other cloud services. This segment includes SaaS and subscription services, which the Company offers using digital tools and platforms. The Company has business operations within this segment in the United States, Canada, Brazil and the UK. Selected financial information for each business segment is presented below: 20 Table of Contents Quarter ended Nine months ended March 31, March 31, 2023 2022 2023 2022 (in thousands) Sales: Specialty Technology Solutions $ 565,652 $ 503,072 $ 1,769,530 $ 1,501,702 Modern Communications & Cloud 319,867 342,918 1,071,043 1,065,950 $ 885,519 $ 845,990 $ 2,840,573 $ 2,567,652 Depreciation and amortization: Specialty Technology Solutions $ 2,638 $ 2,874 $ 8,099 $ 8,741 Modern Communications & Cloud 3,717 3,738 11,102 11,312 Corporate 719 693 2,158 2,131 $ 7,074 $ 7,305 $ 21,359 $ 22,184 Operating income (loss): Specialty Technology Solutions $ 19,811 $ 20,623 $ 61,345 $ 51,278 Modern Communications & Cloud 14,468 12,294 47,253 43,494 Corporate — — — ( 30 ) $ 34,279 $ 32,917 $ 108,598 $ 94,742 Capital expenditures: Specialty Technology Solutions $ ( 520 ) $ ( 62 ) $ ( 1,546 ) $ ( 496 ) Modern Communications & Cloud ( 1,766 ) ( 620 ) ( 5,003 ) ( 2,830 ) $ ( 2,286 ) $ ( 682 ) $ ( 6,549 ) $ ( 3,326 ) Sales by Geography Category: United States and Canada $ 811,963 $ 766,035 $ 2,584,598 $ 2,312,250 International 76,722 81,461 263,017 259,693 Less intercompany sales ( 3,166 ) ( 1,506 ) ( 7,042 ) ( 4,291 ) $ 885,519 $ 845,990 $ 2,840,573 $ 2,567,652 March 31, 2023 June 30, 2022 (in thousands) Assets: Specialty Technology Solutions $ 1,077,363 $ 1,030,538 Modern Communications & Cloud 903,019 906,890 Corporate — — $ 1,980,382 $ 1,937,428 Property and equipment, net by Geography Category: United States and Canada $ 28,120 $ 32,715 International 8,366 4,762 $ 36,486 $ 37,477 (11) Leases In accordance with Accounting Standards Codification ("ASC") 842, at contract inception the Company determines if a contract contains a lease by assessing whether the contract contains an identified asset and whether the Company has the ability to control the asset. The Company also determines if the lease meets the classification criteria for an operating lease versus a finance lease under ASC 842. Substantially all of the Company's leases are operating leases for real estate, warehouse and office equipment ranging in duration from 1 year to 10 years. The Company has elected not to record short-term operating 21 Table of Contents leases with an initial term of 12 months or less on the Condensed Consolidated Balance Sheets. Operating leases are recorded as other non-current assets, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company has finance leases for information technology equipment expiring through fiscal year 2027. Finance leases are recorded as property and equipment, net , accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The gross amount of the balances recorded related to finance leases is immaterial to the condensed consolidated financial statements at March 31, 2023 and the consolidated financial statements at June 30, 2022. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the net present value of future minimum lease payments over the lease term. The Company generally is not able to determine the rate implicit in its leases and has elected to apply an incremental borrowing rate as the discount rate for the present value determination, which is based on the Company's cost of borrowings for the relevant terms of each lease and geographical economic factors. Certain operating lease agreements contain options to extend or terminate the lease. The lease term used is adjusted for these options when the Company is reasonably certain it will exercise the option. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments not based on a rate or index, such as costs for common area maintenance, are expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable. The following table presents amounts recorded on the Condensed Consolidated Balance Sheets related to operating leases at March 31, 2023 and June 30, 2022: March 31, 2023 June 30, 2022 Operating leases Balance Sheet location (in thousands) Operating lease right-of-use assets Other non-current assets $ 13,541 $ 16,217 Current operating lease liabilities Accrued expenses and other current liabilities $ 4,474 $ 4,499 Long-term operating lease liabilities Other long-term liabilities $ 10,284 $ 13,085 The following table presents amounts recorded in operating lease expense as part of selling general and administrative expenses on the Condensed Consolidated Income Statements during the quarters and nine months ended March 31, 2023 and 2022. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less. Quarter ended March 31, Nine months ended March 31, 2023 2022 2023 2022 (in thousands) Operating lease cost $ 1,319 $ 1,366 $ 3,896 $ 3,877 Variable lease cost 396 317 1,158 966 $ 1,715 $ 1,683 $ 5,054 $ 4,843 Supplemental cash flow information related to the Company's operating leases for the nine months ended March 31, 2023 and 2022 are presented in the table below: Nine months ended March 31, 2023 2022 (in thousands) Cash paid for amounts in the measurement of lease liabilities $ 4,054 $ 4,082 Right-of-use assets obtained in exchange for lease obligations 746 2,313 The weighted-average remaining lease term and discount rate at March 31, 2023 are presented in the table below: 22 Table of Contents March 31, 2023 Weighted-average remaining lease term 3.80 years Weighted-average discount rate 4.30 % The following table presents the maturities of the Company's operating lease liabilities at March 31, 2023: Operating leases (in thousands) 2023 $ 1,371 2024 4,699 2025 3,569 2026 3,030 2027 2,673 Thereafter 632 Total future payments 15,974 Less: amounts representing interest 1,216 Present value of lease payments $ 14,758 (12) Commitments and Contingencies The Company is, from time to time, party to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. During the Company's due diligence for the Network1 acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company recorded indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as the funds were escrowed as part of the acquisition. The amount available after the impact of foreign currency translation for future pre-acquisition contingency settlements or to be released to the sellers was $ 3.2 million and $ 4.1 million at March 31, 2023 and June 30, 2022, respectively. The table below summarizes the balances and line item presentation of Network1's pre-acquisition contingencies and corresponding indemnification receivables in the Company's Condensed Consolidated Balance Sheets at March 31, 2023 and June 30, 2022: March 31, 2023 June 30, 2022 Network1 (in thousands) Assets Prepaid expenses and other current assets $ 15 $ 15 Other non-current assets $ 3,833 $ 3,818 Liabilities Accrued expenses and other current liabilities $ 15 $ 15 Other long-term liabilities $ 3,833 $ 3,818 (13) Income Taxes Income taxes for the quarters and nine months ended March 31, 2023 and 2022 have been included in the accompanying condensed consolidated financial statements using an estimated annual effective tax rate. In addition to applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall tax provision. During the quarter ended March 31, 2023, there were no material discrete items. For the nine months ended March 31, 2023, a discrete net tax benefit of $ 0.7 million was recorded, which is primarily attributable to a notional interest deduction on the net equity of the Company's Brazilian subsidiary. 23 Table of Contents The Company’s effective tax rate of 29.1 % and 27.8 % for the quarter and nine months ended March 31, 2023 differs from the current federal statutory rate of 21% primarily as a result of income derived from tax jurisdictions with varying income tax rates, nondeductible expenses and state income taxes. The Company's effective tax rate was 27.8 % and 25.6 % for the quarter and nine months ended March 31, 2022. As of March 31, 2023, the Company is not permanently reinvested with respect to all earnings generated by foreign operations. The Company has determined that there is no material deferred tax liability for federal, state and withholding tax related to undistributed earnings. During the quarter ended March 31, 2023, foreign subsidiaries did not repatriate any cash to the United States. There is no certainty to the timing of any future distributions of such earnings to the U.S. in whole or in part. The Company had approximately $ 1.2 million and $ 1.1 million of total gross unrecognized tax benefits at March 31, 2023 and June 30, 2022. Of this total at March 31, 2023, approximately $ 0.9 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At March 31, 2023 and June 30, 2022, the Company had approximately $ 1.2 million accrued for interest and penalties. The Company conducts business globally and one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to federal, state and local or non-U.S. income tax examinations by tax authorities for the years before June 30, 2017. (14) Discontinued Operations On August 20, 2019, the Company announced plans to divest the product distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and the Miami-based export operations ("Divestitures") as these businesses were performing below management's expectations. The Company continues to operate its digital business in these countries. Management determined that the Company did not have sufficient scale in these markets to maximize the value-added model for product distribution, leading the Company to focus and invest in its higher-growth, higher-margin businesses. Results from the Divestitures were included within each reportable segment, which includes the Specialty Technology Solutions and Modern Communications & Cloud segments. The Company signed an agreement on July 23, 2020 with Intcomex for its businesses located in Latin America, outside of Brazil. The Company finalized the sale of the Latin America businesses on October 30, 2020. Th e Company also finalized the sale of the Europe and UK businesses on November 12, 2020. Total cash received for the sale of Divestitures was $ 37.5 million. There were no components of net income or loss from discontinued operations for the quarter and nine months ended March 31, 2023 or the quarter ended March 31, 2022. During the nine months ended March 31, 2022, the Company recognized a gain from the sale of discontinued operations of $ 0.1 million. There were no assets or liabilities classified as held-for-sale in the accompanying consolidated balance sheets at March 31, 2023 and June 30, 2022. There were no cash flows from discontinued operations for the nine months ended March 31, 2023 and 2022. 24 Table of Contents