SCANSOURCE, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview ScanSource is a leading hybrid distributor connecting devices to the cloud and accelerating growth for 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. Our segments operate in the United States, Canada, Brazil and the UK and consist of the following: • Specialty Technology Solutions • Modern Communications & Cloud We sell hardware, SaaS, connectivity and cloud 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. Brazil distribution facilities are located in the Brazilian states of Paraná, Espirito Santo and Santa Catarina. We provide some of our digital products, which include SaaS and subscriptions, through our digital tools and platforms. Our key suppliers include 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 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 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. 24 Table of Contents Results of Operations Net Sales 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 ended September 30, 2023 and 2022: Quarter ended September 30, % Change, Constant Currency, Excluding Divestitures and Acquisitions (a) Net Sales by Segment: 2023 2022 $ Change % Change (in thousands) Specialty Technology Solutions $ 509,570 $ 576,329 $ (66,759) (11.6) % (11.7) % Modern Communications & Cloud 366,735 367,484 (749) (0.2) % (1.5) % Total net sales $ 876,305 $ 943,813 $ (67,508) (7.2) % (7.7) % (a) A reconciliation of non-GAAP net sales in constant currency is presented at the end of Results of Operations , under Non-GAAP Financial Information. Specialty Technology Solutions The Specialty Technology Solutions segment consists of sales to customers in North America and Brazil. For the quarter 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 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: 2023 2022 $ Change % Change (in thousands) United States and Canada $ 791,000 $ 859,538 $ (68,538) (8.0) % (8.0) % International 85,305 84,275 1,030 1.2 % (5.4) % Total net sales $ 876,305 $ 943,813 $ (67,508) (7.2) % (7.7) % (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. 25 Table of Contents Gross Profit 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 (in thousands) Specialty Technology Solutions $ 49,183 $ 58,404 $ (9,221) (15.8) % 9.7 % 10.1 % Modern Communications & Cloud 57,325 55,081 2,244 4.1 % 15.6 % 15.0 % Gross profit $ 106,508 $ 113,485 $ (6,977) (6.1) % 12.2 % 12.0 % Our gross profit is primarily affected by sales volume and gross margin mix. Gross margin mix is impacted by multiple factors, which include sales mix (proportion of sales of higher margin products or services relative to total sales), vendor program recognition (consisting of volume rebates, inventory price changes and purchase discounts) and freight costs. Increases in vendor program recognition decrease cost of goods sold, thereby increasing gross profit. Net sales derived from our Intelisys business contribute 100% to our gross profit dollars and margin as they have no associated cost of goods sold. Specialty Technology Solutions For the quarter ended 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%. 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 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 profit margin increased 64 basis points over the prior year to 15.6%. Gross margin mix positively impacted gross profit by $2.4 million, driven by higher vendor program recognition. Operating Expenses 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 (in thousands) Selling, general and administrative expenses $ 75,436 $ 71,593 $ 3,843 5.4 % 8.6 % 7.6 % Depreciation expense 2,795 2,763 32 1.2 % 0.3 % 0.3 % Intangible amortization expense 4,193 4,241 (48) (1.1) % 0.5 % 0.4 % Operating expenses $ 82,424 $ 78,597 $ 3,827 4.9 % 9.4 % 8.3 % 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 The following table summarizes our operating income for the quarters ended September 30, 2023 and 2022: 26 Table of Contents Quarter ended September 30, % of Net Sales September 30, 2023 2022 $ Change % Change 2023 2022 (in thousands) Specialty Technology Solutions $ 11,872 $ 21,852 $ (9,980) (45.7) % 2.3 % 3.8 % Modern Communications & Cloud 12,413 13,036 (623) (4.8) % 3.4 % 3.5 % Corporate (201) — (201) nm* nm* nm* Operating income $ 24,084 $ 34,888 $ (10,804) (31.0) % 2.7 % 3.7 % *nm - percentages are not meaningful Specialty Technology Solutions 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 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. Corporate 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 ended September 30, 2023 and 2022: Quarter ended September 30, % of Net Sales September 30, 2023 2022 $ Change % Change 2023 2022 (in thousands) Interest expense $ 5,585 $ 3,448 $ 2,137 62.0 % 0.6 % 0.4 % Interest income (1,325) (1,589) 264 (16.6) % (0.2) % (0.2) % Net foreign exchange losses 696 922 (226) (24.5) % 0.1 % 0.1 % Other, net (19) (176) 157 (89.2) % (0.0) % (0.0) % Total other expense, net $ 4,937 $ 2,605 $ 2,332 89.5 % 0.6 % 0.3 % Interest expense consists primarily of interest incurred on borrowings, non-utilization fees charged on the revolving credit facility and amortization of debt issuance costs. Interest expense increased for the quarter ended September 30, 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. Foreign exchange gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the Canadian dollar versus the U.S. dollar, the euro versus the U.S. dollar, and the British pound versus the U.S. dollar. We partially offset foreign currency exposure with the use of 27 Table of Contents 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 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. Non-GAAP Financial Information Evaluating Financial Condition and Operating Performance In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating income; non-GAAP pre-tax income; non-GAAP net income; non-GAAP EPS; adjusted earnings before interest expense, income taxes, depreciation, and amortization ("adjusted EBITDA"); adjusted return on invested capital ("adjusted ROIC"); and constant currency. Constant currency is a measure that excludes the translation exchange impact from changes in foreign currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period. These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP. Adjusted Return on Invested Capital Adjusted ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of adjusted ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year. Adjusted EBITDA starts with net income and adds back interest expense, income tax expense, depreciation expense, amortization of intangible assets, share-based compensation expense, and other non-GAAP adjustments. Since adjusted EBITDA excludes some non-cash costs of investing in our business and people, we believe that adjusted EBITDA shows the profitability from our business operations more clearly. We calculate adjusted ROIC as adjusted EBITDA, divided by invested capital. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. The following table summarizes annualized adjusted ROIC for the quarters ended September 30, 2023 and 2022, respectively: Quarter ended September 30, 2023 2022 Adjusted return on invested capital ratio, annualized (a) 11.0 % 15.6 % (a) The annualized EBITDA amount is divided by days in the quarter times 365 days per year, or 366 days for leap year. There were 92 days in the current and prior-year quarter. The components of this calculation and reconciliation to our financial statements are shown on the following schedule: 28 Table of Contents Quarter ended September 30, 2023 2022 (in thousands) Reconciliation of net income to adjusted EBITDA: Net income (GAAP) $ 15,432 $ 24,042 Plus: Interest expense 5,585 3,448 Plus: Income taxes 3,715 8,241 Plus: Depreciation and amortization 7,217 7,228 EBITDA (non-GAAP) 31,949 42,959 Plus: Share-based compensation 2,769 2,316 Plus: Cyberattack restoration costs 201 — Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 34,919 $ 45,275 Quarter ended September 30, 2023 2022 (in thousands) Invested capital calculations: Equity – beginning of the quarter $ 905,298 $ 806,528 Equity – end of the quarter 915,253 827,004 Plus: Share-based compensation, net 2,068 1,718 Plus: Cyberattack restoration costs, net 150 — Average equity 911,385 817,625 Average funded debt (a) 352,897 336,428 Invested capital (denominator for adjusted ROIC) (non-GAAP) $ 1,264,282 $ 1,154,053 (a) Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt. Net Sales in Constant Currency, Excluding Acquisitions and Divestitures We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the average foreign exchange rates between reporting periods. Constant currency is calculated by translating current period results from currencies other than the U.S. dollar into U.S. dollars using the comparable average foreign exchange rates from the prior year period. We also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date in order to show net sales results on an organic basis. This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and the impact of acquisitions. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding acquisitions: 29 Table of Contents Net Sales by Segment: Quarter ended September 30, 2023 2022 $ Change % Change Specialty Technology Solutions: (in thousands) Net sales, reported $ 509,570 $ 576,329 $ (66,759) (11.6) % Foreign exchange impact (a) (934) — Non-GAAP net sales, constant currency $ 508,636 $ 576,329 $ (67,693) (11.7) % Modern Communications & Cloud: Net sales, reported $ 366,735 $ 367,484 $ (749) (0.2) % Foreign exchange impact (a) (4,677) — Non-GAAP net sales, constant currency $ 362,058 $ 367,484 $ (5,426) (1.5) % Consolidated: Net sales, reported $ 876,305 $ 943,813 $ (67,508) (7.2) % Foreign exchange impact (a) (5,611) — Non-GAAP net sales, constant currency $ 870,694 $ 943,813 $ (73,119) (7.7) % (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 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 September 30, 2023 2022 $ Change % Change United States and Canada: (in thousands) Net sales, as reported $ 791,000 $ 859,538 $ (68,538) (8.0) % International: Net sales, reported $ 85,305 $ 84,275 $ 1,030 1.2 % Foreign exchange impact (a) (5,611) — Non-GAAP net sales, constant currency $ 79,694 $ 84,275 $ (4,581) (5.4) % Consolidated: Net sales, reported $ 876,305 $ 943,813 $ (67,508) (7.2) % Foreign exchange impact (a) (5,611) — Non-GAAP net sales, constant currency $ 870,694 $ 943,813 $ (73,119) (7.7) % (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 September 30, 2023 into U.S. dollars using the average foreign exchange rates for the quarter ended September 30, 2022. 30 Table of Contents Operating Income by Segment: Quarter ended September 30, % of Net Sales September 30, 2023 2022 $ Change % Change 2023 2022 Specialty Technology Solutions: (in thousands) GAAP operating income $ 11,872 $ 21,852 $ (9,980) (45.7) % 2.3 % 3.8 % Adjustments: Amortization of intangible assets 1,261 1,341 (80) Non-GAAP operating income $ 13,133 $ 23,193 $ (10,060) (43.4) % 2.6 % 4.0 % Modern Communications & Cloud: GAAP operating income $ 12,413 $ 13,036 $ (623) (4.8) % 3.4 % 3.5 % Adjustments: Amortization of intangible assets 2,932 2,900 32 Non-GAAP operating income $ 15,345 $ 15,936 $ (591) (3.7) % 4.2 % 4.3 % Corporate: GAAP operating loss $ (201) $ — $ (201) nm* nm* nm* Adjustments: Cyberattack restoration costs 201 — 201 Non-GAAP operating income $ — $ — $ — nm* nm* nm* Consolidated: GAAP operating income $ 24,084 $ 34,888 $ (10,804) (31.0) % 2.7 % 3.7 % Adjustments: Amortization of intangible assets 4,193 4,241 (48) Cyberattack restoration costs 201 — 201 Non-GAAP operating income $ 28,478 $ 39,129 $ (10,651) (27.2) % 3.2 % 4.1 % (a) Recovery of prior period withholding taxes in Brazil Additional Non-GAAP Metrics To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP SG&A expenses, non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share. Non-GAAP results exclude amortization of intangible assets related to acquisitions, cyberattack restoration costs and other non-GAAP adjustments. These year-over-year metrics include the translation impact of changes in foreign currency exchange rates. These metrics are useful in assessing and understanding our operating performance, especially when comparing results with previous periods or forecasting performance for future periods. Below we provide a non-GAAP reconciliation of the aforementioned metrics adjusted for the costs and charges mentioned above: 31 Table of Contents Quarter ended September 30, 2023 GAAP Measure Intangible amortization expense Cyberattack restoration costs Non-GAAP measure (in thousands, except per share data) SG&A expenses $75,436 — $(201) $75,235 Operating income 24,084 4,193 201 28,478 Pre-tax income 19,147 4,193 201 23,541 Net income 15,432 3,146 150 18,728 Diluted EPS $0.61 $0.12 $0.01 $0.74 Quarter ended September 30, 2022 GAAP Measure Intangible amortization expense Cyberattack restoration costs Non-GAAP measure (in thousands, except per share data) SG&A expenses $71,593 — — $71,593 Operating income 34,888 4,241 — 39,129 Pre-tax income 32,283 4,241 — 36,524 Net income 24,042 3,161 — 27,203 Diluted EPS $0.94 $0.12 — $1.07 Liquidity and Capital Resources Our primary sources of liquidity are cash flows from operations and borrowings under our $350 million revolving credit facility. Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit. In general, as our sales 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 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. Quarter ended September 30, 2023 2022 (in thousands) Cash provided by (used in): Operating activities $ 93,533 $ (48,459) Investing activities (2,315) (684) Financing activities (83,493) 52,970 32 Table of Contents 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. 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 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 We have a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (as amended, the “Amended Credit Agreement”). On September 28, 2022, we amended and restated our Amended Credit Agreement, which includes (i) a five-year, $350 million multicurrency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. The Amended Credit Agreement extended the credit facility maturity date to September 28, 2027. In addition, pursuant to an “accordion feature,” we may increase our borrowings up to an additional $250 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of our domestic assets and our domestic subsidiaries. Under the terms of the revolving credit facility, the payment of cash dividends is restricted. We incurred debt issuance costs of $1.4 million in connection with the amendment and restatement of the Amended Credit Agreement. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility. Loans denominated in U.S. dollars, other than swingline loans, bear interest at a rate per annum equal to, at our option, (i) the adjusted term SOFR or adjusted daily simple SOFR plus an additional margin ranging from 1.00% to 1.75% depending upon our ratio of (A) total consolidated debt less up to $30 million of unrestricted domestic cash to (B) trailing four-quarter consolidated EBITDA measured as of the end of the most recent year or quarter, as applicable, for which financial statements have been delivered to the Lenders (the “leverage ratio”); or (ii) the alternate base rate plus an additional margin ranging from 0% to 0.75%, depending upon our leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars bear interest based upon the adjusted daily simple SOFR plus an additional margin ranging from 1.00% to 1.75% depending upon our leverage ratio, or such other rate as agreed upon with the applicable swingline lender. The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10% over the applicable SOFR reference rate. Loans denominated in foreign currencies 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 ended September 30, 2023, our borrowings under the credit facility were U.S. dollar loans. 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. Specifically, our Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, our Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies 33 Table of Contents 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 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. Summary We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet our present and future working capital and cash requirements for at least the next twelve months. We also believe that our longer-term working capital, planned expenditures and other general funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities. Accounting Standards Recently Issued See Note 1 of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on our consolidated financial position and results of operations. Critical Accounting Policies and Estimates Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. See Management's Discussion and Analysis of Financial Condition and Results from Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 for a complete discussion. 34 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk For a description of our market risks, see Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. No material changes have occurred to our market risks since June 30, 2023. 35 Table of Contents