What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-06 compared with 2023-11-09 · 265 added, 94 removed, 248 unchanged (59% of the section changed)

1 unchanged sentence

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:

Our segments operate primarily in the United States, Canada and Brazil:

• Specialty Technology Solutions

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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.

Recent Developments

On December 19, 2023 we completed the sale of our UK-based intY business.

We retained our CASCADE cloud services distribution platform, which has been used to grow the Cisco and Microsoft subscription business in the United States and Brazil.

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.

6 unchanged sentences

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)

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

Quarter ended December 31, % Change, Constant Currency, Excluding Divestitures (a)

Net Sales by Segment:

4 unchanged sentences

Total net sales $ 884,792 $ 1,011,241 $ (126,449) (12.5) % (13.0) %

Six months ended December 31, % Change, Constant Currency, Excluding Divestitures (a)

2023 2022 $ Change % Change

(in thousands)

Specialty Technology Solutions $ 1,030,222 $ 1,203,878 $ (173,656) (14.4) % (14.6) %

Modern Communications & Cloud 730,876 751,176 (20,300) (2.7) % (3.9) %

Total net sales $ 1,761,098 $ 1,955,054 $ (193,956) (9.9) % (10.5) %

(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.

1 unchanged sentence

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.

For the quarter and six months ended December 31, 2023, net sales decreased $106.9 million, or 17.0%, and $173.7 million, or 14.4%, respectively, compared to the prior-year period.

Excluding the foreign exchange positive impact, adjusted net sales decreased $107.8 million, or 17.2%, and $175.5 million, or 14.6%, for the quarter and six months ended December 31, 2023, compared to the prior-year period.

The decrease in net sales and adjusted net sales for the quarter and six-month period is primarily due to lower sales volumes in our mobility and barcoding business, partially offset by an increase in networking 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)

For the quarter and six months ended December 31, 2023, net sales decreased $19.6 million, or 5.1%, and $20.3 million, or 2.7%, respectively, compared to the prior-year period.

Excluding the foreign exchange positive impact and the impact of divestitures, adjusted net sales decreased $23.3 million, or 6.1%, and $28.8 million, or 3.9%, for the quarter and six months ended December 31, 2023, compared to the prior-year period.

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

Intelisys net billings increased to approximately $2.64 billion annualized.

Intelisys net sales for the quarter and six months ended December 31, 2023 increased 7.5% and 8.1%, respectively, year-over-year.

Quarter ended December 31, % Change, Constant Currency, Excluding Divestitures (a)

Net Sales by Geography:

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Total net sales $ 884,792 $ 1,011,241 $ (126,449) (12.5) % (13.0) %

Six months ended December 31, % Change, Constant Currency, Excluding Divestitures (a)

2023 2022 $ Change % Change

(in thousands)

United States and Canada $ 1,586,384 $ 1,768,760 $ (182,376) (10.3) % (10.3) %

International 174,714 186,294 (11,580) (6.2) % (12.0) %

Total net sales $ 1,761,098 $ 1,955,054 $ (193,956) (9.9) % (10.5) %

(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 ended September 30, 2023 and 2022:

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

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

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

2023 2022 $ Change % Change 2023 2022

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Gross profit $ 100,748 $ 115,334 $ (14,586) (12.6) % 11.4 % 11.4 %

Six months ended December 31, % of Net Sales December 31,

2023 2022 $ Change % Change 2023 2022

(in thousands)

Specialty Technology Solutions $ 96,315 $ 115,135 $ (18,820) (16.3) % 9.3 % 9.6 %

Modern Communications & Cloud 110,941 113,683 (2,742) (2.4) % 15.2 % 15.1 %

Gross profit $ 207,256 $ 228,818 $ (21,562) (9.4) % 11.8 % 11.7 %

Our gross profit is primarily affected by sales volume and gross margin mix.

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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.

For the quarter ended December 31, 2023, gross profit dollars for the Specialty Technology Solutions segment declined $9.6 million, or 16.9%, compared to the prior-year quarter.

Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $9.7 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.

Gross profit margin increased slightly quarter-over-quarter to 9.1% which positively impacted gross profit dollars by less than $0.1 million.

For the six months ended December 31, 2023, gross profit dollars decreased $18.8 million, or 16.3%, compared to the prior-year period.

Lower sales volume, after considering the associated cost of goods sold, reduced gross profit by $16.6 million.

Gross profit margin decreased 21 basis points year-over-year to 9.3%.

Gross margin mix negatively impacted gross profit by $2.2 million largely from lower vendor program recognition.

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%.

For the quarter ended December 31, 2023, gross profit dollars for the Modern Communications & Cloud segment decreased $5.0 million, or 8.5%, compared to the prior-year quarter.

Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $3.0 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.

Gross profit margin decreased 55 basis points quarter-over-quarter to 14.7%.

Gross margin mix negatively impacted gross profit by $2.0 million largely from a less favorable sales mix.

For the six months ended December 31, 2023, gross profit dollars declined $2.7 million, or 2.4%, compared to the prior-year period.

Lower sales volume, after considering the associated cost of goods sold, reduced gross profit dollars by $3.0 million.

Gross profit margin increased slightly year-over-year to 15.2% which positively impacted gross profit dollars by $0.3 million.

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,

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

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

2023 2022 $ Change % Change 2023 2022

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Operating expenses $ 73,922 $ 75,902 $ (1,980) (2.6) % 8.4 % 7.5 %

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.

Six months ended December 31, % of Net Sales December 31,

2023 2022 $ Change % Change 2023 2022

(in thousands)

Selling, general and administrative expenses $ 142,356 $ 140,667 $ 1,689 1.2 % 8.1 % 7.2 %

Depreciation expense 5,759 5,441 318 5.8 % 0.3 % 0.3 %

Intangible amortization expense 8,230 8,391 (161) (1.9) % 0.5 % 0.4 %

Operating expenses $ 156,345 $ 154,499 $ 1,846 1.2 % 8.9 % 7.9 %

Selling, general and administrative expenses (“SG&A”) decreased by $2.2 million, or 3.1%, for the quarter ended December 31, 2023, compared to the prior-year period.

The decrease for the quarter ended December 31, 2023 is primarily attributable to lower employee costs for the quarter.

For the six months ended December 31, 2023, SG&A expenses increased by $1.7 million, or 1.2%, compared to the prior-year period.

The increase for the six months ended December 31, 2023 is primarily attributable to higher bad debt expense as a result of increases in specific customer reserves partially offset by lower employee costs.

Operating Income

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,

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

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

2023 2022 $ Change % Change 2023 2022

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Operating income $ 26,826 $ 39,432 $ (12,606) (32.0) % 3.0 % 3.9 %

Six months ended December 31, % of Net Sales December 31,

2023 2022 $ Change % Change 2023 2022

(in thousands)

Specialty Technology Solutions $ 25,240 $ 41,534 $ (16,294) (39.2) % 2.4 % 3.5 %

Modern Communications & Cloud 27,014 32,785 (5,771) (17.6) % 3.7 % 4.4 %

Corporate (1,343) — (1,343) nm* nm* nm*

Operating income $ 50,911 $ 74,319 $ (23,408) (31.5) % 2.9 % 3.8 %

*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.

For the Specialty Technology Solutions segment, operating income decreased $6.3 million, or 32.1%, and $16.3 million, or 39.2%, respectively, for the quarter and six months ended December 31, 2023, compared to the prior-year period.

Operating margin decreased to 2.6% and 2.4% for the quarter and six months ended December 31, 2023, respectively.

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.

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

For the Modern Communications & Cloud segment, operating income decreased $5.1 million, or 26.1%, and $5.8 million, or 17.6%, respectively, for the quarter and six months ended December 31, 2023 compared to the prior-year period.

Operating margin decreased to 4.0% and 3.7% for the quarter and six months ended December 31, 2023, respectively.

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

For the quarter and six months ended December 31, 2023, Corporate operating loss of $1.1 million and $1.3 million, represents costs associated with the sale of our intY business and 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,

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

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

2023 2022 $ Change % Change 2023 2022

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Net foreign exchange losses 429 347 82 23.6 % 0.0 % 0.0 %

Gain on sale of business (14,533) — (14,533) nm* (1.6) % — %

Other, net (356) (140) (216) 154.3 % (0.0) % (0.0) %

Total other expense, net $ 4,937 $ 2,605 $ 2,332 89.5 % 0.6 % 0.3 %

Total other (income) expense, net $ (13,220) $ 3,240 $ (16,460) (508.0) % (1.5) % 0.3 %

Six months ended December 31, % of Net Sales December 31,

2023 2022 $ Change % Change 2023 2022

(in thousands)

Interest expense $ 8,945 $ 8,507 $ 438 5.1 % 0.5 % 0.4 %

Interest income (3,444) (3,618) 174 (4.8) % (0.2) % (0.2) %

Net foreign exchange losses 1,124 1,270 (146) (11.5) % 0.1 % 0.1 %

Gain on sale of business (14,533) — (14,533) nm* (0.8) % — %

Other, net (374) (315) (59) 18.7 % (0.0) % (0.0) %

Total other (income) expense, net $ (8,282) $ 5,844 $ (14,126) (241.7) % (0.5) % 0.3 %

*nm - percentages are not meaningful

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.

Interest expense decreased for the quarter ended December 31, 2023 compared to the prior-year periods, primarily from lower average borrowings on our multi-currency revolving credit facility.

Interest expense increased slightly for the six months ended December 31, 2023 as a result of higher interest rates for the six-month period compared to the prior-year.

Interest income for the quarter and six months ended December 31, 2023 was generated on interest-bearing investments in Brazil and customer receivables in both North America and Brazil.

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.

For the quarter and six months ended December 31, 2023, we recognized a $14.5 million gain on the sale of our UK-based intY business.

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.

For the quarter and six months ended December 31, 2023, income tax expense was $7.3 million and $11.0 million, respectively, reflecting an effective tax rate of 18.3% and 18.6%, respectively.

In comparison, for the quarter and six months ended December 31, 2022, income tax expense was $10.5 million and $18.7 million, respectively, reflecting an effective tax rate of 28.9% and 27.3%, respectively.

The decrease in the effective tax rate for the quarter is due to a $3.8 million discrete tax benefit, which is primarily attributable to the sale of our UK-based intY business.

We expect the effective tax rate, excluding discrete items, for fiscal year 2024 to be approximately 27.0% to 28.0%.

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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 September 30, 2023 and 2022, respectively:

Quarter ended September 30,

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

Quarter ended December 31,

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 September 30,

Quarter ended December 31,

(in thousands)

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EBITDA (non-GAAP) 50,663 48,309

Tax recovery (1,386) (2,858)

Share-based compensation 2,571 3,364

Acquisition and divestiture costs 703 —

Cyberattack restoration costs 441 —

Gain on sale of business (14,533) —

Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 38,459 $ 48,815

Quarter ended September 30,

Quarter ended December 31,

(in thousands)

4 unchanged sentences

Cyberattack restoration costs, net 329 —

Acquisition and divestiture costs 703 —

Tax recovery, net (640) (1,886)

Gain on sale of business (14,533) —

Average equity 928,316 845,000

8 unchanged sentences

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:

We also exclude the impact of acquisitions or divestitures prior to the first full year of operations from the acquisition or divestiture 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 and divestitures.

Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency excluding acquisitions and divestitures:

Net Sales by Segment:

Quarter ended September 30,

Quarter ended December 31,

2023 2022 $ Change % Change

3 unchanged sentences

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 508,636 $ 576,329 $ (67,693) (11.7) %

Non-GAAP net sales $ 519,765 $ 627,548 $ (107,783) (17.2) %

Modern Communications & Cloud:

1 unchanged sentence

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 362,058 $ 367,484 $ (5,426) (1.5) %

Divestitures (1,628) (2,170)

Non-GAAP net sales $ 358,190 $ 381,523 $ (23,333) (6.1) %

Consolidated:

1 unchanged sentence

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 870,694 $ 943,813 $ (73,119) (7.7) %

Divestitures (1,628) (2,170)

Non-GAAP net sales $ 877,955 $ 1,009,071 $ (131,116) (13.0) %

(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.

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

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

Net Sales by Segment:

Six months ended December 31,

2023 2022 $ Change % Change

Specialty Technology Solutions (in thousands)

Net sales, reported $ 1,030,222 $ 1,203,878 $ (173,656) (14.4) %

Foreign exchange impact (a)

Non-GAAP net sales $ 1,028,402 $ 1,203,878 $ (175,476) (14.6) %

Modern Communications & Cloud

Net sales, reported $ 730,876 $ 751,176 $ (20,300) (2.7) %

Foreign exchange impact (a)

Divestitures (3,747) (4,208)

Non-GAAP net sales $ 718,129 $ 746,968 $ (28,839) (3.9) %

Consolidated:

Net sales, reported $ 1,761,098 $ 1,955,054 $ (193,956) (9.9) %

Foreign exchange impact (a)

Divestitures (3,747) (4,208)

Non-GAAP net sales $ 1,746,531 $ 1,950,846 $ (204,315) (10.5) %

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

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

dollars using the average foreign exchange rates for the six months ended December 31, 2022.

Net Sales by Geography:

Quarter ended September 30,

Quarter ended December 31,

2023 2022 $ Change % Change

5 unchanged sentences

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 79,694 $ 84,275 $ (4,581) (5.4) %

Divestitures (1,628) (2,170)

Non-GAAP net sales $ 82,573 $ 99,850 $ (17,277) (17.3) %

Consolidated:

1 unchanged sentence

Foreign exchange impact (a)

Non-GAAP net sales, constant currency $ 870,694 $ 943,813 $ (73,119) (7.7) %

Divestitures (1,628) (2,170)

Non-GAAP net sales $ 877,955 $ 1,009,071 $ (131,116) (13.0) %

(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.

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

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

Six months ended December 31,

2023 2022 $ Change % Change

United States and Canada:

(in thousands)

Net sales, as reported $ 1,586,384 $ 1,768,760 $ (182,376) (10.3) %

International:

Net sales, reported $ 174,714 $ 186,294 $ (11,580) (6.2) %

Foreign exchange impact (a)

Divestitures (3,747) (4,208)

Non-GAAP net sales $ 160,147 $ 182,086 $ (21,939) (12.0) %

Consolidated:

Net sales, reported $ 1,761,098 $ 1,955,054 $ (193,956) (9.9) %

Foreign exchange impact (a)

Divestitures (3,747) (4,208)

Non-GAAP net sales $ 1,746,531 $ 1,950,846 $ (204,315) (10.5) %

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

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

dollars using the average foreign exchange rates for the six months ended December 31, 2022.

Operating Income by Segment:

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

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

2023 2022 $ Change % Change 2023 2022

7 unchanged sentences

Amortization of intangible assets 2,776 2,884 (108)

Tax recovery (a)

(1,386) (2,858) 1,472

Non-GAAP operating income $ 15,992 $ 19,776 $ (3,784) (19.1) % 4.4 % 5.2 %

GAAP operating loss $ (1,144) $ — $ (1,144) nm* nm* nm*

Acquisition and divestiture costs 703 — 703

Cyberattack restoration costs 441 — 441

4 unchanged sentences

Cyberattack restoration costs 441 — 441

Tax recovery (a)

(1,386) (2,858) 1,472

Acquisition and divestiture costs 703 — 703

Non-GAAP operating income $ 30,621 $ 40,724 $ (10,103) (24.8) % 3.5 % 4.0 %

(a) Recovery of prior period withholding taxes in Brazil.

Operating Income by Segment:

Six months ended December 31, % of Net Sales December 31,

2023 2022 $ Change % Change 2023 2022

Specialty Technology Solutions:

(in thousands)

GAAP operating income $ 25,240 $ 41,534 $ (16,294) (39.2) % 2.4 % 3.5 %

Amortization of intangible assets 2,523 2,608 (85)

Non-GAAP operating income $ 27,763 $ 44,142 $ (16,379) (37.1) % 2.7 % 3.7 %

Modern Communications & Cloud:

GAAP operating income $ 27,014 $ 32,785 $ (5,771) (17.6) % 3.7 % 4.4 %

Amortization of intangible assets 5,707 5,783 (76)

Tax recovery (a)

(1,386) (2,858) 1,472

Non-GAAP operating income $ 31,335 $ 35,710 $ (4,375) (12.3) % 4.3 % 4.8 %

GAAP operating loss $ (1,343) $ — $ (1,343) nm* nm* nm*

Cyberattack restoration costs 640 — 640

Acquisition and divestiture costs 703 — 703

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

Consolidated:

GAAP operating income $ 50,911 $ 74,319 $ (23,408) (31.5) % 2.9 % 3.8 %

Amortization of intangible assets 8,230 8,391 (161)

Cyberattack restoration costs 640 — 640

Tax recovery (a)

(1,386) (2,858) 1,472

Acquisition and divestiture costs 703 — 703

Non-GAAP operating income $ 59,098 $ 79,852 $ (20,754) (26.0) % 3.4 % 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.

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

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

1 unchanged sentence

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

Quarter ended September 30, 2023

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

Quarter ended December 31, 2023

Measure Intangible

Divestiture costs Tax

recovery Cyberattack

restoration costs Gain on

a business (a)

(in thousands, except per share data)

4 unchanged sentences

Diluted EPS $1.29 $0.12 $0.03 $(0.03) $0.01 $(0.57) $0.85

Quarter ended September 30, 2022

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

Quarter ended December 31, 2022

Measure Intangible

expense Divestiture costs Tax

recovery Cyberattack

restoration costs Gain on

a business (a)

(in thousands, except per share data)

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Diluted EPS $1.01 $0.12 $ — $(0.07) $ — $ — $1.06

(a) Reflects gain on the sale of the UK-based intY business.

This transaction resulted in a capital loss for tax purposes.

The Company did not record a tax provision on the capital loss since there were no offsetting capital gains.

Six months ended December 31, 2023

Measure Intangible

expense Divestiture costs Tax

recovery Cyberattack

restoration costs Gain on

a business (a)

SG&A expenses $ 142,356 $ — $ (703) $ 1,386 $ (640) $ — $ 142,399

Operating income 50,911 8,230 703 (1,386) 640 — 59,098

Pre-tax income 59,193 8,230 703 (1,386) 640 (14,533) 52,847

Net income 48,158 6,121 703 (640) 479 (14,533) 40,288

Diluted EPS $ 1.91 $ 0.24 $ 0.03 $ (0.03) $ 0.02 $ (0.58) $ 1.60

Six months ended December 31, 2022

Measure Intangible

expense Divestiture costs Tax

recovery Cyberattack

restoration costs Gain on

a business (a)

SG&A expenses $ 140,667 $ — $ — $ 2,858 $ — $ — $ 143,525

Operating income 74,319 8,391 — (2,858) — — 79,852

Pre-tax income 68,475 8,391 — (2,858) — — 74,008

Net income 49,776 6,254 — (1,886) — — 54,144

Diluted EPS $ 1.96 $ 0.25 $ — $ (0.07) $ — $ — $ 2.13

(a) Reflects gain on the sale of the UK-based intY business.

This transaction resulted in a capital loss for tax purposes.

The Company did not record a tax provision on the capital loss since there were no offsetting capital gains.

Liquidity and Capital Resources

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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.

Our cash and cash equivalents balance totaled $45.0 million at December 31, 2023, compared to $36.2 million at June 30, 2023, including $38.3 million and $31.0 million held outside of the United States at December 31, 2023 and June 30, 2023, respectively.

Checks released but not yet cleared in the amount of $8.0 million are included in accounts payable at December 31, 2023 and June 30, 2023.

We conduct business in North America and Brazil 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 decreased $75.7 million to $794.6 million at December 31, 2023 from $870.3 million at June 30, 2023, primarily from decreases in inventory and accounts receivable, partially offset by lower accounts payable, as a result of 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,

Six months ended

(in thousands)

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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.

Net cash provided by operating activities was $156.8 million for the six months ended December 31, 2023, compared to $75.3 million used in operating activities in the prior-year period.

Cash provided by operating activities for the six months ended December 31, 2023 is attributable to reductions in inventory and accounts receivable, which decreased 24% and 12%, respectively, compared to June 30, 2023, partially offset by a reduction in accounts payable which decreased 22% comparatively.

Cash used in operating activities for the six months ended December 31, 2022 is primarily attributable to increases in inventory and accounts receivable, which increased 24% and 7%, respectively, compared to June 30, 2022.

The number of days sales outstanding ("DSO") was 68 days at December 31, 2023, compared to 72 days at June 30, 2023 and 69 days at December 31, 2022.

Inventory turned 5.1 times during the quarter ended December 31, 2023, compared to 4.4 times during the quarter ended June 30, 2023 and 5.0 times in the prior-year quarter ended December 31, 2022.

Cash provided by investing activities for the six months ended December 31, 2023 was $13.1 million, compared to $4.3 million used in investing activities in the prior-year period.

Cash provided by investing activities for the six months ended December 31, 2023 is largely due to cash received from the sale of our intY UK business.

Cash used in investing activities for the six months ended December 31, 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.

For the six months ended December 31, 2023, cash used in financing activities totaled $161.3 million, compared to $108.0 million provided by financing activities for the prior-year period.

Cash used in financing activities for the six months ended December 31, 2023 is primarily attributable to net repayments on the revolving credit facility.

Cash provided by financing activities for the six months ended December 31, 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 ended September 30, 2023, our borrowings under the credit facility were U.S.

During the quarter and six months ended December 31, 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 spread in effect as of December 31, 2023 was 1.25% for SOFR-based loans and 0.25% for alternate base rate loans.

The commitment fee rate in effect at December 31, 2023 was 0.20%.

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 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.

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

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

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the quarters ended December 31, 2023 and 2022 w as $138.7 million and $219.5 million, respectively.

There was $329.1 million and $171.0 million available for additional borrowings as of December 31, 2023 and June 30, 2023, respectively.

The effective interest rates for the revolving line of credit were 6.70% and 6.74% as of December 31, 2023 and June 30, 2023, respectively.

There were no letters of credit issued under the multi-currency revolving credit facility at December 31, 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.

While we were in compliance with the financial covenants contained in the Credit Facility as of December 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.

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