SCANSOURCE, INC. 10-K

ITEM 8. Financial Statements and Supplementary Data. Index to Financial Statements Page Financial Statements Report of Grant Thornton LLP Independent Registered Public Accounting Firm (PCAOB ID: 248 ) 39 Report of Grant Thornton LLP Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 40 Consolidated Balance Sheets 41 Consolidated Income Statements 42 Consolidated Statements of Comprehensive Income (Loss) 43 Consolidated Statements of Shareholders’ Equity 44 Consolidated Statements of Cash Flows 45 Notes to Consolidated Financial Statements 47 All schedules and exhibits not included are not applicable, not required or would contain information that is shown in the financial statements or notes thereto. 38 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders ScanSource, Inc.: Opinion on the financial statements We have audited the accompanying consolidated balance sheets of ScanSource, Inc. (a South Carolina corporation) and subsidiaries (the “Company”) as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 22, 2023 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Grant Thornton LLP We have served as the Company’s auditor since 2014. Columbia, South Carolina August 22, 2023 39 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders ScanSource, Inc.: Opinion on internal control over financial reporting We have audited the internal control over financial reporting of ScanSource, Inc. (a South Carolina corporation) and subsidiaries (the “Company”) as of June 30, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2023, and our report dated August 22, 2023 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Grant Thornton, LLP Columbia, South Carolina August 22, 2023 40 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share information) June 30, 2023 June 30, 2022 Assets Current assets: Cash and cash equivalents $ 36,178 $ 37,987 Accounts receivable, less allowance of $ 15,480 at June 30, 2023 and $ 16,806 at June 30, 2022 753,236 729,442 Inventories 757,574 614,814 Prepaid expenses and other current assets 110,087 141,562 Total current assets 1,657,075 1,523,805 Property and equipment, net 37,379 37,477 Goodwill 216,706 214,435 Identifiable intangible assets, net 68,495 84,427 Deferred income taxes 17,764 15,668 Other non-current assets 70,750 61,616 Total assets $ 2,068,169 $ 1,937,428 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 691,119 $ 714,177 Accrued expenses and other current liabilities 78,892 88,455 Income taxes payable 9,875 34 Current portion of long-term debt 6,915 11,598 Total current liabilities 786,801 814,264 Deferred income taxes 3,816 3,144 Long-term debt, net of current portion 144,006 123,733 Borrowings under revolving credit facility 178,980 135,839 Other long-term liabilities 49,268 53,920 Total liabilities 1,162,871 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, 24,844,203 and 25,187,351 shares issued and outstanding at June 30, 2023 and June 30, 2022, respectively 58,241 64,297 Retained earnings 936,678 846,869 Accumulated other comprehensive loss ( 89,621 ) ( 104,638 ) Total shareholders’ equity 905,298 806,528 Total liabilities and shareholders’ equity $ 2,068,169 $ 1,937,428 See accompanying notes to consolidated financial statements. 41 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Income Statements Years Ended June 30, 2023, 2022 and 2021 (in thousands, except per share information) 2023 2022 2021 Net sales $ 3,787,721 $ 3,529,935 $ 3,150,806 Cost of goods sold 3,338,482 3,103,411 2,800,090 Gross profit 449,239 426,524 350,716 Selling, general and administrative expenses 285,695 275,442 247,438 Depreciation expense 10,912 11,062 12,533 Intangible amortization expense 16,746 17,853 19,488 Restructuring and other charges — — 9,258 Change in fair value of contingent consideration — — 516 Operating income 135,886 122,167 61,483 Interest expense 19,786 6,523 6,929 Interest income ( 7,414 ) ( 4,333 ) ( 3,097 ) Other expense, net 1,664 1,354 116 Income before income taxes 121,850 118,623 57,535 Provision for income taxes 33,758 29,925 12,146 Net income from continuing operations 88,092 88,698 45,389 Net income (loss) from discontinued operations 1,717 100 ( 34,594 ) Net income $ 89,809 $ 88,798 $ 10,795 Per share data: Net income from continuing operations per common share, basic $ 3.50 $ 3.48 $ 1.79 Net income (loss) from discontinued operations per common share, basic 0.07 — ( 1.36 ) Net income per common share, basic $ 3.57 $ 3.48 $ 0.42 Weighted-average shares outstanding, basic 25,142 25,504 25,423 Net income from continuing operations per common share, diluted $ 3.47 $ 3.44 $ 1.78 Net income (loss) from discontinued operations per common share, diluted 0.07 — ( 1.36 ) Net income per common share, diluted $ 3.54 $ 3.45 $ 0.42 Weighted-average shares outstanding, diluted 25,362 25,758 25,518 See accompanying notes to consolidated financial statements. 42 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) Years Ended June 30, 2023, 2022 and 2021 (in thousands) 2023 2022 2021 Net income $ 89,809 $ 88,798 $ 10,795 Unrealized gain on hedged transaction, net of tax 2,254 5,833 2,249 Foreign currency translation adjustment 12,763 ( 12,338 ) 20,778 Realized foreign currency loss from discontinued operations — — 11,635 Comprehensive income $ 104,826 $ 82,293 $ 45,457 See accompanying notes to these consolidated financial statements. 43 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity Years Ended June 30, 2023, 2022 and 2021 (in thousands, except share information) Common Stock (Shares) Common Stock (Amount) Retained Earnings Accumulated Other Comprehensive Loss Total Balance at June 30, 2020 25,361,298 $ 63,765 $ 747,276 $ ( 132,795 ) $ 678,246 Net income — — 10,795 — 10,795 Unrealized gain on hedged transaction, net of tax — — — 2,249 2,249 Foreign currency translation adjustment — — — 20,778 20,778 Realized foreign currency loss from discontinued operations — — — 11,635 11,635 Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 138,167 ( 585 ) — — ( 585 ) Share-based compensation — 8,073 — — 8,073 Balance at June 30, 2021 25,499,465 71,253 758,071 ( 98,133 ) 731,191 Net income — — 88,798 — 88,798 Unrealized gain on hedged transaction, net of tax — — — 5,833 5,833 Foreign currency translation adjustment — — — ( 12,338 ) ( 12,338 ) Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 238,080 ( 450 ) — — ( 450 ) Common stock repurchased ( 550,194 ) ( 18,203 ) — — ( 18,203 ) Share-based compensation — 11,697 — — 11,697 Balance at June 30, 2022 25,187,351 64,297 846,869 ( 104,638 ) 806,528 Net income — — 89,809 — 89,809 Unrealized gain on hedged transaction, net of tax — — — 2,254 2,254 Foreign currency translation adjustment — — — 12,763 12,763 Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes 180,960 ( 1,553 ) — — ( 1,553 ) Common stock repurchased ( 524,108 ) ( 15,753 ) — — ( 15,753 ) Share-based compensation — 11,250 — — 11,250 Balance at June 30, 2023 24,844,203 $ 58,241 $ 936,678 $ ( 89,621 ) $ 905,298 See accompanying notes to consolidated financial statements. 44 Table of Contents Index to Financial Statements ScanSource, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended June 30, 2023, 2022 and 2021 (in thousands) 2023 2022 2021 Cash flows from operating activities: Net income $ 89,809 $ 88,798 $ 10,795 Net income (loss) from discontinued operations 1,717 100 ( 34,594 ) Net income from continuing operations 88,092 88,698 45,389 Adjustments to reconcile net income to net cash (used in) provided by operating activities of continuing operations: Depreciation and amortization 28,614 29,884 33,507 Amortization of debt issue costs 577 417 417 Provision for doubtful accounts 2,785 1,514 338 Share-based compensation 11,219 11,663 8,039 Deferred income taxes ( 1,496 ) 5,737 2,916 Change in fair value of contingent consideration — — 516 Contingent consideration payments excess — — ( 5,457 ) Finance lease interest 44 34 119 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 17,368 ) ( 165,939 ) ( 118,859 ) Inventories ( 138,313 ) ( 145,962 ) ( 12,301 ) Prepaid expenses and other assets 32,653 ( 27,371 ) ( 18,753 ) Other non-current assets ( 7,582 ) 1,123 9,948 Accounts payable ( 30,656 ) 82,969 175,120 Accrued expenses and other liabilities ( 14,195 ) ( 4,869 ) ( 493 ) Income taxes payable 9,857 ( 2,252 ) ( 3,679 ) Net cash (used in) provided by operating activities of continuing operations ( 35,769 ) ( 124,354 ) 116,767 Cash flows from investing activities of continuing operations: Capital expenditures ( 9,979 ) ( 6,849 ) ( 2,363 ) Cash received for business disposal 1,717 3,125 34,356 Net cash (used in) provided by investing activities of continuing operations ( 8,262 ) ( 3,724 ) 31,993 Cash flows from financing activities of continuing operations: Borrowings on revolving credit, net of expenses 2,499,166 2,166,409 1,881,679 Repayments on revolving credit, net of expenses ( 2,456,025 ) ( 2,030,569 ) ( 1,949,392 ) Debt issuance costs ( 1,407 ) — — Borrowings (repayments) on long-term debt, net 15,590 ( 7,843 ) ( 7,839 ) Repayments of finance lease obligations ( 589 ) ( 1,238 ) ( 1,294 ) Contingent consideration payments — — ( 41,393 ) Exercise of stock options 910 2,304 451 Taxes paid on settlement of equity awards ( 2,463 ) ( 2,754 ) ( 1,036 ) Repurchase of common stock ( 15,651 ) ( 18,203 ) — Net cash provided by (used in) financing activities of continuing operations 39,531 108,106 ( 118,824 ) 45 Table of Contents Index to Financial Statements 2023 2022 2021 (continued) Cash flows from discontinued operations: Net cash flows provided by operating activities of discontinued operations — — 24,173 Net cash flows used in investing activities of discontinued operations — — ( 58 ) Net cash flows used in financing activities of discontinued operations — — ( 29,494 ) Net cash flows used in by discontinued operations — — ( 5,379 ) Effect of exchange rate changes on cash and cash equivalents 2,691 ( 4,759 ) 3,706 (Decrease) increase in cash and cash equivalents ( 1,809 ) ( 24,731 ) 28,263 Cash and cash equivalents at beginning of period 37,987 62,718 34,455 Cash and cash equivalents at end of period 36,178 37,987 62,718 Cash and cash equivalents of discontinued operations — — — Cash and cash equivalents of continuing operations $ 36,178 $ 37,987 $ 62,718 Supplemental disclosure of consolidated cash flow information: Interest paid during the year $ 18,789 $ 6,066 $ 6,412 Income taxes paid during the year $ 28,547 $ 29,418 $ 12,002 See accompanying notes to consolidated financial statements. 46 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2023 (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, networking, 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. Cybersecurity Incident On May 14, 2023, the Company discovered it was subject to a cybersecurity attack perpetrated by unauthorized third parties that affected its IT systems. Upon detection, the Company took immediate steps to address the incident, engaged third-party experts, and notified law enforcement. The Company has cyber insurance and is working with its insurance carriers on claims to recover costs incurred. On May 26, 2023, the Company substantially recovered its operations and completed the restoration of its pertinent IT systems. The Company has taken actions to strengthen its existing IT security infrastructure and continues to implement additional measures to prevent unauthorized access to, or manipulation of, its systems and data. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only. Related Party Transactions A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. There were no material related party transactions for the fiscal years ended June 30, 2023, 2022 and 2021. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable, asset impairments, inventory reserves, purchase price allocations, goodwill and intangibles and supplier incentives. Management bases its estimates on assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above-described items, are reasonable and that the actual results will not vary significantly from the estimated amounts. The following accounting policies relate to the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements: 47 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 (a) Allowances for Trade and Notes Receivable The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible 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. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. (b) Inventory Reserves Management determines the inventory reserves required to reduce inventories to the lower of cost or net realizable value based principally on the effects of technological changes, quantities of goods on hand, length of time on hand and other factors. Net realizable value is determined based on continual inquiries of suppliers who are able to provide credible knowledge of the salability and value of the products. An estimate is made of the net realizable value, less cost to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. The estimates used to calculate these reserves are applied consistently. The adjustments are recorded in the period in which the loss of utility of the inventory occurs, which establishes a new cost basis for the inventory. This new cost basis is maintained until the reserved inventory is disposed of, returned to the supplier or sold. To the extent that specifically reserved inventory is sold, cost of goods sold is expensed for the new cost basis of the inventory sold. (c) Purchase Price Allocations The Company accounts for business combinations in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations . For each acquisition, the Company allocates the purchase price to assets acquired, liabilities assumed and goodwill and intangibles. The Company recognizes assets and liabilities acquired at their estimated fair values. Management uses judgment to (i) identify the acquired assets and liabilities assumed, (ii) estimate the fair value of these assets, (iii) estimate the useful life of the assets and (iv) assess the appropriate method for recognizing depreciation or amortization expense over the assets' useful life. (d) Goodwill and Intangible Asset Fair Value The Company estimates the fair value of its goodwill reporting units, as well as its finite lived intangible assets primarily based on the income approach utilizing the discounted cash flow method. The Company also utilizes fair value estimates derived from the market approach utilizing the public company market multiple method to validate the results of the discounted cash flow method for fair value of goodwill, which requires it to make assumptions about the applicability of those multiples to its reporting units. The discounted cash flow method requires the Company to estimate future cash flows, using key assumptions such as the weighted average cost of capital, revenue growth rates, projected gross margin and operating margin percentage growth, expected working capital changes and a related cash flow impact from working capital changes, and then discount those amounts at an appropriate discount rate to present value. (e) Supplier Incentives The Company receives incentives from suppliers as achievement-based supplier rebates that require management to make certain estimates about the amount of supplier consideration that will be received. Achievement-based supplier rebates are earned by achieving certain sales or purchase targets on a periodic basis. The Company determines whether, among other items, all qualifying sales and purchases are considered in calculating the rebates and cash receipts or credit memos 48 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 received are appropriately applied. The determination of achievement-based rebates requires management to make assumptions about future purchases and sales. Estimates are based on the terms of the incentive program and historical experiences. 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 $ 8.0 million and $ 18.0 million are classified as accounts payable as of June 30, 2023 and 2022, respectively. The Company maintains its cash with various financial institutions globally that are monitored regularly for credit quality, although it may hold amounts in excess of Federal Deposit Insurance Corporation or other insured limits. Cash and cash equivalents held outside of the United States totaled $ 31.0 million and $ 35.0 million as of June 30, 2023 and 2022, respectively. Concentration of Credit Risk The Company sells to a large base of customers throughout the United States, Canada, Brazil and the UK. The Company performs ongoing credit evaluations of its customers’ financial condition. In certain cases, the Company will accept tangible assets as collateral to increase the trade credit of its customers. Sales to any one customer were less than 10% of the Company’s net sales for fiscal years 2023, 2022 and 2021. In the event that the Company does not collect payment on accounts receivable within the established trade terms for certain customers, the Company may establish arrangements for longer-term financing. The Company accounts for these arrangements by recording them at their historical cost less specific allowances at balance sheet dates. Interest income is recognized in the period earned and is recorded as interest income in the Consolidated Income Statement. Derivative Financial Instruments The Company uses derivative instruments to manage certain exposures related to fluctuations in foreign currency exchange rates and changes in interest rates in connection with borrowing activities. The Company records all derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value. The Company does not use derivative financial instruments for trading or speculative purposes. The Company’s exposure to changes in foreign currency exchange rates results from foreign currency denominated assets and liabilities, purchasing and selling internationally in several foreign currencies and from intercompany loans with foreign subsidiaries. The Company’s objective is to preserve the economic value of non-functional currency denominated cash flows. The Company's foreign currencies are denominated primarily in Brazilian reais, British pounds and Canadian dollars. The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The market risk related to the foreign exchange agreements is offset by changes in the valuation of the underlying items. These contracts are generally for a duration of 90 days or less. The Company has elected not to designate its foreign currency contracts as hedging instruments. They are, therefore, marked-to-market with changes in their fair value recorded in the Consolidated Income Statement each period. Derivative financial instruments related to foreign currency exposure are accounted for on an accrual basis with gains or losses on these contracts recorded in income in the period in which their value changes, with the offsetting entry for unsettled positions reflected in either other assets or other liabilities. The Company's earnings are affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure, the Company has an interest rate swap agreement and has designated this instrument as a hedge of the cash flows on certain variable rate debt. To the extent the derivative instrument was effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative instrument were not included in 49 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 current earnings, but were reported as other comprehensive income (loss). There was no ineffective portion recorded as an adjustment to earnings for the years ended June 30, 2023, 2022 and 2021. Investments The Company has investments that are held in a grantor trust formed by the Company related to the ScanSource, Inc. Nonqualified Deferred Compensation Plan and founder’s Supplemental Executive Retirement Plan. The Company has classified these investments as trading securities, and they are recorded at fair value with unrealized gains and losses included in the accompanying Consolidated Income Statements. The Company’s obligations under this deferred compensation plan change in concert with the performance of the investments along with contributions to and withdrawals from the plan. The fair value of these investments and the corresponding deferred compensation obligation was $ 28.2 million and $ 25.2 million as of June 30, 2023 and June 30, 2022, respectively. These investments are classified as either prepaid expenses and current assets or other non-current assets in the Consolidated Balance Sheets depending on the timing of planned disbursements. The deferred compensation obligation is classified either within accrued expenses and other current liabilities or other long-term liabilities as well. The amounts of these investments classified as current assets with corresponding current liabilities were $ 3.5 million and $ 2.6 million at June 30, 2023 and June 30, 2022, respectively. Inventories Inventories (consisting entirely of finished goods) are stated at the lower of cost (first-in, first-out method) or net realizable value. Supplier Programs The Company receives incentives from suppliers related to cooperative advertising allowances, volume rebates and other incentive programs. These incentives are generally under quarterly, semi-annual or annual agreements with the suppliers. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the supplier. Suppliers generally require that the Company use the suppliers' cooperative advertising allowances for advertising or other marketing programs. Incentives received from suppliers for specifically identified incremental cooperative advertising programs are recorded as adjustments to net sales. ASC 606, Revenue from Contracts with Customers addresses accounting for consideration payable to a customer, which the Company interprets and applies as the customer (i.e., the Company) receiving advertising funds from a supplier. The portion of these supplier funds in excess of our costs are reflected as a reduction of inventory. Such funds are recognized as a reduction of the cost of goods sold when the related inventory is sold. The Company records unrestricted volume rebates received as a reduction of inventory and reduces the cost of goods sold when the related inventory is sold. Amounts received or receivables from suppliers that are not yet earned are deferred in the Consolidated Balance Sheets. Supplier receivables are generally collected through reductions to accounts payable authorized by the supplier. In addition, the Company may receive early payment discounts from certain suppliers. The Company records early payment discounts received as a reduction of inventory, thereby resulting in a reduction of cost of goods sold when the related inventory is sold. Management makes certain estimates of the amounts of supplier consideration that will be received. Estimates are based on the terms of the incentive program and historical experiences. Actual recognition of the supplier consideration may vary from management estimates. Supplier Concentration The Company sells products from many suppliers; however, sales of products supplied by Cisco and Zebra each constituted more than 10 % of the Company's net sales for the years ended June 30, 2023, 2022 and 2021. Product Warranty The Company’s suppliers generally provide a warranty on the products provided by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. In three of its product lines, the Company offers a self-branded warranty program, in which management has determined that the Company is the primary 50 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 obligor. The Company purchases contracts from unrelated third parties, generally the original equipment manufacturers, to fulfill any obligation to service or replace defective product claimed on these warranty programs. As a result, the Company has not recorded a provision for estimated service warranty costs. To maintain customer relations, the Company facilitates returns of defective products from the Company's customers by accepting for exchange, with the Company's prior approval, most defective products within 30 days of invoicing. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 3 to 10 years for furniture, equipment and computer software, 25 to 40 years for buildings and 15 years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized. Capitalized Software The Company accounts for capitalized software in accordance with ASC 350-40, Computer Software Developed for Internal Use, which provides guidance for computer software developed or obtained for internal use. The Company is required to continually evaluate the stage of the implementation process to determine whether or not costs are expensed or capitalized. Costs incurred during the preliminary project phase or planning and research phase are expensed as incurred. Costs incurred during the development phase, such as material and direct services costs, compensation costs of employees associated with the development and interest cost, are capitalized as incurred. Costs incurred during the post-implementation or operation phase, such as training and maintenance costs, are expensed as incurred. In addition, costs incurred to modify existing software that result in additional functionality are capitalized as incurred. Goodwill The Company accounts for recorded goodwill in accordance with ASC 350, Goodwill and Other Intangible Assets , which requires that goodwill be reviewed annually for impairment or more frequently if impairment indicators exist. Goodwill testing utilizes an impairment analysis, whereby the Company compares the carrying value of each identified reporting unit to its fair value. The Company's goodwill reporting units align directly with its operating segments, Specialty Technology Solutions and Modern Communications & Cloud. The fair values of the reporting units are estimated using the net present value of discounted cash flows generated by each reporting unit. Considerable judgment is necessary in estimating future cash flows, discount rates and other factors affecting the estimated fair value of the reporting units, including operating and macroeconomic factors. Historical financial information, internal plans and projections and industry information are used in making such estimates. Under Accounting Standards Update ("ASU") 2017-04, if fair value of goodwill is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting units' fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, the Company would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company also assesses the recoverability of goodwill if facts and circumstances indicate goodwill may be impaired. In its most recent annual test, the Company estimated the fair value of its reporting units primarily based on the income approach utilizing the discounted cash flow method. The Company also corroborated the fair value estimates derived from the income approach by considering the implied market multiples of comparable transactions and companies. The discounted cash flow method required the Company to estimate future cash flows and discount those amounts to present value. The key assumptions utilized in determining fair value included: • Industry weighted-average cost of capital ("WACC"): The Company utilized a WACC relative to each reporting unit's respective geography and industry as the discount rate for estimated future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant in each respective geography. • Operating income: The Company utilized historical and expected revenue growth rates, gross margins and operating expense percentages, which varied based on the projections of each reporting unit being evaluated. 51 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 • Cash flows from working capital changes: The Company utilized a projected cash flow impact pertaining to depreciation, capital expenditures and expected changes in working capital as each of its goodwill reporting units grow. No goodwill impairment charges were recognized for the fiscal years ended June 30, 2023, 2022 and 2021 . See Note 7 - Goodwill and Other Identifiable Intangible Assets for more information regarding goodwill and the results of our testing. Intangible Assets Intangible assets consist of customer relationships, trade names, distributor agreements, supplier partner programs, developed technology, non-compete agreements and an encryption key library. Customer relationships, trade names, supplier partner programs, developed technology and the encryption key library are amortized using the straight-line method over their estimated useful lives, which range from 4 to 19 years. Non-compete agreements are amortized over their contract life. These assets are shown in detail in Note 7 - Goodwill and Other Identifiable Intangible Assets. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Tests for recoverability of a long-lived asset to be held and used are measured by comparing the carrying amount of the long-lived asset to the sum of the estimated future undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows, the Company uses projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. If it is determined that a long-lived asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value . No intangible asset or other long-lived asset impairment charges were recognized for the fiscal years ended June 30, 2023, 2022 and 2021. See Note 7 - Goodwill and Other Identifiable Intangible Assets for more information regarding intangible asset impairment charges. Fair Value of Financial Instruments The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable, accrued liabilities, borrowings under the revolving credit facility and subsidiary lines of credit approximate fair value based upon either short maturities or variable interest rates of these instruments. For additional information related to the fair value of derivatives, please see Note 10 - Fair Value of Financial Instruments . Contingencies The Company accrues for contingent obligations, including estimated legal costs, when it is probable that a liability is incurred and the amount is reasonably estimable. As facts concerning contingencies become known, management reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal and other regulatory matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process. Revenue Recognition The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers . 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 software licenses. For more detailed disclosures on the Company's revenue recognition policies, see Note 3 - Revenue Recognition . 52 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Advertising Costs The Company defers advertising-related costs until the advertising is first run in trade or other publications or, in the case of brochures, until the brochures are printed and available for distribution or posted online. Advertising costs, net of supplier reimbursement, are included in selling, general and administrative expenses and were not significant in any of the three fiscal years ended June 30, 2023, 2022 and 2021. Deferred advertising costs for each of these three fiscal years were also not significant. Foreign Currency The currency effects of translating the financial statements of the Company’s foreign entities that operate in their local currency are included in the cumulative currency translation adjustment component of accumulated other comprehensive income or loss. The Company's functional currencies include U.S. dollars, Brazilian reals, British pounds, euros and Canadian dollars. The assets and liabilities of these foreign entities are translated into U.S. dollars using the exchange rate at the end of the respective period. Sales, costs and expenses are translated at average exchange rates effective during the respective period. Foreign currency transactional and re-measurement gains and losses are included in other expense (income) in the Consolidated Income Statements. Such amounts are not significant to any of the periods presented. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. In accordance with ASC 740, Accounting for Income Taxes, valuation allowances are provided against deferred tax assets when it is more likely than not that an asset will not be realized . Additionally, the Company maintains reserves for uncertain tax provisions. See Note 13 - Income Taxes for further discussion. Share-Based Payments The Company accounts for share-based compensation using the provisions of ASC 718, Accounting for Stock Compensation , which requires the recognition of the fair value of share-based compensation. Furthermore, the Company adopted ASU 2016-09, which simplified several aspects of the accounting for share-based compensation, including income tax effects, forfeitures, statutory withholding requirements and cash flow statement classifications. Share-based compensation is estimated at the grant date based on the fair value of the awards. Since this compensation cost is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASU 2016-09 allows companies to elect an accounting policy to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. The Company estimates the total number of awards expected to be forfeited at the time of grant and revise such estimates, if necessary, in subsequent periods if actual forfeitures differ. The Company has elected to expense grants of awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting portion of the award. Common stock repurchases Repurchases of common stock are accounted for at cost, which includes brokerage fees, and are included as a component of shareholder's equity on the Consolidated Balance Sheets. Comprehensive Income ASC 220, Comprehensive Income , defines comprehensive income as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive income for the Company include net income, unrealized gains or losses on hedged transactions, net of tax and foreign currency translation adjustments arising from the consolidation of the Company’s foreign subsidiaries. Recent Accounting Pronouncements 53 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 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 are recorded at inception and adjusted over the contractual life. The changes in the allowance for doubtful accounts for the fiscal years ended June 30, 2023, 2022 and 2021 are set forth in the tables below. Description Balance at Beginning of Period Amounts Charged to Expense Write-offs Other (1) Balance at End of Period (in thousands) Allowance for doubtful accounts: Year ended June 30, 2021 $ 21,906 338 ( 4,556 ) 1,653 $ 19,341 Year ended June 30, 2022 $ 19,341 1,514 ( 1,751 ) ( 2,298 ) $ 16,806 Year ended June 30, 2023 $ 16,806 2,785 ( 2,062 ) ( 2,049 ) $ 15,480 (1) "Other" amounts include recoveries and the effect of foreign currency fluctuations for the fiscal years ended June 30, 2023, 2022 and 2021, respectively. (3) Revenue Recognition The Company provides technology solutions and services from the world's leading suppliers of mobility, barcode, POS, payments, networking, 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. Significant Judgments: Principal versus Agent Considerations The Company is the principal for sales of hardware, and certain software 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. 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 54 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 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 the Company may also provide other rebates or incentives, which are accounted for as variable consideration. 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. The Company estimates returns allowance based on historical experience and reduces revenue accordingly. 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. Practical Expedients & Accounting Policy Elections • Incremental costs of obtaining a contract - These costs are included in selling, general and administrative expenses as the amortization period is generally one year or less. The Company expenses costs associated with obtaining and fulfilling contracts as incurred. • Shipping costs - The Company accounts for certain shipping and handling activities as fulfillment costs and expenses them as incurred. • Significant financing components - The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less. • Sales tax and other related taxes - Sales and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue. Disaggregation of Revenue The following tables represent the Company's disaggregation of revenue: Fiscal year ended June 30, 2023 Specialty Technology Solutions Modern Communications & Cloud Total Revenue by product/service type: (in thousands) Hardware, software and cloud (excluding Intelisys) $ 2,331,030 $ 1,377,185 $ 3,708,215 Intelisys connectivity and cloud — 79,506 79,506 $ 2,331,030 $ 1,456,691 $ 3,787,721 55 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Fiscal year ended June 30, 2022 Specialty Technology Solutions Modern Communications & Cloud Total Revenue by product/service type: (in thousands) Hardware, software and cloud (excluding Intelisys) $ 2,082,321 $ 1,373,342 $ 3,455,663 Intelisys connectivity and cloud — 74,272 74,272 $ 2,082,321 $ 1,447,614 $ 3,529,935 Fiscal year ended June 30, 2021 Specialty Technology Solutions Modern Communications & Cloud Total Revenue by product/service type: (in thousands) Hardware, software and cloud (excluding Intelisys) $ 1,815,933 $ 1,269,930 $ 3,085,863 Intelisys connectivity and cloud — 64,943 64,943 $ 1,815,933 $ 1,334,873 $ 3,150,806 (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. Fiscal year ended June 30, 2023 2022 2021 (in thousands, except per share data) Numerator: Net income from continuing operations $ 88,092 $ 88,698 $ 45,389 Net income (loss) from discontinued operations 1,717 100 ( 34,594 ) Net income $ 89,809 $ 88,798 $ 10,795 Denominator: Weighted-average shares, basic 25,142 25,504 25,423 Dilutive effect of share-based payments 220 254 95 Weighted-average shares, diluted 25,362 25,758 25,518 Net income from continuing operations per common share, basic $ 3.50 $ 3.48 $ 1.79 Net income (loss) from discontinued operations per common share, basic 0.07 — ( 1.36 ) Net income per common share, basic $ 3.57 $ 3.48 $ 0.42 Net income from continuing operations per common share, diluted $ 3.47 $ 3.44 $ 1.78 Net income (loss) from discontinued operations per common share, diluted 0.07 — ( 1.36 ) Net income per common share, diluted $ 3.54 $ 3.45 $ 0.42 56 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 For the years ended June 30, 2023, 2022 and 2021, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would have been antidilutive were 1,135,984 , 926,286 and 1,297,214 , respectively. (5) Property and Equipment Property and equipment is comprised of the following: June 30, 2023 2022 (in thousands) Land $ 2,143 $ 2,999 Buildings and leasehold improvements 20,326 19,838 Computer software and equipment 77,673 72,289 Furniture, fixtures and equipment 17,895 15,223 Construction in progress 919 209 Rental equipment 10,734 9,539 129,690 120,097 Less accumulated depreciation ( 92,311 ) ( 82,620 ) $ 37,379 $ 37,477 Depreciation expense recorded as selling, general and administrative costs in the accompanying Consolidated Income Statements was $ 10.9 million, $ 11.1 million and $ 12.5 million for the fiscal years ended June 30, 2023, 2022 and 2021, respectively. Depreciation expense recorded as cost of goods sold in the accompanying Consolidated Income Statements was $ 1.0 million, $ 1.0 million and $ 1.5 million for the fiscal years ended June 30, 2023, 2022 and 2021, respectively. (6) Other Assets and Liabilities, Current and Noncurrent The table below details prepaid expenses and other current assets. June 30, 2023 2022 (in thousands) Other receivables $ 72,539 $ 70,105 Prepaid expense 14,547 51,013 Other taxes receivable 7,500 5,177 Other current assets 15,501 15,267 $ 110,087 $ 141,562 The table below details accrued expenses and other current liabilities. 57 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 June 30, 2023 2022 (in thousands) Deferred warranty revenue $ 8,640 $ 9,640 Accrued compensation 24,403 25,180 Other taxes payable 5,848 10,852 Accrued marketing expense 7,878 7,697 Accrued freight 3,428 3,421 Short-term operating lease liability 4,355 4,499 Other accrued liabilities 24,341 27,166 $ 78,893 $ 88,455 (7) Goodwill and Other Identifiable Intangible Assets In accordance with ASC 350, Intangibles - Goodwill and Other Intangible Assets , the Company performs its annual goodwill impairment test during the fourth quarter of each fiscal year, or whenever indicators of impairment are present. The reporting units utilized for goodwill impairment tests align directly with our operating segments, Specialty Technology Solutions and Modern Communications & Cloud. The testing includes the determination of each reporting unit's fair value using a discounted cash flows model compared to each reporting unit's carrying value. Key assumptions used in determining fair value include projected growth and operating margin, working capital requirements and discount rates. During fiscal years ended June 30, 2023, 2022 and 2021, no impairment charges related to goodwill were recorded . The fair value of the Specialty Technology Solutions and Modern Communications & Cloud reporting units exceeded its carrying value by 2 % and 13 %, respectively, as of the annual goodwill impairment testing date. Changes in the carrying amount of goodwill for the years ended June 30, 2023 and 2022, by reportable segment, are set forth in the table below. Specialty Technology Solutions Modern Communications & Cloud Total (in thousands) Balance at June 30, 2021 $ 16,370 $ 202,507 $ 218,877 Unrealized loss on foreign currency translation — ( 4,442 ) ( 4,442 ) Balance at June 30, 2022 $ 16,370 $ 198,065 $ 214,435 Unrealized gain on foreign currency translation — 2,271 2,271 Balance at June 30, 2023 $ 16,370 $ 200,336 $ 216,706 The following table shows the Company’s identifiable intangible assets as of June 30, 2023 and 2022, respectively. 58 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 June 30, 2023 June 30, 2022 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value (in thousands) Amortized intangible assets: Customer relationships $ 138,574 $ 90,650 $ 47,924 $ 137,366 $ 79,147 $ 58,219 Trade names 19,562 14,109 5,453 19,480 12,469 7,011 Non-compete agreements 2,410 2,410 — 2,410 2,396 14 Supplier partner program 4,085 2,481 1,604 4,085 2,051 2,034 Encryption key library 19,900 14,718 5,182 19,900 12,230 7,670 Developed technology 14,262 5,930 8,332 13,865 4,386 9,479 Total intangibles $ 198,793 $ 130,298 $ 68,495 $ 197,106 $ 112,679 $ 84,427 The weighted-average amortization period for all intangible assets was approximately 10 years for the fiscal years ended June 30, 2023, 2022 and 2021. Amortization expense for continuing operations for the years ended June 30, 2023, 2022 and 2021 was $ 16.7 million, $ 17.9 million and $ 19.5 million, respectively, all of which relates to selling, general and administrative costs, not the cost of selling goods, and has been presented as such in the accompanying Consolidated Income Statements. Estimated future amortization expense is as follows: Amortization Expense (in thousands) Year Ended June 30, 2024 $ 16,783 2025 16,783 2026 12,882 2027 6,674 2028 5,317 Thereafter 10,056 Total $ 68,495 (8) Short Term Borrowings and Long Term Debt The following table shows the Company’s short-term and long-term debt as of June 30, 2023 and 2022, respectively. June 30, 2023 2022 (in thousands) Current portion of long-term debt $ 6,915 $ 11,598 Mississippi revenue bond, net of current portion 3,381 3,733 Senior secured term loan facility, net of current portion 140,625 120,000 Borrowings under revolving credit facility 178,980 135,839 Total debt $ 329,901 $ 271,170 Credit Facility 59 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 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 fiscal year ended June 30, 2023, the Company's borrowings under the credit facility were U.S. dollar loans. The spread in effect as of June 30, 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 as of June 30, 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 as of 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 Amended Credit Agreement as of June 30, 2023. The average daily balance outstanding on the revolving credit facility, excluding the term loan facility, was $ 223.5 million and $ 69.0 million during the fiscal year ended June 30, 2023 and 2022, respectively. There was $ 171.0 million and $ 214.2 million available for additional borrowings as of June 30, 2023 and 2022, respectively. There were no letters of credit issued under the multi-currency revolving credit facility as of June 30, 2023 and 2022. Mississippi Revenue Bond On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi facility through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at a rate equal to one-month term SOFR plus 0.10 % plus the applicable margin of 0.85 %. The terms of the bond allow for payment of interest only for the first 10 years of the agreement and then, 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 5 th anniversary of the agreement, requiring the Company to pay back the bonds at 100 % of the principal amount outstanding. As of June 30, 2023, the Company was in compliance with all covenants under this bond. The interest rates at June 30, 2023 and 2022 were 6.11 % and 1.97 %, respectively. 60 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Scheduled maturities of the Company’s short-term borrowings, revolving credit facility and long-term debt at June 30, 2023 are as follows: Revolving Credit Facility Term Loan Facility Mississippi Bond (in thousands) Fiscal year: 2024 $ — $ 6,563 $ 352 2025 — 7,500 357 2026 — 7,500 361 2027 — 10,313 366 2028 178,980 115,312 371 Thereafter — — 1,926 Total principal payments $ 178,980 $ 147,188 $ 3,733 Debt Issuance Costs As of June 30, 2023, net debt issuance costs associated with the credit facility and bonds totaled $ 1.6 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument. (9) 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 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. S ee Note 1- Business and Summary of Significant Accounting Policies for more information regarding the Company's policy on derivative financial instruments. The Company had contracts outstanding with notional amounts of $ 34.3 million and $ 34.5 million for the exchange of foreign currencies as of June 30, 2023 and 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 are as follows: Fiscal year ended June 30, 2023 2022 2021 (in thousands) Net foreign exchange derivative contract losses (gains) $ 3,928 $ ( 304 ) $ 3,462 Net foreign currency transactional and re-measurement (gains) losses ( 1,760 ) 2,382 ( 2,617 ) Net foreign currency losses $ 2,168 $ 2,078 $ 845 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 and are included in other income and expense. Foreign exchange 61 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 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. 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 a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap 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 fiscal years ended June 30, 2023, 2022 and 2021. The components of the cash flow hedge included in accumulated other comprehensive (loss) income, net of income taxes, in the Consolidated Statements of Shareholders’ Equity, are as follows: Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Net interest (income) expense recognized as a result of interest rate swap $ ( 1,553 ) $ 2,088 $ 2,250 Unrealized gain in fair value of interest swap rates 4,554 5,748 731 Net increase in accumulated other comprehensive income (loss) 3,001 7,836 2,981 Income tax effect 747 2,003 732 Net increase in accumulated other comprehensive income, net of tax $ 2,254 $ 5,833 $ 2,249 The Company has the following derivative instruments for continuing operations located on the Consolidated Balance Sheets as of June 30, 2023, utilized for the risk management purposes detailed above: June 30, 2023 Balance Sheet Location Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments (in thousands) Derivative assets: Foreign exchange contracts Prepaid expenses and other current assets $ — $ 1 Interest rate swap agreement Other current assets $ 4,687 $ — Foreign currency hedge Other current assets $ 100 $ — The Company has the following derivative instruments located on the Consolidated Balance Sheets as of June 30, 2022, utilized for the risk management purposes detailed above: 62 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 June 30, 2022 Balance Sheet Location 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 current assets $ 1,686 $ — Derivative liabilities: Foreign exchange contracts Accrued expenses and other current liabilities $ — $ 5 Foreign currency hedge Other current liabilities $ 93 $ — (10) 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 is required to classify certain assets and liabilities based on the fair value hierarchy, which groups 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; • 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, interest rate swap agreements and contingent consideration owed to the previous owners of Intelisys. The carrying value of debt listed in Note 8 - Short-Term Borrowings and Long Term 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 criteria). The following table summarizes the valuation of the Company's remaining assets and liabilities measured at fair value on a recurring basis as of June 30, 2023: 63 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 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 $ 28,209 $ 28,209 $ — Forward foreign currency exchange contracts 1 — 1 Interest rate swap agreement 4,687 — 4,687 Foreign currency hedge 100 — 100 Total assets at fair value $ 32,997 $ 28,209 $ 4,788 Liabilities: Deferred compensation plan investments, current and non-current portion $ 28,229 $ 28,229 $ — Total liabilities at fair value $ 28,229 $ 28,229 $ — The following table presents assets and liabilities measured at fair value on a recurring basis as of June 30, 2022: 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 or active employees. These investments are recorded to prepaid and other current assets or other non-current assets depending on their corresponding, anticipated distributions 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 LIBOR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Consolidated Balance Sheet as prepaid expenses and other current assets or accrued expenses and other current liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 9 - Derivatives and Hedging Activities . (11) Share-Based Compensation Share-Based Compensation Plans 64 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 The Company has awards outstanding from two share-based compensation plans (the 2013 Long-Term Incentive Plan and the 2021 Long-Term Incentive Plan). The 2021 Long-Term Incentive Plan was approved at the annual meeting of the shareholders on January 27, 2022. The 2021 Plan permits the grant of any or all of the following types of awards to grantees: stock options, including non-qualified options and ISOs; SARs; restricted stock ("RSA"); deferred stock and restricted stock units ("RSU"); performance units ("PU") and performance shares; dividend equivalents; and other stock-based awards. Eligible grantees include employees, officers, non-employee consultants and non-employee directors of the Company and its affiliates. Awards are currently only being granted under the 2021 Long-Term Incentive Plan. As of June 30, 2023, there were 1,270,781 shares available for future grant under the 2021 Long-Term Incentive Plan. All of the Company’s share-based compensation plans are shareholder approved, and it is the Company’s belief that such awards align the interests of its employees and directors with those of its shareholders. An RSA is common stock that is subject to risk of forfeiture or other restrictions that lapse upon satisfaction of specified conditions. An RSU represents the right to receive shares of common stock in the future with the right to future delivery of the shares subject to risk of forfeiture or other restrictions that lapse upon satisfaction of specified conditions. A PU represents the right to receive shares of common stock in the future contingent on performance against predetermined objectives over a specified performance period. The Company accounts for its share-based compensation awards in accordance with ASC 718, Stock Compensation, which requires all share-based compensation to be recognized in the income statement based on fair value and applies to all awards granted, modified, canceled or repurchased after the effective date. Total share-based compensation included as a component of selling, general and administrative expenses in our Consolidated Income Statements was as follows: Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Share-based compensation related to: Equity classified stock options $ 1,426 $ 1,848 $ 1,332 Equity classified restricted stock 9,793 9,815 6,707 Total share-based compensation $ 11,219 $ 11,663 $ 8,039 Stock Options The Company did not grant stock options during the fiscal year ended June 30, 2023 or June 30, 2022. The Company granted stock options for 640,782 shares during the fiscal year ended June 30, 2021 that vest annually over 3 years and have a 10 -year contractual life. These options were granted with an exercise price that is no less than 100 % of the fair market value of the underlying shares on the date of the grant. The fair value of each option (for purposes of calculation of share-based compensation) was estimated on the date of grant using the Black-Scholes-Merton option pricing formula that uses assumptions determined at the date of grant. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them ("expected term"), the estimated volatility of the Company's common stock price over the expected term ("expected volatility") and the number of options that will ultimately not complete their vesting requirements ("forfeitures"). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Consolidated Income Statements. The Company used the following weighted-average assumptions for the options granted in fiscal year ended June 30, 2021: 65 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Fiscal Year Ended June 30, 2021 Expected term 5 years Expected volatility 42.78 % Risk-free interest rate 0.36 % Dividend yield 0.00 % Weighted-average fair value per option $ 9.01 The weighted-average expected term of the options represents the period of time the options are expected to be outstanding based on historical trends and behaviors of certain groups and individuals receiving these awards. The expected volatility is predominantly based on the historical volatility of our common stock for a period approximating the expected term. The risk-free interest rate reflects the interest rate at grant date on zero-coupon United States governmental bonds that have a remaining life similar to the expected option term. The dividend yield assumption was based on the Company's dividend payment history and management's expectations of future dividend payments. A summary of activity under our stock option plans is presented below: Fiscal Year Ended June 30, 2023 Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life Aggregate Intrinsic Value Outstanding, beginning of year 1,123,099 $ 32.23 Granted during the period — — Exercised during the period ( 36,435 ) 25.00 Canceled, forfeited, or expired during the period ( 59,993 ) 27.70 Outstanding, end of year 1,026,671 32.76 4.57 $ 2,113,985 Vested and expected to vest at June 30, 2023 1,026,460 32.76 4.57 $ 2,112,871 Exercisable, end of year 855,834 $ 34.28 4.01 $ — The aggregate intrinsic value was calculated using the market price of the Company's stock on June 30, 2023, and the exercise price for only those options that have an exercise price that is less than the market price of our stock. This amount will change as the market price per share changes. The aggregate intrinsic value of options exercised during the fiscal years ended June 30, 2023, 2022 and 2021 was $ 0.2 million, $ 0.6 million and less than $ 0.1 million, respectively. A summary of the status of the Company’s shares subject to unvested options is presented below: Fiscal Year Ended June 30, 2023 Options Weighted Average Exercise Price Weighted Average Grant Date Fair Value Unvested, beginning of year 384,638 $ 25.16 $ 9.08 Granted — — — Vested ( 171,926 ) 25.11 9.06 Canceled or forfeited ( 41,875 ) 25.51 9.30 Unvested, end of year 170,837 $ 25.12 $ 9.06 As of June 30, 2023, there was approximately $ 0.6 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans in the form of stock options. This cost is expected to be recognized 66 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 over a weighted-average period of 0.38 years. The total fair value of options vested during the fiscal years ended June 30, 2023, 2022 and 2021 is $ 1.6 million, $ 1.9 million and $ 0.3 million, respectively. The following table summarizes information about stock options outstanding and exercisable as of June 30, 2023: Options Outstanding Options Exercisable Range of Exercise Prices Shares Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 22.27 - $ 26.38 363,233 7.38 24.53 231,673 24.55 $ 26.38 - $ 30.49 119,021 7.40 27.14 79,744 27.14 $ 30.49 - $ 34.60 57,799 4.44 34.35 57,799 34.35 $ 34.60 - $ 38.71 207,169 2.83 37.71 207,169 37.71 $ 38.71 - $ 42.82 279,449 1.02 41.83 279,449 41.83 1,026,671 4.57 $ 32.76 855,834 $ 34.28 The Company issues shares to satisfy the exercise of options. Restricted Stock Grants of Restricted Shares During the fiscal year ended June 30, 2023, the Company granted 518,987 shares of restricted stock to employees and non-employee directors, all of which were issued in the form of RSUs: Fiscal Year Ended June 30, 2023 Shares granted Date granted Grant date fair value Vesting period Employees Certain employees based on performance 346,059 August 26, 2022 $ 28.66 Annually over 4 years Certain employees based on performance 58,323 August 26, 2022 $ 28.66 Annually over 3 years Certain employees based on performance 58,323 August 26, 2022 $ 27.92 Annually over 3 years Certain employees based on performance 815 December 1, 2022 $ 30.70 Annually over 4 years Certain employees based on hire 13,067 June 1, 2023 $ 28.70 Annually over 4 years Non-Employee Directors Certain Directors 42,400 August 26, 2022 $ 28.66 12 months A summary of the status of the Company’s outstanding restricted stock is presented below: Fiscal Year Ended June 30, 2023 Shares Weighted-Average Grant Date Fair Value Outstanding, beginning of year 639,342 $ 32.04 Granted during the period 518,987 28.58 Vested during the period ( 224,062 ) 30.56 Cancelled, forfeited, or expired during the period ( 44,357 ) 31.29 Outstanding, end of year 889,910 $ 30.43 67 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 As of June 30, 2023, there was approximately $ 18.4 million of unrecognized compensation cost related to unvested performance units and restricted stock units granted, which is expected to be recognized over a weighted-average period of 1.31 years. The Company withheld 79,537 shares for income taxes during the fiscal year ended June 30, 2023. (12) Employee Benefit Plans The Company maintains defined contribution plans that cover all employees located in the United States that meet certain eligibility requirements and provides a matching contribution equal to 50% of each participant’s contribution, up to a maximum of 6 % of the participant's eligible compensation. Employer contributions are vested based upon tenure over a five-year period. Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Matching contributions $ 3,270 $ 2,929 $ 1,262 Internationally, the Company contributes to either plans required by local governments or to various employee annuity plans. Additionally, the Company maintains a non-qualified, unfunded deferred compensation plan that allows eligible members of management to defer a portion of their compensation in addition to receiving discretionary matching contributions from the Company. Employer contributions are vested over a five-year period. (13) Income Taxes As of the fiscal year ended June 30, 2023, the Company maintains the ability to access the earnings of foreign subsidiaries. The Company considered recording a deferred tax liability related to federal, state and withholding tax and determined that no liability should be recorded. There is no certainty as to the timing of the distributions of such earnings to the U.S. in whole or in part. Income tax expense (benefit) consists of: Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Current: Federal $ 25,034 $ 16,895 $ 9,132 State 6,455 5,238 1,261 Foreign 4,507 3,896 874 Total current 35,996 26,029 11,267 Deferred: Federal ( 2,991 ) 3,429 207 State ( 541 ) 129 ( 1,297 ) Foreign 1,294 338 1,969 Total deferred ( 2,238 ) 3,896 879 Provision for income taxes $ 33,758 $ 29,925 $ 12,146 A reconciliation is provided below of the U.S. Federal income tax expense for the fiscal years ended June 30, 2023, June 30, 2022 and June 30, 2021 with the applicable statutory rate of 21%. 68 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) U.S. statutory rate 21.0 % 21.0 % 21.0 % U.S. Federal income tax at statutory rate $ 25,588 $ 24,911 $ 12,082 Increase (decrease) in income taxes due to: State and local income taxes, net of Federal benefit 4,559 4,265 996 Tax credits ( 909 ) ( 796 ) ( 170 ) Valuation allowance 1,087 ( 200 ) 3,472 Effect of varying statutory rates in foreign operations, net 2,751 1,145 1,051 Stock compensation 37 ( 121 ) 1,094 Disallowed interest — — 86 Earnings from foreign subsidiaries 957 928 124 Losses on dispositions — — ( 2,897 ) Global intangible low taxed income tax 1,551 630 ( 45 ) Nontaxable income ( 3,189 ) ( 2,050 ) ( 1,628 ) Notional interest deduction on net equity ( 733 ) ( 780 ) ( 568 ) Other 2,059 1,993 ( 1,451 ) Provision for income taxes $ 33,758 $ 29,925 $ 12,146 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below: June 30, 2023 2022 (in thousands) Deferred tax assets derived from: Allowance for accounts receivable $ 5,811 $ 3,630 Inventories 3,326 3,510 Nondeductible accrued expenses 7,561 7,859 Net operating loss carryforwards 596 705 Tax credits 8,430 6,410 Deferred compensation 7,173 6,548 Stock compensation 4,718 4,001 Capital loss carryforwards 7,348 7,831 Timing of amortization deduction from intangible assets 6,170 5,676 Total deferred tax assets 51,133 46,170 Valuation allowance ( 14,397 ) ( 13,181 ) Total deferred tax assets, net of allowance 36,736 32,989 Deferred tax liabilities derived from: Timing of depreciation and other deductions from building and equipment ( 1,533 ) ( 3,035 ) Timing of amortization deduction from goodwill ( 10,886 ) ( 5,693 ) Timing of amortization deduction from intangible assets ( 10,369 ) ( 11,737 ) Total deferred tax liabilities ( 22,788 ) ( 20,465 ) Net deferred tax assets $ 13,948 $ 12,524 The components of pretax earnings are as follows: 69 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Domestic $ 94,994 $ 93,586 $ 39,511 Foreign 26,856 25,037 18,024 Worldwide pretax earnings $ 121,850 $ 118,623 $ 57,535 As of June 30, 2023, there were (i) gross net operating loss carryforwards of approximately $ 1.3 million for U.S. federal income tax purposes; (ii) gross state net operating loss carryforwards of approximately $ 1.5 million; (iii) foreign gross net operating loss carryforwards of approximately $ 1.1 million; (iv) state income tax credit carryforwards of approximately $ 3.0 million that began to expire in the 2022 tax year; (v) withholding tax credits of approximately $ 5.0 million; (vi) foreign tax credits of $ 1.0 million, and (vii) gross capital loss carryovers of $ 29.2 million. The Company maintains a valuation allowance of $ 0.1 million for U.S. federal net operating losses, $ 7.3 million for capital loss carryforwards, $ 0.2 million for foreign net operating losses, a less than $ 0.1 million valuation allowance for state net operating losses, a $ 5.1 million valuation allowance for withholding tax credits, a $ 1.0 million valuation allowance for foreign tax credits, and a $ 0.6 million valuation allowance for state income tax credits, where it was determined that, in accordance with ASC 740, it is more likely than not that they cannot be utilized. The Company recognizes excess tax benefits and tax deficiencies as income tax expense or benefit for stock award settlements in accordance with ASU 2016-09. The Company recognized net tax benefit of less than $ 0.1 million for the fiscal year ended June 30, 2023, net tax benefit of $ 0.3 million for the fiscal year ended June 30, 2022 and net tax expense of $ 1.1 million for the fiscal year ended June 30, 2021. As of June 30, 2023, the Company had gross unrecognized tax benefits of $ 1.2 million, $ 0.9 million of which, if recognized, would affect the effective tax rate. This reflects an increase of less than $ 0.1 million on a gross basis over the prior fiscal year. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Income Statement. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet. The total amount of interest and penalties accrued, but excluded from the table below, were $ 1.2 million, $ 1.2 million and $ 1.1 million for the fiscal years ended June 30, 2023, 2022 and 2021, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: June 30, 2023 2022 2021 (in thousands) Beginning Balance $ 1,065 $ 1,121 $ 1,156 Additions based on tax positions related to the current year 123 139 68 Reduction for tax positions of prior years ( 16 ) ( 195 ) ( 103 ) Ending Balance $ 1,172 $ 1,065 $ 1,121 A court ruling issued in Brazil in June 2023 confirmed that Brazilian state-provided tax benefits are not subject to income tax. The Company recorded, discrete to the June 30, 2023 quarter, an income tax benefit of $ 2.2 million related to the confirmation of the recovery of state-provided tax benefits. Subsequent to the 2023 fiscal year-end, the IRS issued Notice 2023-55 which provides taxpayers with Brazilian subsidiaries temporary relief from the final foreign tax credit regulations. This Notice will apply to the Company’s fiscal year ended June 30, 2023 and the resulting tax benefit of approximately $ 1.5 million will be recognized as a discrete item in the first quarter of the June 30, 2024 fiscal year. 70 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the United States federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With certain exceptions, the Company is no longer subject to state and local, or non-United States income tax examinations by tax authorities for tax years before June 30, 2018. (14) Leases In accordance with ASC 842, Leases , 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 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 financial statements at June 30, 2023 and 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 Sheet related to operating leases at June 30, 2023 and 2022: Operating leases Balance Sheet location June 30, 2023 June 30, 2022 (in thousands) Operating lease right-of-use assets Other non-current assets $ 12,539 $ 16,217 Current operating lease liabilities Accrued expenses and other current liabilities 4,355 4,499 Long-term operating lease liabilities Other long-term liabilities 9,329 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 fiscal years ended June 30, 2023, 2022 and 2021. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less. Fiscal year ended June 30, 2023 2022 2021 (in thousands) Operating lease cost $ 5,224 $ 5,239 $ 5,256 Variable lease cost 1,460 1,208 1,068 $ 6,684 $ 6,447 $ 6,324 71 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Supplemental cash flow information related to the Company's operating leases for the fiscal years ended June 30, 2023, 2022 and 2021 are presented in the table below: Fiscal year ended June 30, 2023 2022 2021 (in thousands) Cash paid for amounts in the measurement of lease liabilities $ 5,463 $ 5,182 $ 5,456 Right-of-use assets obtained in exchange for lease obligations 897 2,313 — The weighted-average remaining lease term and discount rate at June 30, 2023 and 2022 are presented in the table below: June 30, 2023 June 30, 2022 Weighted-average remaining lease term 3.62 4.37 Weighted-average discount rate 4.30 % 3.98 % The following table presents the maturities of the Company's operating lease liabilities at June 30, 2023: Operating leases (in thousands) 2024 $ 4,836 2025 3,577 2026 3,038 2027 2,678 2028 632 Thereafter — Total future payments 14,761 Less: amounts representing interest 1,077 Present value of lease payments $ 13,684 (15) Commitments and Contingencies A majority of the Company’s net revenues in fiscal years 2023, 2022 and 2021 were received from the sale of products purchased from the Company’s ten largest suppliers. The Company has entered into written agreements with substantially all of its major suppliers. While the Company’s agreements with most of its suppliers contain standard provisions for periodic renewals, these agreements generally permit termination by either party without cause upon 30 to 120 days' notice. The Company or its subsidiaries are, from time to time, parties 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 and results of operations. Capital Projects The Company expects total capital expenditures to range from $ 6.0 million to $ 8.0 million during fiscal year 2024 primarily for IT investments and facility improvements. 72 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Pre-Acquisition Contingencies 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. There were no deposits into the escrow account and $ 1.2 million was released from the escrow account during the fiscal year ended June 30, 2023. There were no deposits into, or releases from the escrow account during the fiscal year ended June 30, 2022. The amount available after the impact of foreign currency translation, as of June 30, 2023 and 2022, for future pre-acquisition contingency settlements or to be released to the sellers was $ 3.4 million and $ 4.1 million, 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 consolidated balance sheet: June 30, 2023 June 30, 2022 (in thousands) Assets Prepaid expenses and other assets (current) $ 16 $ 15 Other assets (noncurrent) $ 4,150 $ 3,818 Liabilities Other current liabilities $ 16 $ 15 Other long-term liabilities $ 4,150 $ 3,818 The amount of reasonably possible undiscounted pre-acquisition contingencies as of June 30, 2023 is estimated to range from $ 4.2 million to $ 16.9 million at this time, of which all exposures are indemnifiable under the share purchase agreement. 73 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 (16) 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. 74 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Selected financial information for each business segment is presented below: Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Sales: Specialty Technology Solutions $ 2,331,030 $ 2,082,321 $ 1,815,933 Modern Communications & Cloud 1,456,691 1,447,614 1,334,873 $ 3,787,721 $ 3,529,935 $ 3,150,806 Depreciation and amortization: Specialty Technology Solutions $ 10,838 $ 11,754 $ 13,193 Modern Communications & Cloud 14,901 15,110 17,287 Corporate 2,875 3,020 3,027 $ 28,614 $ 29,884 $ 33,507 Change in fair value of contingent consideration: Specialty Technology Solutions $ — $ — $ — Modern Communications & Cloud — — 516 $ — $ — $ 516 Operating income: Specialty Technology Solutions $ 75,688 $ 66,686 $ 29,566 Modern Communications & Cloud 61,658 55,511 43,551 Corporate (1) ( 1,460 ) ( 30 ) ( 11,634 ) $ 135,886 $ 122,167 $ 61,483 Capital expenditures: Specialty Technology Solutions $ ( 3,966 ) $ ( 1,667 ) $ ( 1,282 ) Modern Communications & Cloud ( 6,013 ) ( 5,182 ) ( 1,067 ) Corporate — — ( 14 ) $ ( 9,979 ) $ ( 6,849 ) $ ( 2,363 ) Sales by Geography Category: United States $ 3,443,561 $ 3,178,829 $ 2,854,179 International 355,647 356,241 310,075 Less intercompany sales ( 11,487 ) ( 5,135 ) ( 13,448 ) $ 3,787,721 $ 3,529,935 $ 3,150,806 (1) For the year ended June 30, 2023, the amounts shown above include cyberattack restoration costs. For the year ended June 30, 2022, the amounts shown above include divestiture costs. For the year ended June 30, 2021, the amounts shown above include acquisition, divestiture, and restructuring. 75 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 June 30, 2023 June 30, 2022 (in thousands) Assets: Specialty Technology Solutions $ 1,104,103 $ 1,030,538 Modern Communications & Cloud 964,066 906,890 Corporate — — $ 2,068,169 $ 1,937,428 Property and equipment, net by Geography Category: United States $ 27,323 $ 32,715 International 10,056 4,762 $ 37,379 $ 37,477 (17) Accumulated Other Comprehensive Income The components of accumulated other comprehensive loss, net of tax, are as follows: Fiscal Years Ended June 30, 2023 2022 2021 (in thousands) Currency translation adjustment $ ( 93,136 ) $ ( 105,899 ) $ ( 93,561 ) Unrealized loss on fair value of interest rate swap, net of tax 3,515 1,261 ( 4,572 ) Accumulated other comprehensive loss $ ( 89,621 ) $ ( 104,638 ) $ ( 98,133 ) The tax effect of amounts in comprehensive loss reflect a tax expense or benefit as follows: Fiscal years ended June 30, 2023 2022 2021 (in thousands) Tax expense $ 737 $ 1,741 $ 2,084 (18) 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, (the "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. The Company also finalized the sale of the Europe and UK businesses on November 12, 2020. Total cash received for the sale of the Divestitures was $ 39.2 million. During the fiscal year ended June 30, 2021, the Company recorded a pre-tax loss on disposal group of $ 34.5 million, which was primarily attributable to a reduction in the net proceeds realized at closing for the Divestitures. The Company received cash for the sale of Divestitures totaling $ 34.4 million during the fiscal year ended June 30, 2021. 76 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 During the fiscal year ended June 30, 2022, the Company received a second payment of $ 3.1 million for its businesses in Latin America, outside of Brazil, related to working capital adjustments and in accordance with the Share Purchase Agreement between Intcomex and the Company. The receipt of payment resulted in a gain on disposal group of $ 0.1 million. During the fiscal year ended June 30, 2023, the Company received a third payment related to a tax settlement of $ 1.7 million for its businesses in Latin America, outside of Brazil. The receipt of payment resulted in a gain on disposal group of $ 1.7 million. Major components of net loss from discontinued operations for the years ended June 30, 2023, 2022 and 2021 were as follows: Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Net sales $ — $ — $ 213,373 Cost of goods sold — — 198,512 Gross profit — — 14,861 Selling, general and administrative expenses — — 17,291 Operating loss — — ( 2,430 ) Interest expense, net — — 394 (Gain) loss on held for sale classification ( 1,717 ) ( 100 ) 34,597 Other expense, net — — 310 Income (loss) from discontinued operations before taxes 1,717 100 ( 37,731 ) Income tax (benefit) expense — — ( 3,137 ) Net income (loss) from discontinued operations $ 1,717 $ 100 $ ( 34,594 ) Significant non-cash operating items and capital expenditures reflected in the cash flows from discontinued operations for the fiscal years ended June 30, 2023, 2022 and 2021 were as follows: Fiscal Year Ended June 30, 2023 2022 2021 (in thousands) Loss on held for sale classification $ — $ — $ 34,597 Capital expenditures — — ( 58 ) (19) Restructuring In July 2020, as part of a strategic review of organizational structure and operations, the Company announced a global cost reduction and restructuring program. The Company also closed its Canpango business, a Salesforce implementation and consulting business. There has been limited adoption by the Company's partner community of the services Canpango offers. These actions included entering into severance and termination agreements with employees, legal fees to execute the reduction in force and costs associated with lease terminations. There were no restructuring or severance costs incurred during the fiscal years ended June 30, 2023 or 2022. The following table presents the restructuring and severance costs incurred for the fiscal year ended June 30, 2021: 77 Table of Contents Index to Financial Statements SCANSOURCE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) June 30, 2023 Fiscal year ended June 30, 2021 (in thousands) Severance and benefit costs $ 8,824 Other 434 Total restructuring and other charges $ 9,258 For the fiscal year ended June 30, 2021, all restructuring costs are recognized in the Corporate reporting unit and have not been allocated to the Modern Communications & Cloud or Specialty Technology Solutions segment. There were no accrued restructuring and severance costs as of June 30, 2023. 78 Table of Contents Index to Financial Statements ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.