What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-05-09 · 102 added, 238 removed, 240 unchanged (59% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

We provide technology solutions and services from more than 500 leading suppliers of mobility and barcode, POS and payments, physical security and networking, communications and collaboration, connectivity and cloud services to our approximately 30,000 sales partners located in the United States, Canada, Brazil, the UK and Europe.

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

We provide technology solutions and services from more than 500 leading suppliers of mobility, barcode, POS, payments, physical security, networking, unified communications, collaboration, connectivity and cloud services to our approximately 30,000 customers located in the United States, Canada, Brazil, the UK and Europe.

We operate our business under a management structure that enhances our technology focus and hybrid distribution growth strategy.

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• Modern Communications & Cloud

We sell hardware, SaaS, connectivity and cloud solutions and services through channel partners to end-customers.

We sell hardware, SaaS, connectivity and cloud services from leading technology suppliers to customers that solve end users' challenges.

We operate distribution facilities that support our United States and Canada business in Mississippi, California and Kentucky.

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We provide some of our digital products, which include SaaS and subscriptions, through our digital tools and platforms.

Our key suppliers include 8x8, AT&T, Aruba/HPE, Avaya, Axis, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Equinix, Extreme, F5, Five9, Fortinet, Genesys, Granite, GTT, Hanwha, Honeywell, Ingenico, Jabra, Lumen, Microsoft, MetTel, Mitel, NCR, NICE CXone, Poly, RingCentral, Spectrum, Toshiba Global Commerce Solutions, Trend Micro, Ubiquiti, Verifone, Verizon, VMWare, Windstream, Zebra Technologies and Zoom.

Recent Developments

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

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

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

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

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

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

Our key suppliers include AT&T, Aruba/HPE, Avaya, Axis, Cisco, Comcast Business, Dell, Extreme, Five9, Hanwha, Honeywell, Ingenico, Lumen, Microsoft, NCR, Poly HP, RingCentral, Verifone, Verizon, Zebra Technologies and Zoom.

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

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

Our hybrid distribution strategy relies on a channel sales model to offer hardware, SaaS, connectivity and cloud services from leading technology suppliers to sales partners that solve end-customers’ challenges.

ScanSource enables sales partners to deliver solutions for their customers to address changing end-customer buying and consumption patterns.

Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services.

As a trusted adviser to our sales partners, we provide customized solutions through our strong understanding of end-customer needs.

Our goal is to provide exceptional experiences for our customers, suppliers and employees through operational excellence.

Our hybrid distribution strategy relies on a channel sales model to offer hardware, SaaS, connectivity and cloud services from leading technology suppliers to customers that solve end users’ challenges.

ScanSource enables customers to deliver solutions for their end users to address changing buying and consumption patterns.

Our solutions may include a combination of offerings from multiple suppliers or give our customers access to additional services.

As a trusted adviser to our customers, we provide solutions through our strong understanding of end user needs.

Results of Operations

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

The following tables summarize our net sales results by business segment and by geographic location for the quarters and nine months ended March 31, 2023 and 2022:

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

The following tables summarize our net sales results by business segment and by geographic location for the quarters ended September 30, 2023 and 2022:

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

Net Sales by Segment:

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Total net sales $ 876,305 $ 943,813 $ (67,508) (7.2) % (7.7) %

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

2023 2022 $ Change % Change

(in thousands)

Specialty Technology Solutions $ 1,769,530 $ 1,501,702 $ 267,828 17.8 % 17.8 %

Modern Communications & Cloud 1,071,043 1,065,950 5,093 0.5 % 0.1 %

Total net sales $ 2,840,573 $ 2,567,652 $ 272,921 10.6 % 10.4 %

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

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

For the quarter and nine months ended March 31, 2023, net sales for the Specialty Technology Solutions segment increased $62.6 million, or 12.4%, and $267.8 million, or 17.8%, respectively, compared to the prior-year periods.

Excluding the foreign exchange positive impact, adjusted net sales increased $62.6 million, or 12.5% for the quarter ended March 31, 2023 and $266.8 million, or 17.8%, for the nine months ended March 31, 2023, compared to the prior-year periods.

The increase in net sales and adjusted net sales for the quarter and nine month periods is primarily due to strong growth in key technologies in North America.

For the quarter ended September 30, 2023, net sales for the Specialty Technology Solutions segment decreased $66.8 million, or 11.6%, compared to the prior-year period.

Excluding the foreign exchange positive impact, adjusted net sales decreased $67.7 million, or 11.7% for the quarter ended September 30, 2023, compared to the prior-year period.

The decrease in net sales and adjusted net sales is primarily due to lower sales volumes in mobility and barcoding, partially offset by increased networking and security sales.

Modern Communications & Cloud

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

For the quarter ended March 31, 2023, net sales for the Modern Communications & Cloud segment decreased $23.1 million, or 6.7%, compared to the prior-year period.

Excluding the foreign exchange negative impact, adjusted net sales decreased $22.7 million, or 6.6%, for the quarter ended March 31, 2023, compared to the prior-year period.

The decrease in net sales and adjusted net sales for the quarter is primarily due to lower sales volumes in our communications hardware, partially offset by increased networking sales.

For the nine months ended March 31, 2023, net sales for the Modern Communications & Cloud segment increased $5.1 million, or 0.5%, compared to the prior-year period.

Excluding the foreign exchange positive impact, adjusted net sales increased $1.5 million, or 0.1%, for the nine months ended March 31, 2023, compared to the prior-year period.

For our Intelisys business, net sales for the third quarter and nine month period of fiscal year 2023 increased 4.3% and 6.8%, respectively, year-over-year.

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

For the quarter ended September 30, 2023, net sales for the Modern Communications & Cloud segment decreased $0.7 million, or 0.2%, compared to the prior-year period.

Excluding the foreign exchange positive impact, adjusted net sales decreased $5.4 million, or 1.5%, for the quarter ended September 30, 2023, compared to the prior-year period.

The decrease in net sales and adjusted net sales for the quarter is primarily due to lower sales volumes in our communications hardware, partially offset by growth in Cisco products.

Intelisys net billings increased to approximately $2.51 billion annualized, and Intelisys net sales for the quarter ended September 30, 2023 increased 8.8% year-over-year.

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

Net Sales by Geography:

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Total net sales $ 876,305 $ 943,813 $ (67,508) (7.2) % (7.7) %

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

2023 2022 $ Change % Change

(in thousands)

United States and Canada $ 2,577,556 $ 2,307,959 $ 269,597 11.7 % 11.7 %

International 263,017 259,693 3,324 1.3 % (0.5) %

Total net sales $ 2,840,573 $ 2,567,652 $ 272,921 10.6 % 10.4 %

(a) A reconciliation of non-GAAP net sales in constant currency is presented at the end of Results of Operations in the non-GAAP section.

The following table summarizes our gross profit for the quarters and nine months ended March 31, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

(in thousands)

Specialty Technology Solutions $ 57,664 $ 54,021 $ 3,643 6.7 % 10.2 % 10.7 %

Modern Communications & Cloud 54,098 52,487 1,611 3.1 % 16.9 % 15.3 %

Gross profit $ 111,762 $ 106,508 $ 5,254 4.9 % 12.6 % 12.6 %

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

The following table summarizes our gross profit for the quarters ended September 30, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

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Specialty Technology Solutions

For the quarter ended March 31, 2023, gross profit dollars for the Specialty Technology Solutions segment increased $3.6 million, or 6.7%.

Gross profit margin decreased 54 basis points over the prior-year to 10.2%.

Higher sales volume, after considering the associated cost of goods sold, contributed $6.7 million to the growth of gross profit dollars.

Gross margin mix reduced gross profit by $3.1 million, largely from a less favorable sales mix and decreased vendor program recognition.

For the nine months ended March 31, 2023, the Specialty Technology Solutions segment achieved gross profit growth of $21.0 million, or 13.9%.

For the quarter ended September 30, 2023, gross profit dollars for the Specialty Technology Solutions segment decreased $9.2 million, or 15.8% compared to the prior year period.

Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $6.8 million.

Gross profit margin decreased 48 basis points over the prior year to 9.7%.

Increases in sales volume, after considering the associated cost of goods sold, contributed $27.1 million to the growth of gross profit dollars.

Gross margin mix reduced gross profit by $6.0 million, primarily from increased freight costs and lower vendor program recognition.

Gross margin mix negatively impacted gross profit by $2.5 million, largely from decreased vendor program recognition and a less favorable sales mix.

Modern Communications & Cloud

For the quarter ended March 31, 2023, gross profit dollars for the Modern Communications & Cloud segment increased $1.6 million, or 3.1%.

Gross profit margin increased 161 basis points over the prior-year to 16.9%.

For the quarter ended September 30, 2023, gross profit dollars for the Modern Communications & Cloud segment increased $2.2 million, or 4.1%.

Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $0.1 million.

Gross margin mix increased gross profit by $5.1 million, largely driven by a more favorable sales mix.

For the nine months ended March 31, 2023, the Modern Communications & Cloud segment achieved gross profit growth of $3.8 million, or 2.3%.

Gross profit margin increased 64 basis points over the prior year to 15.6%.

Increases in sales volume, after considering the associated cost of goods sold, contributed $0.7 million to the growth of gross profit dollars.

Gross margin mix increased gross profit by $3.1 million, primarily from a more favorable sales mix.

Operating Expenses

The following table summarizes our operating expenses for the quarters and nine months ended March 31, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

(in thousands)

Selling, general and administrative expenses $ 70,669 $ 66,522 $ 4,147 6.2 % 8.0 % 7.9 %

Depreciation expense 2,644 2,612 32 1.2 % 0.3 % 0.3 %

Intangible amortization expense 4,170 4,457 (287) (6.4) % 0.5 % 0.5 %

Gross margin mix positively impacted gross profit by $2.4 million, driven by higher vendor program recognition.

Operating Expenses

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

The following table summarizes our operating expenses for the quarters ended September 30, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

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Operating expenses $ 82,424 $ 78,597 $ 3,827 4.9 % 9.4 % 8.3 %

Selling, general and administrative expenses ("SG&A") increased by $4.1 million, or 6.2%, for the quarter ended March 31, 2023, compared to the prior-year period.

The increase for the quarter ended March 31, 2023 is primarily attributable to higher bad debt expense, which increased year-over-year primarily due to a large bad debt recovery in the prior-year quarter, and higher employee costs.

For the nine months ended March 31, 2023, SG&A expenses increased by $11.8 million, or 5.9%, compared to the prior-year period.

The increase for the nine months ended March 31, 2023 is primarily attributable to higher employee costs, partially offset by a $2.9 million recovery of prior period withholding taxes in Brazil.

Operating Income

The following table summarizes our operating income for the quarters and nine months ended March 31, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

(in thousands)

Specialty Technology Solutions $ 19,811 $ 20,623 $ (812) (3.9) % 3.5 % 4.1 %

Modern Communications & Cloud 14,468 12,294 2,174 17.7 % 4.5 % 3.6 %

Corporate — — — nm* nm* nm*

Selling, general and administrative expenses ("SG&A") increased by $3.8 million, or 5.4%, for the quarter ended September 30, 2023, compared to the prior-year period.

The increase for the quarter ended September 30, 2023 is primarily attributable to higher bad debt expense, due to increases in specific customer reserves.

Operating Income

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

The following table summarizes our operating income for the quarters ended September 30, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

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Specialty Technology Solutions

For the Specialty Technology Solutions segment, operating income decreased $0.8 million, or 3.9% for the quarter ended March 31, 2023 compared to the prior-year period.

Operating margin decreased to 3.5% for the quarter ended March 31, 2023.

The decrease in operating income and margin for the quarter is primarily due to higher bad debt expense, which increased year-over-year primarily due to a large bad debt recovery in the prior-year quarter.

For the nine months ended March 31, 2023, operating income increased $10.1 million, or 19.6%, compared to the prior-year period.

Operating margin increased to 3.5% for the nine months ended March 31, 2023.

The increase in operating income and margin for the nine month period is due to higher gross profits.

For the Specialty Technology Solutions segment, operating income decreased $10.0 million, or 45.7% for the quarter ended September 30, 2023, compared to the prior-year period.

Operating margin decreased to 2.3% for the quarter ended September 30, 2023.

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

Modern Communications & Cloud

For the Modern Communications & Cloud segment, operating income increased $2.2 million and $3.8 million for the quarter and nine months ended March 31, 2023, respectively, compared to the prior-year period.

Operating margin increased to 4.5% and 4.4% for the quarter and nine months ended March 31, 2023, respectively.

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

Corporate recognized no restructuring or divestiture expenses for the quarter and nine months ended March 31, 2023 or the quarter ended March 31, 2022.

During the nine months ended March 31, 2022, Corporate incurred less than $0.1 million of restructuring and divestiture expenses.

For the Modern Communications & Cloud segment, operating income decreased $0.6 million for the quarter ended September 30, 2023 compared to the prior-year period.

Operating margin decreased to 3.4% for the quarter ended September 30, 2023.

The decrease in operating income and margin is primarily attributable due to higher bad debt expense, due to increases in specific customer reserves.

For the quarter ended September 30, 2023, Corporate operating loss of $0.2 million represents cyberattack restoration costs.

Total Other (Income) Expense

The following table summarizes our total other (income) expense for the quarters and nine months ended March 31, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

(in thousands)

Interest expense $ 5,715 $ 1,483 $ 4,232 285.4 % 0.6 % 0.2 %

Interest income (1,710) (1,000) (710) 71.0 % (0.2) % (0.1) %

Net foreign exchange losses 505 258 247 95.7 % 0.1 % 0.0 %

Other, net (144) (394) 250 (63.5) % (0.0) % (0.0) %

Total other expense, net $ 4,366 $ 347 $ 4,019 1,158.2 % 0.5 % 0.0 %

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

The following table summarizes our total other (income) expense for the quarters ended September 30, 2023 and 2022:

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

2023 2022 $ Change % Change 2023 2022

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Interest expense consists primarily of interest incurred on borrowings, non-utilization fees charged on the revolving credit facility and amortization of debt issuance costs.

Interest expense increased for the quarter and nine months ended March 31, 2023 compared to the prior-year periods, primarily from higher interest rates and higher average borrowings on our multi-currency revolving credit facility.

Interest income for the quarter and nine months ended March 31, 2023 was generated on interest-bearing investments in Brazil and customer receivables.

Interest expense increased for the quarter ended September 30, 2023 compared to the prior-year periods, primarily from higher interest rates and higher average borrowings on our multi-currency revolving credit facility.

Interest income for the quarter ended September 30, 2023 was generated on interest-bearing investments in Brazil and customer receivables.

Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign exchange forward contracts gains and losses.

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dollar, and the British pound versus the U.S.

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

We partially offset foreign currency exposure with the use of

foreign exchange contracts to hedge against these exposures.

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

Provision for Income Taxes

For the quarter and nine months ended March 31, 2023, income tax expense was $8.7 million and $27.4 million reflecting an effective tax rate of 29.1% and 27.8%, respectively.

In comparison, for the quarter and nine months ended March 31, 2022, income tax expense was $9.0 million and $23.7 million, reflecting an effective tax rate of 27.8% and 25.6%, respectively.

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

We expect the effective tax rate for fiscal year 2023 to be approximately 27.4% to 28.4%.

For the quarter ended September 30, 2023, income tax expense was $3.7 million reflecting an effective tax rate of 19.4%.

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

The decrease in the effective tax rate for the quarter is primarily due to discrete items.

A discrete tax benefit of $1.5 million was recognized in the September 30, 2023 quarter, primarily attributable to the additional foreign tax credits permitted for the 2023 fiscal year as a result of the issuance of IRS Notice 2023-55.

We expect the effective tax rate, excluding discrete items, for fiscal year 2024 to be approximately 26.6% to 27.6%.

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

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and constant currency.

Constant currency is a measure that excludes the translation exchange impact from changes in

foreign currency exchange rates between reporting periods.

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

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

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We believe the calculation of adjusted ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.

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

Since adjusted EBITDA excludes some non-cash costs of investing in our business and people, we believe that adjusted EBITDA shows the profitability from our business operations more clearly.

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Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period.

The following table summarizes annualized adjusted ROIC for the quarters ended March 31, 2023 and 2022, respectively:

Quarter ended March 31,

The following table summarizes annualized adjusted ROIC for the quarters ended September 30, 2023 and 2022, respectively:

Quarter ended September 30,

Adjusted return on invested capital ratio, annualized (a)

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

Quarter ended March 31,

Quarter ended September 30,

(in thousands)

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Share-based compensation 2,769 2,316

Cyberattack restoration costs 201 —

Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 34,919 $ 45,275

Quarter ended March 31,

Quarter ended September 30,

(in thousands)

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Share-based compensation, net 2,068 1,718

Cyberattack restoration costs, net 150 —

Average equity 911,385 817,625

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Net Sales by Segment:

Quarter ended March 31,

Quarter ended September 30,

2023 2022 $ Change % Change

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(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the quarter ended March 31, 2023 into U.S.

dollars using the average foreign exchange rates for the quarter ended March 31, 2022.

Net Sales by Segment:

Nine months ended March 31,

2023 2022 $ Change % Change

Specialty Technology Solutions (in thousands)

Net sales, reported $ 1,769,530 $ 1,501,702 $ 267,828 17.8 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,768,531 $ 1,501,702 $ 266,829 17.8 %

Modern Communications & Cloud

Net sales, reported $ 1,071,043 $ 1,065,950 $ 5,093 0.5 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 1,067,412 $ 1,065,950 $ 1,462 0.1 %

Consolidated:

Net sales, reported $ 2,840,573 $ 2,567,652 $ 272,921 10.6 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 2,835,943 $ 2,567,652 $ 268,291 10.4 %

(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the nine months ended March 31, 2023 into U.S.

dollars using the average foreign exchange rates for the nine months ended March 31, 2022.

Calculated by translating the net sales for the quarter ended September 30, 2023 into U.S.

dollars using the average foreign exchange rates for the quarter ended September 30, 2022.

Net Sales by Geography:

Quarter ended March 31,

2023 2022 $ Change % Change

United States and Canada:

(in thousands)

Net sales, as reported $ 808,797 $ 764,529 $ 44,268 5.8 %

International:

Net sales, reported $ 76,722 $ 81,461 $ (4,739) (5.8) %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 77,146 $ 81,461 $ (4,315) (5.3) %

Consolidated:

Net sales, reported $ 885,519 $ 845,990 $ 39,529 4.7 %

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 885,943 $ 845,990 $ 39,953 4.7 %

(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the quarter ended March 31, 2023 into U.S.

dollars using the average foreign exchange rates for the quarter ended March 31, 2022.

Nine months ended March 31,

Quarter ended September 30,

2023 2022 $ Change % Change

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(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates.

Calculated by translating the net sales for the nine months ended March 31, 2023 into U.S.

dollars using the average foreign exchange rates for the nine months ended March 31, 2022.

Operating Income by Segment:

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

2023 2022 $ Change % Change 2023 2022

Specialty Technology Solutions:

(in thousands)

GAAP operating income $ 19,811 $ 20,623 $ (812) (3.9) % 3.5 % 4.1 %

Amortization of intangible assets 1,266 1,491 (225)

Non-GAAP operating income $ 21,077 $ 22,114 $ (1,037) (4.7) % 3.7 % 4.4 %

Modern Communications & Cloud:

GAAP operating income $ 14,468 $ 12,294 $ 2,174 17.7 % 4.5 % 3.6 %

Amortization of intangible assets 2,904 2,966 (62)

Non-GAAP operating income $ 17,372 $ 15,260 $ 2,112 13.8 % 5.4 % 4.5 %

GAAP operating loss $ — $ — $ — nm* nm* nm*

Acquisition and divestiture costs — — —

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

Consolidated:

GAAP operating income $ 34,279 $ 32,917 $ 1,362 4.1 % 3.9 % 3.9 %

Amortization of intangible assets 4,170 4,457 (287)

Non-GAAP operating income $ 38,449 $ 37,374 $ 1,075 2.9 % 4.3 % 4.4 %

(a) Recovery of prior period withholding taxes in Brazil

Calculated by translating the net sales for the quarter ended September 30, 2023 into U.S.

dollars using the average foreign exchange rates for the quarter ended September 30, 2022.

Operating Income by Segment:

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

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

2023 2022 $ Change % Change 2023 2022

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Amortization of intangible assets 2,932 2,900 32

Tax recovery (a)

(2,858) — (2,858)

Non-GAAP operating income $ 15,345 $ 15,936 $ (591) (3.7) % 4.2 % 4.3 %

GAAP operating loss $ (201) $ — $ (201) nm* nm* nm*

Acquisition and divestiture costs — 30 (30)

Cyberattack restoration costs 201 — 201

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

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Amortization of intangible assets 4,193 4,241 (48)

Tax recovery (a)

(2,858) — (2,858)

Acquisition and divestiture costs — 30 (30)

Cyberattack restoration costs 201 — 201

Non-GAAP operating income $ 28,478 $ 39,129 $ (10,651) (27.2) % 3.2 % 4.1 %

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To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP SG&A expenses, non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share.

Non-GAAP results exclude amortization of intangible assets related to acquisitions, changes in fair value of contingent consideration, acquisition and divestiture costs, restructuring costs, impact of Divestitures and other non-GAAP adjustments.

Non-GAAP results exclude amortization of intangible assets related to acquisitions, cyberattack restoration costs and other non-GAAP adjustments.

These year-over-year metrics include the translation impact of changes in foreign currency exchange rates.

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

Quarter ended March 31, 2023

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

(in thousands, except per share data)

SG&A expenses $ 70,669 $ — $ — $ — $ 70,669

Operating income 34,279 4,170 — — 38,449

Pre-tax income 29,913 4,170 — — 34,083

Net income 21,221 3,109 — — 24,330

Diluted EPS $ 0.83 $ 0.12 $ — $ — $ 0.96

Quarter ended March 31, 2022

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

(in thousands, except per share data)

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

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

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

Net income 23,526 3,353 — — 26,879

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

Nine months ended March 31, 2023

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

Non-GAAP measure

Quarter ended September 30, 2023

GAAP Measure Intangible amortization expense Cyberattack restoration costs Non-GAAP measure

(in thousands, except per share data)

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Diluted EPS $0.61 $0.12 $0.01 $0.74

Nine months ended March 31, 2022

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

Quarter ended September 30, 2022

GAAP Measure Intangible amortization expense Cyberattack restoration costs Non-GAAP measure

(in thousands, except per share data)

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Diluted EPS $0.94 $0.12 — $1.07

(a) Recovery of prior period withholding taxes in Brazil

Liquidity and Capital Resources

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Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit.

In general, as our sales volumes increase, our net investment in working capital increases, which typically results in decreased cash flow from operating activities.

Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.

Our cash and cash equivalents balance totaled $37.4 million at March 31, 2023, compared to $38.0 million at June 30, 2022, including $31.4 million and $35.0 million held outside of the United States at March 31, 2023 and June 30, 2022, respectively.

Checks released but not yet cleared in the amounts of $7.4 million and $18.0 million are included in accounts payable at March 31, 2023 and June 30, 2022, respectively.

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

In general, as our sales volume increases, our net investment in working capital increases, which typically results in decreased cash flow from operating activities.

Conversely, when sales volume decreases, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.

Our cash and cash equivalents balance totaled $42.6 million at September 30, 2023, compared to $36.2 million at June 30, 2023, including $31.3 million and $31.0 million held outside of the United States at September 30, 2023 and June 30, 2023, respectively.

Checks released but not yet cleared in the amounts of $10.3 million and $8.0 million are included in accounts payable at September 30, 2023 and June 30, 2023, respectively.

We conduct business in North America, Brazil, and the UK where we generate and use cash.

We provide for United States income taxes from the earnings of our Canadian and Brazilian subsidiaries.

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

Our net investment in working capital increased $123.8 million to $833.4 million at March 31, 2023 from $709.5 million at June 30, 2022, primarily from increases in inventory and decreases in accounts payable.

Our net investment in working capital decreased $63.9 million to $806.4 million at September 30, 2023 from $870.3 million at June 30, 2023, primarily from decreases in inventory attributable to lower sales volume and our multi-quarter working capital improvement plan.

Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels and payments to vendors.

For the nine months ended March 31, 2023, our working capital investment increased to support our 10.6% year-over-year net sales growth.

Nine months ended

Quarter ended

September 30,

(in thousands)

Cash (used in) provided by:

Cash provided by (used in):

Operating activities $ 93,533 $ (48,459)

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Financing activities (83,493) 52,970

Net cash used in operating activities was $20.5 million for the nine months ended March 31, 2023, compared to $45.7 million used in operating activities in the prior-year period.

Cash used in operating activities for the nine months ended March 31, 2023 is attributable to a 22% increase in inventory and an 8% decrease in accounts payable compared to the beginning of the nine month period.

Cash used in operating activities for the nine months ended March 31, 2022 is primarily attributable to increases in inventory and accounts receivable, which increased 26% and 13%, respectively, compared to the beginning of the nine month period.

Operating cash flows are subject to variability period over period as a result of the timing of payments related to accounts receivable, accounts payable, and other working capital items.

The number of days sales outstanding ("DSO") was 70 days at March 31, 2023, compared to 68 days at June 30, 2022 and 69 days at March 31, 2022.

The increase in DSO for the quarter ended March 31, 2023 is primarily due to increased net receivables, driven by customer terms and timing of sales near the end of the reporting period.

Inventory turned 4.1 times during the quarter ended March 31, 2023, compared to 5.0 times for previous quarter ended December 31, 2022 and 5.1 times in the prior-year quarter ended March 31, 2022.

The decrease in inventory turns for the quarter ended March 31, 2023 is primarily due to increased inventory.

Cash used in investing activities for the nine months ended March 31, 2023 was $6.5 million, compared to $0.2 million used in investing activities in the prior-year period.

Cash used in investing activities for the nine months ended March 31, 2023 represents capital expenditures, primarily for IT investments.

Cash provided by investing activities for the nine months ended March 31, 2022 represents proceeds from the sale of our discontinued operations, partially offset by capital expenditures.

Net cash provided by operating activities was $93.5 million for the quarter ended September 30, 2023, compared to $48.5 million used in operating activities in the prior-year quarter.

Cash provided by operating activities for the quarter ended September 30, 2023 is attributable to decreases in inventory and accounts receivable, which decreased 13% and 8% respectively, compared to the beginning of the quarter.

Cash used in operating activities for the quarter ended September 30, 2022 is primarily attributable to increases in inventory and accounts receivable, which increased 10% and 2%, respectively, compared to the beginning of the prior-year quarter.

The number of days sales outstanding ("DSO") was 71 days at September 30, 2023, compared to 72 days at June 30, 2023 and 71 days at September 30, 2022.

Inventory turned 4.4 times during the quarter ended September 30, 2023, unchanged for the quarter ended June 30, 2023 and 5.1 times in the prior-year quarter ended September 30, 2022.

Cash used in investing activities for the quarter ended September 30, 2023 was $2.3 million, compared to $0.7 million used in investing activities in the prior-year quarter.

Cash used in investing activities for the quarter ended September 30, 2023 and 2022 represents capital expenditures.

Management expects capital expenditures for fiscal year 2024 to range from $6.0 million to $8.0 million, primarily for IT investments and facility improvements.

For the nine months ended March 31, 2023, cash provided by financing activities totaled $25.6 million, compared to $27.7 million provided by financing activities for the prior-year period.

Cash provided by financing activities for the nine months ended March 31, 2023 and 2022 is primarily attributable to net borrowings on the revolving credit facility.

For the quarter ended September 30, 2023, cash used in financing activities totaled $83.5 million, compared to $53.0 million provided by financing activities for the prior-year quarter.

Cash used in financing activities for the quarter ended September 30, 2023 is primarily attributable to net repayments on the revolving credit facility.

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

Credit Facility

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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 our leverage ratio plus, if applicable, certain mandatory costs.

During the quarter and nine months ended March 31, 2023, our borrowings under the credit facility were U.S.

During the quarter ended September 30, 2023, our borrowings under the credit facility were U.S.

dollar loans.

The spread in effect as of March 31, 2023 was 1.50% for LIBOR and SOFR-based loans and 0.50% for alternate base rate loans.

The commitment fee rate in effect at March 31, 2023 was 0.25%.

The spread in effect as of September 30, 2023 was 1.50% for SOFR-based loans and 0.50% for alternate base rate loans.

The commitment fee rate in effect at September 30, 2023 was 0.25%.

The Amended Credit Agreement includes customary representations, warranties and affirmative and negative covenants, including financial covenants.

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In addition, our Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter.

In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates.

We were in compliance with all covenants under the credit facility at March 31, 2023.

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the nine month periods ended March 31, 2023 and 2022 was $227.2 million and $60.0 million, respectively.

There was $190.8 million and $214.2 million available for additional borrowings as of March 31, 2023 and June 30, 2022, respectively.

There were no letters of credit issued under the multi-currency revolving credit facility at March 31, 2023 or June 30, 2022.

In the event of a default, customary remedies

are available to the lenders, including acceleration and increased interest rates.

We were in compliance with all covenants under the credit facility at September 30, 2023.

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the quarters ended September 30, 2023 and 2022 was $200.9 million and $200.5 million, respectively.

There was $251.9 million and $171.0 million available for additional borrowings as of September 30, 2023 and June 30, 2023, respectively.

The effective interest rates for the revolving line of credit were 6.92% and 6.74% as of September 30, 2023 and June 30, 2023, respectively.

There were no letters of credit issued under the multi-currency revolving credit facility at September 30, 2023 or June 30, 2023.

Availability to use this borrowing capacity depends upon, among other things, the levels of our Leverage Ratio and Interest Coverage Ratio, which, in turn, will depend upon (1) our Credit Facility Net Debt relative to our Credit Facility EBITDA and (2) Credit Facility EBITDA relative to total interest expense, respectively.

As a result, our availability will increase if EBITDA increases (subject to the limit of the facility) and decrease if EBITDA decreases.

While we were in compliance with the financial covenants contained in the Credit Facility as of March 31, 2023, and currently expect to continue to maintain such compliance, should we encounter difficulties, our historical relationship with our Credit Facility lending group has been strong and we anticipate their continued support of our long-term business.

While we were in compliance with the financial covenants contained in the Credit Facility as of September 30, 2023, and currently expect to continue to maintain such compliance, should we encounter difficulties, our historical relationship with our Credit Facility lending group has been strong and we anticipate their continued support of our long-term business.

We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet our present and future working capital and cash requirements for at least the next twelve months.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis