UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Quarterly period ended ~~December 31, 2022~~September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 000-26926

ScanSource, Inc.

South Carolina

(State of Incorporation)

57-0965380

(I.R.S. Employer Identification No.)

6 Logue Court

Greenville, South Carolina 29615

(864) 288-2432


Securities registered pursuant to Section 12(b) of the Act:
Title of each class:	Trading Symbol:	Name of exchange on which registered:
Common stock, no par value	SCSC	NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Smaller reporting company

☐

Accelerated filer

☐

Emerging growth company

☐

Non-accelerated filer

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding at ~~February~~November 1, 2023
Common Stock, no par value per share						~~25,349,304~~24,966,931 shares

SCANSOURCE, INC.

INDEX TO FORM 10-Q

~~December 31, 2022~~September 30, 2023


		Page #
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets (unaudited) at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022~~2023	5
	Condensed Consolidated Income Statements (unaudited) for the Quarters Ended September 30, 2023 and ~~Six Months Ended December 31,~~ 2022 ~~and 2021~~	6
	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Quarters Ended September 30, 2023 and ~~Six Months Ended December 31,~~ 2022 ~~and 2021~~	7
	Condensed Consolidated Statements of Shareholders' Equity (unaudited) for the Quarters Ended September 30, 2023 and ~~Six Months Ended December 31,~~ 2022 ~~and 2021~~	8
	Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~Six Months~~Quarters Ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~	10
	Notes to Condensed Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2524
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4235
Item 4.	Controls and Procedures	4336

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4437
Item 1A.	Risk Factors	4437
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4437
Item 5.	Other Information	38
Item 6.	Exhibits	4539

SIGNATURES		4640

Table of Contents

FORWARD-LOOKING STATEMENTS

Forward-looking statements are included in the "Risk Factors," "Legal Proceedings," "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures About Market Risk" sections and elsewhere herein. Words such as "expects," "anticipates," "believes," "intends," "plans," "hopes," "forecasts," "seeks," "estimates," "goals," "projects," "strategy," "future," "likely," "may," "should," and variations of such words and similar expressions generally identify such forward-looking statements. Any forward-looking statement made by us in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to the following factors, which are neither presented in order of importance nor weighted: ~~the impact of the COVID-19 pandemic,~~ macroeconomic conditions, including potential prolonged economic weakness, inflation and supply chain challenges, the failure to manage and implement the Company's organic growth strategy, credit risks involving the Company's larger customers and suppliers, changes in interest and exchange rates and regulatory regimes impacting the Company's international operations, risk to the Company's business from a ~~cyber-security~~cyber attack, a failure of the Company's IT systems, failure to hire and retain quality employees, loss of the Company's major customers, ~~termination of~~relationships with the Company's ~~relationship with~~ key suppliers and sales partners or a termination or a significant modification of the terms under which it operates with ~~a key supplier,~~such suppliers and sales partners, changes in the Company's operating strategy and other factors set forth in "Risk Factors" contained in our Annual Report on Form 10-K for the year ended June 30, ~~2022.~~2023.

Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.			Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share information)


		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	66,445	$	37,987	Cash and cash equivalents	$	42,647	$	36,178
Accounts receivable, less allowance of $13,353 at December 31, 2022 and $16,806 at June 30, 2022		779,562		729,442
Accounts receivable, less allowance of $19,570 at September 30, 2023 and $15,480 at June 30, 2023						Accounts receivable, less allowance of $19,570 at September 30, 2023 and $15,480 at June 30, 2023	691,669		753,236
Inventories	Inventories	761,936		614,814		Inventories	656,170		757,574
Prepaid expenses and other current assets	Prepaid expenses and other current assets	111,119		141,562		Prepaid expenses and other current assets	116,949		110,087

Total current assets	Total current assets	1,719,062		1,523,805		Total current assets	1,507,435		1,657,075
Property and equipment, net	Property and equipment, net	36,593		37,477		Property and equipment, net	36,745		37,379
Goodwill	Goodwill	214,367		214,435		Goodwill	215,152		216,706
Identifiable intangible assets, net	Identifiable intangible assets, net	75,950		84,427		Identifiable intangible assets, net	63,675		68,495
Deferred income taxes	Deferred income taxes	14,751		15,668		Deferred income taxes	16,421		17,764
Other non-current assets	Other non-current assets	69,806		61,616		Other non-current assets	59,107		70,750

Total assets	Total assets	$	2,130,529	$	1,937,428	Total assets	$	1,898,535	$	2,068,169
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity					Liabilities and Shareholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	748,662	$	714,177	Accounts payable	$	617,594	$	691,119
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	76,985		88,455		Accrued expenses and other current liabilities	67,138		78,892

Income taxes payable	Income taxes payable	6,049		34		Income taxes payable	8,108		9,875

Current portion of long-term debt	Current portion of long-term debt	5,040		11,598		Current portion of long-term debt	8,209		6,915

Total current liabilities	Total current liabilities	836,736		814,264		Total current liabilities	701,049		786,801
Deferred income taxes	Deferred income taxes	3,132		3,144		Deferred income taxes	3,679		3,816
Long-term debt, net of current portion	Long-term debt, net of current portion	147,756		123,733		Long-term debt, net of current portion	141,774		144,006
Borrowings under revolving credit facility	Borrowings under revolving credit facility	230,000		135,839		Borrowings under revolving credit facility	98,125		178,980

Other long-term liabilities	Other long-term liabilities	50,519		53,920		Other long-term liabilities	38,655		49,268

Total liabilities	Total liabilities	1,268,143		1,130,900		Total liabilities	983,282		1,162,871
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies
Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued	Preferred stock, no par value; 3,000,000 shares authorized, none issued	—		—		Preferred stock, no par value; 3,000,000 shares authorized, none issued	—		—
Common stock, no par value; 45,000,000 shares authorized, 25,343,014 and 25,187,351 shares issued and outstanding at December 31, 2022 and June 30, 2022, respectively		68,313		64,297
Common stock, no par value; 45,000,000 shares authorized, 24,960,231 and 24,844,203 shares issued and outstanding at September 30, 2023 and June 30, 2023, respectively						Common stock, no par value; 45,000,000 shares authorized, 24,960,231 and 24,844,203 shares issued and outstanding at September 30, 2023 and June 30, 2023, respectively	59,501		58,241
Retained earnings	Retained earnings	896,645		846,869		Retained earnings	952,110		936,678
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(102,572)		(104,638)		Accumulated other comprehensive loss	(96,358)		(89,621)
Total shareholders’ equity	Total shareholders’ equity	862,386		806,528		Total shareholders’ equity	915,253		905,298
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	2,130,529	$	1,937,428	Total liabilities and shareholders’ equity	$	1,898,535	$	2,068,169

June 30, 2022 amounts are derived from audited consolidated financial statements.
June 30, 2023 amounts are derived from audited consolidated financial statements.						June 30, 2023 amounts are derived from audited consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.	See accompanying notes to these condensed consolidated financial statements.					See accompanying notes to these condensed consolidated financial statements.

Table of Contents

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

(In thousands, except per share data)


		Quarter ended				Six months ended					Quarter ended
		December 31,				December 31,					September 30,
		2022		2021		2022		2021			2023		2022
Net sales	Net sales	$	1,011,241	$	864,079	$	1,955,054	$	1,721,662	Net sales	$	876,305	$	943,813
Cost of goods sold	Cost of goods sold	895,907		756,426		1,726,236		1,512,437		Cost of goods sold	769,797		830,328
Gross profit	Gross profit	115,334		107,653		228,818		209,225		Gross profit	106,508		113,485
Selling, general and administrative expenses	Selling, general and administrative expenses	69,074		69,161		140,667		133,016		Selling, general and administrative expenses	75,436		71,593
Depreciation expense	Depreciation expense	2,678		2,547		5,441		5,427		Depreciation expense	2,795		2,763
Intangible amortization expense	Intangible amortization expense	4,150		4,447		8,391		8,956		Intangible amortization expense	4,193		4,241

Operating income	Operating income	39,432		31,498		74,319		61,826		Operating income	24,084		34,888
Interest expense	Interest expense	5,060		1,493		8,507		3,153		Interest expense	5,585		3,448
Interest income	Interest income	(2,027)		(947)		(3,618)		(1,973)		Interest income	(1,325)		(1,589)
Other expense, net	Other expense, net	207		543		955		807		Other expense, net	677		746
Income before income taxes	Income before income taxes	36,192		30,409		68,475		59,839		Income before income taxes	19,147		32,283
Provision for income taxes	Provision for income taxes	10,458		7,257		18,699		14,614		Provision for income taxes	3,715		8,241
Net income from continuing operations		25,734		23,152		49,776		45,225
Net income from discontinued operations		—		100		—		100

Net income	Net income	$	25,734	$	23,252	$	49,776	$	45,325	Net income	$	15,432	$	24,042

Per share data:	Per share data:									Per share data:
Net income from continuing operations per common share, basic		$	1.02	$	0.91	$	1.97	$	1.77
Net income from discontinued operations per common share, basic		—		—		—		—

Net income per common share, basic	Net income per common share, basic	$	1.02	$	0.91	$	1.97	$	1.77	Net income per common share, basic	$	0.62	$	0.95
Weighted-average shares outstanding, basic	Weighted-average shares outstanding, basic	25,287		25,585		25,244		25,549		Weighted-average shares outstanding, basic	24,886		25,201

Net income from continuing operations per common share, diluted		$	1.01	$	0.89	$	1.96	$	1.75
Net income from discontinued operations per common share, diluted		—		—		—		—

Net income per common share, diluted	Net income per common share, diluted	$	1.01	$	0.90	$	1.96	$	1.76	Net income per common share, diluted	$	0.61	$	0.94
Weighted-average shares outstanding, diluted	Weighted-average shares outstanding, diluted	25,502		25,895		25,454		25,806		Weighted-average shares outstanding, diluted	25,178		25,451


See accompanying notes to these condensed consolidated financial statements.

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SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


		Quarter ended				Six months ended					Quarter ended
		December 31,				December 31,					September 30,
		2022		2021		2022		2021			2023		2022
Net income	Net income	$	25,734	$	23,252	$	49,776	$	45,325	Net income	$	15,432	$	24,042
Unrealized gain on hedged transaction, net of tax	Unrealized gain on hedged transaction, net of tax	3		1,172		1,882		1,585		Unrealized gain on hedged transaction, net of tax	153		1,879
Foreign currency translation adjustment	Foreign currency translation adjustment	7,401		(2,759)		184		(13,906)		Foreign currency translation adjustment	(6,890)		(7,217)
Comprehensive income	Comprehensive income	$	33,138	$	21,665	$	51,842	$	33,004	Comprehensive income	$	8,695	$	18,704


See accompanying notes to these condensed consolidated financial statements.

Table of Contents

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

(In thousands, except share information)


		Common Stock (Shares)	Common Stock (Amount)		Retained Earnings		Accumulated Other Comprehensive Loss		Total			Common Stock (Shares)	Common Stock (Amount)		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at June 30, 2022		25,187,351	$	64,297	$	846,869	$	(104,638)	$	806,528
Balance at June 30, 2023											Balance at June 30, 2023	24,844,203	$	58,241	$	936,678	$	(89,621)	$	905,298
Net income	Net income	—	—		24,042		—		24,042		Net income	—	—		15,432		—		15,432
Unrealized gain on hedged transaction, net of tax	Unrealized gain on hedged transaction, net of tax	—	—		—		1,879		1,879		Unrealized gain on hedged transaction, net of tax	—	—		—		153		153
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		(7,217)		(7,217)		Foreign currency translation adjustment	—	—		—		(6,890)		(6,890)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes	Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes	38,551	(586)		—		—		(586)		Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes	116,028	(1,510)		—		—		(1,510)

Share-based compensation	Share-based compensation	—	2,358		—		—		2,358		Share-based compensation	—	2,770		—		—		2,770

Balance at September 30, 2022		25,225,902	$	66,069	$	870,911	$	(109,976)	$	827,004
Net income		—	—		25,734		—		25,734
Unrealized gain on hedged transaction, net of tax		—	—		—		3		3
Foreign currency translation adjustment		—	—		—		7,401		7,401
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes		117,112	(1,112)		—		—		(1,112)
Balance at September 30, 2023											Balance at September 30, 2023	24,960,231	$	59,501	$	952,110	$	(96,358)	$	915,253

Share-based compensation		—	3,356		—		—		3,356

Balance at December 31, 2022		25,343,014	$	68,313	$	896,645	$	(102,572)	$	862,386

See accompanying notes to these condensed consolidated financial statements.	See accompanying notes to these condensed consolidated financial statements.										See accompanying notes to these condensed consolidated financial statements.

Table of Contents

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

(In thousands, except share information)


		Common Stock (Shares)	Common Stock (Amount)		Retained Earnings		Accumulated Other Comprehensive Loss		Total			Common Stock (Shares)	Common Stock (Amount)		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at June 30, 2021		25,499,465	$	71,253	$	758,071	$	(98,133)	$	731,191
Balance at June 30, 2022											Balance at June 30, 2022	25,187,351	$	64,297	$	846,869	$	(104,638)	$	806,528
Net income	Net income	—	—		22,073		—		22,073		Net income	—	—		24,042		—		24,042
Unrealized gain on hedged transaction, net of tax	Unrealized gain on hedged transaction, net of tax	—	—		—		413		413		Unrealized gain on hedged transaction, net of tax	—	—		—		1,879		1,879
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		(11,147)		(11,147)		Foreign currency translation adjustment	—	—		—		(7,217)		(7,217)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes	Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes	29,086	994		—		—		994		Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes	38,551	(586)		—		—		(586)

Share-based compensation	Share-based compensation	—	2,570		—		—		2,570		Share-based compensation	—	2,358		—		—		2,358
Balance at September 30, 2021		25,528,551	$	74,817	$	780,144	$	(108,867)	$	746,094
Net income		—	—		23,252		—		23,252
Unrealized gain on hedged transaction, net of tax		—	—		—		1,172		1,172
Foreign currency translation adjustment		—	—		—		(2,759)		(2,759)
Balance at September 30, 2022											Balance at September 30, 2022	25,225,902	$	66,069	$	870,911	$	(109,976)	$	827,004

Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes		134,897	(2,513)		—		—		(2,513)
Common stock repurchased		(5,903)	(183)		—		—		(183)
Share-based compensation		—	3,462		—		—		3,462
Balance at December 31, 2021		25,657,545	$	75,583	$	803,396	$	(110,454)	$	768,525

See accompanying notes to these condensed consolidated financial statements.	See accompanying notes to these condensed consolidated financial statements.										See accompanying notes to these condensed consolidated financial statements.

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SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


		Six months ended					Quarter ended
		December 31,					September 30,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	49,776	$	45,325	Net income	$	15,432	$	24,042
Net income from discontinued operations		—		100
Net income from continuing operations		49,776		45,225
Adjustments to reconcile net income to net cash used in operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:						Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	14,285		14,879		Depreciation and amortization	7,217		7,228
Amortization of debt issue costs	Amortization of debt issue costs	385		209		Amortization of debt issue costs	96		289
Provision for doubtful accounts	Provision for doubtful accounts	33		921		Provision for doubtful accounts	4,157		125
Share-based compensation	Share-based compensation	5,679		6,032		Share-based compensation	2,769		2,316

Deferred income taxes	Deferred income taxes	932		(109)		Deferred income taxes	1,303		2,274

Finance lease interest	Finance lease interest	24		26		Finance lease interest	15		2
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	(49,541)		(54,370)		Accounts receivable	53,284		(18,799)
Inventories	Inventories	(146,826)		(95,531)		Inventories	99,630		(62,192)
Prepaid expenses and other assets	Prepaid expenses and other assets	30,487		(11,236)		Prepaid expenses and other assets	(7,743)		14,690
Other non-current assets	Other non-current assets	(7,168)		(1,561)		Other non-current assets	11,227		(9,469)
Accounts payable	Accounts payable	33,820		25,444		Accounts payable	(70,292)		(1,053)
Accrued expenses and other liabilities	Accrued expenses and other liabilities	(13,268)		(5,130)		Accrued expenses and other liabilities	(21,764)		(13,168)
Income taxes payable	Income taxes payable	6,036		(177)		Income taxes payable	(1,798)		5,256
Net cash used in operating activities		(75,346)		(75,378)
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	93,533		(48,459)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capital expenditures	Capital expenditures	(4,262)		(2,645)		Capital expenditures	(2,315)		(684)

Proceeds from the sale of discontinued operations		—		3,125

Net cash (used in) provided by investing activities		(4,262)		480

Net cash used in investing activities						Net cash used in investing activities	(2,315)		(684)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Borrowings on revolving credit, net of expenses	Borrowings on revolving credit, net of expenses	1,232,058		1,115,161		Borrowings on revolving credit, net of expenses	588,570		579,011
Repayments on revolving credit, net of expenses	Repayments on revolving credit, net of expenses	(1,137,897)		(1,057,376)		Repayments on revolving credit, net of expenses	(669,424)		(542,147)
Borrowings (repayments) on long-term debt, net		17,465		(4,093)
(Repayments) borrowings on long-term debt, net						(Repayments) borrowings on long-term debt, net	(938)		18,402
Repayments on finance lease obligation	Repayments on finance lease obligation	(492)		(624)		Repayments on finance lease obligation	(191)		(303)
Debt issuance costs	Debt issuance costs	(1,407)		—		Debt issuance costs	—		(1,407)

Exercise of stock options	Exercise of stock options	634		1,114		Exercise of stock options	72		10
Taxes paid on settlement of equity awards	Taxes paid on settlement of equity awards	(2,332)		(2,634)		Taxes paid on settlement of equity awards	(1,582)		(596)
Common stock repurchased		—		(183)

Net cash provided by financing activities		108,029		51,365

Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(83,493)		52,970
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	37		(5,062)		Effect of exchange rate changes on cash and cash equivalents	(1,256)		(1,342)
Increase (decrease) in cash and cash equivalents		28,458		(28,595)
Increase in cash and cash equivalents						Increase in cash and cash equivalents	6,469		2,485
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	37,987		62,718		Cash and cash equivalents at beginning of period	36,178		37,987
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	66,445	$	34,123	Cash and cash equivalents at end of period	$	42,647	$	40,472

See accompanying notes to these condensed consolidated financial statements.	See accompanying notes to these condensed consolidated financial statements.					See accompanying notes to these condensed consolidated financial statements.

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SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Business and Summary of Significant Accounting Policies

Business Description

ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “ScanSource”) is a leading hybrid distributor connecting devices to the cloud and accelerating growth for partners across hardware, Software as a Service ("SaaS"), connectivity and cloud. The Company brings technology solutions and services from the world’s leading suppliers of mobility and barcode, point-of-sale ("POS"), payments, networking, physical security, unified communications and collaboration, telecom and cloud services to market. The Company operates in the United States, Canada, Brazil and the ~~UK.~~United Kingdom ("UK"). The Company's two operating segments, Specialty Technology Solutions and Modern Communications & Cloud, are based on ~~technology.~~technology type and are generally related to technology devices and communication, connectivity and cloud services, respectively.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("U.S. GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, the results of operations for the quarters ended September 30, 2023 and ~~six months ended December 31,~~ 2022, ~~and 2021,~~ the condensed consolidated statements of comprehensive income for the quarters ended September 30, 2023 and ~~six months ended December 31,~~ 2022, ~~and 2021,~~ the condensed consolidated statements of shareholders' equity for the quarters ~~and six months~~ ended ~~December 31,~~September 30, 2023 and 2022 and ~~2021 and~~ the condensed consolidated statements of cash flows for the ~~six months~~quarters ended ~~December 31, 2022~~September 30, 2023 and ~~2021.~~2022. The results of operations for the ~~quarters and six months~~quarter ended ~~December 31, 2022~~September 30, 2023 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2022.~~2023. Unless otherwise indicated, disclosures provided in the Notes pertain to continuing operations only.

The Company has reclassified certain prior-year amounts in the segment results to conform with current year presentation. The reclassifications had no effect on the condensed consolidated financial results.

Summary of Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies for the ~~six months~~quarter ended ~~December 31, 2022~~September 30, 2023 from the policies described in the notes to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, ~~2022.~~2023. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2022.~~2023.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. The Company maintains zero-balance disbursement accounts at various financial institutions at which the Company does not maintain significant depository relationships. Due to the terms of the agreements governing these accounts, the Company generally does not have the right to offset outstanding checks written from these accounts against cash on hand, and the respective institutions are not legally obligated to honor the checks until sufficient funds are transferred to fund the checks. As a result, checks released but not yet cleared from these accounts in the amounts of ~~$8.9~~$10.3 million and ~~$18.0~~$8.0 million are included in accounts payable on the condensed consolidated balance sheets at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, respectively.

Long-lived Assets

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The Company presents depreciation expense and intangible amortization expense on the ~~Condensed Consolidated Income Statements.~~condensed consolidated income statements. The Company's depreciation expense related to selling, general and administrative costs totaled ~~$2.7 million and $5.4~~$2.8 million for the ~~quarter~~quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and $2.5 million and $5.4 million for the quarter and six months ended December 31, 2021.~~2022. Depreciation expense reported as part of cost of goods sold on the ~~Condensed Consolidated Income Statements~~condensed consolidated income statements totaled $0.2 million ~~and $0.5 million~~ for the ~~quarter~~quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021.~~2022. The Company's intangible amortization expense reported on the ~~Condensed Consolidated Income Statements~~condensed consolidated income statements relates to selling, general and administrative costs, not the cost of selling goods. Intangible amortization expense totaled $4.2 million ~~and $8.4 million~~ for the ~~quarter~~quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and $4.4 million and $9.0 million for the quarter and six months ended December 31, 2021.~~2022.

Recent Accounting Pronouncements

In July 2023, the Securities and Exchange Commission issued final rules that require new and enhanced disclosures on cybersecurity risk management, strategy, governance, and incident reporting. Under the final rules, companies must report material cybersecurity incidents within four business days of determining the incident is material on Form 8-K. As additional information about the material aspects of the previously reported incidents become available, a Form 8-K/A must be filed with the additional disclosures. These disclosure requirements on Form 8-K are effective beginning December 18, 2023. For fiscal years ending on or after December 15, 2023, companies must disclose their cybersecurity processes, management's role in cybersecurity governance, and cybersecurity oversight by the Board of Directors on Form 10-K.

The Company has reviewed newly issued accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on its consolidated financial statements as a result of future adoption.

(2) Trade Accounts and Notes Receivable, Net

The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due to the Company. The Company has notes receivable with certain customers, which are included in “Accounts receivable, less allowance” in the Condensed Consolidated Balance Sheets.

Management determines the estimate of the allowance for doubtful accounts receivable by considering a number of factors, including: (i) historical experience, (ii) aging of the accounts receivable, (iii) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country-specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables over the contractual life are recorded at inception and adjusted over the contractual life.

The changes in the allowance for doubtful accounts for the ~~six~~three months ended ~~December 31, 2022~~September 30, 2023 are set forth in the table below.

June 30, 2022 Amounts Charged to Expense Write-offs
Other (1)
December 31, 2022
(in thousands)
Trade accounts and current notes receivable allowance $ 16,806 $ 33 $ (2,842) $ (644) $ 13,353


	June 30, 2023		Amounts Charged to Expense		Write-offs		Other (1)		September 30, 2023
	(in thousands)
Trade accounts and current notes receivable allowance	$	15,480	$	4,157	$	(594)	$	527	$	19,570

(1)"Other" amounts include recoveries and the effect of foreign currency fluctuations for the ~~six~~three months ended ~~December 31, 2022.~~September 30, 2023.

(3) Revenue Recognition

The Company provides technology solutions and services from the world's leading suppliers of mobility, barcode, POS, payments, physical security, unified communications, collaboration, telecom and cloud services. This includes hardware, related accessories and device configuration as well as software licenses, professional services and hardware support programs.

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In determining the appropriate amount of revenue to recognize, the Company applies the following five-step model: (i) identify contracts with customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company recognizes revenue as control of products and services are transferred to customers, which is generally at the point of shipment. The Company delivers products to customers in several ways, including: (i) shipment from a Company warehouse, (ii) drop-shipment directly from the supplier, or (iii) electronic delivery for non-physical products.

Principal versus Agent Considerations

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The Company is the principal for sales of all hardware and certain software and services. The Company considers itself the principal in those transactions where it has control of the product or service before it is transferred to the customer. The Company recognizes the principal-associated revenue and cost of goods sold on a gross basis.

The Company is the agent for third-party service contracts, including product warranties and supplier-hosted software. These service contracts are sold separately from the products, and the Company often serves as the agent for the contract on behalf of the original equipment manufacturer. The Company's responsibility is to arrange for the provision of the specified service by the original equipment manufacturer, and the Company does not control the specified service before it is transferred to the customer. Because the Company acts as an agent, revenue is recognized net of cost at the time of sale. The Intelisys business operates under an agency model.

Variable Considerations

For certain transactions, products are sold with a right of return and may also provide other rebates or incentives, which are accounted for as variable consideration. The Company estimates a returns allowance based on historical experience and reduces revenue accordingly. The Company estimates the amount of variable consideration for rebates and incentives by using the expected value to be given to the customer and reduces the revenue by those estimated amounts. These estimates are reviewed and updated as necessary at the end of each reporting period.

Contract Balances

The Company records contract assets and liabilities for payments received from customers in advance of services performed. These assets and liabilities are the result of the sales of the Company's self-branded warranty programs and other transactions where control has not yet passed to the customer. These amounts are immaterial to the consolidated financial statements for the periods presented.

Disaggregation of Revenue

The following tables represent the Company's disaggregation of revenue:


		Quarter ended December 31, 2022						Quarter ended September 30, 2023
		Specialty Technology Solutions		Modern Communications & Cloud		Total				Specialty Technology Solutions		Modern Communications & Cloud		Total
				(in thousands)								(in thousands)
Revenue by product/service	Revenue by product/service								Revenue by product/service
Hardware, software and cloud (excluding Intelisys)	Hardware, software and cloud (excluding Intelisys)	$	627,548	$	363,743	$	991,291		Hardware, software and cloud (excluding Intelisys)	$	509,570	$	346,232	$	855,802
Intelisys connectivity and cloud	Intelisys connectivity and cloud	—		19,950		19,950			Intelisys connectivity and cloud	—		20,503		20,503
		$	627,548	$	383,693	$	1,011,241			$	509,570	$	366,735	$	876,305

		Six months ended December 31, 2022
		Specialty Technology Solutions		Modern Communications & Cloud		Total
				(in thousands)
Revenue by product/service:
Hardware, software and cloud (excluding Intelisys)		$	1,203,878	$	712,373	$	1,916,251
Intelisys connectivity and cloud		—		38,803		38,803
		$	1,203,878	$	751,176	$	1,955,054

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		Quarter ended December 31, 2021						Quarter ended September 30, 2022
		Specialty Technology Solutions		Modern Communications & Cloud		Total				Specialty Technology Solutions		Modern Communications & Cloud		Total
				(in thousands)								(in thousands)
Revenue by product/service	Revenue by product/service								Revenue by product/service
Hardware, software and cloud (excluding Intelisys)	Hardware, software and cloud (excluding Intelisys)	$	496,920	$	348,893	$	845,813		Hardware, software and cloud (excluding Intelisys)	$	576,329	$	348,631	$	924,960
Intelisys connectivity and cloud	Intelisys connectivity and cloud	—		18,266		18,266			Intelisys connectivity and cloud	—		18,853		18,853
		$	496,920	$	367,159	$	864,079			$	576,329	$	367,484	$	943,813

		Six months ended December 31, 2021
		Specialty Technology Solutions		Modern Communications & Cloud		Total
				(in thousands)
Revenue by product/service:
Hardware, software and cloud (excluding Intelisys)		$	998,630	$	687,142	$	1,685,772
Intelisys connectivity and cloud		—		35,890		35,890
		$	998,630	$	723,032	$	1,721,662

(4) Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.


		Quarter ended				Six months ended					Quarter ended
		December 31,				December 31,					September 30,
		2022		2021		2022		2021			2023		2022
		(in thousands, except per share data)									(in thousands, except per share data)
Numerator:	Numerator:									Numerator:
Net income from continuing operations		$	25,734	$	23,152	$	49,776	$	45,225
Net income from discontinued operations		—		100		—		100

Net income	Net income	$	25,734	$	23,252	$	49,776	$	45,325	Net income	$	15,432	$	24,042
Denominator:	Denominator:									Denominator:
Weighted-average shares, basic	Weighted-average shares, basic	25,287		25,585		25,244		25,549		Weighted-average shares, basic	24,886		25,201
Dilutive effect of share-based payments	Dilutive effect of share-based payments	215		310		210		257		Dilutive effect of share-based payments	292		250
Weighted-average shares, diluted	Weighted-average shares, diluted	25,502		25,895		25,454		25,806		Weighted-average shares, diluted	25,178		25,451

Net income from continuing operations per common share, basic		$	1.02	$	0.91	$	1.97	$	1.77
Net loss from discontinued operations per common share, basic		—		—		—		—

Net income per common share, basic	Net income per common share, basic	$	1.02	$	0.91	$	1.97	$	1.77	Net income per common share, basic	$	0.62	$	0.95

Net income from continuing operations per common share, diluted		$	1.01	$	0.89	$	1.96	$	1.75
Net loss from discontinued operations per common share, diluted		—		—		—		—

Net income per common share, diluted	Net income per common share, diluted	$	1.01	$	0.90	$	1.96	$	1.76	Net income per common share, diluted	$	0.61	$	0.94

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For the quarters ~~and six months~~ ended ~~December 31,~~September 30, 2023 and 2022, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were ~~847,651~~854,893 and 1,268,455, respectively. For the quarters and six months ended December 31, 2021, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 847,484 and 1,149,352,1,128,445, respectively.

(5) Accumulated Other Comprehensive Loss

~~Accumulated~~The components of accumulated other comprehensive loss, ~~consists~~net of ~~the following:~~tax are as follows:


		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023
		(in thousands)					(in thousands)
Foreign currency translation adjustment	Foreign currency translation adjustment	$	(105,715)	$	(105,899)	Foreign currency translation adjustment	$	(100,026)	$	(93,136)
Unrealized gain on hedged transaction, net of tax	Unrealized gain on hedged transaction, net of tax	3,143		1,261		Unrealized gain on hedged transaction, net of tax	3,668		3,515
Accumulated other comprehensive loss	Accumulated other comprehensive loss	$	(102,572)	$	(104,638)	Accumulated other comprehensive loss	$	(96,358)	$	(89,621)

The tax effect of amounts in comprehensive loss reflect a tax (benefit) expense or as follows:

Quarter ended December 31, Six months ended December 31,
2022 2021 2022 2021
(in thousands)
Tax expense $ 166 $ 517 $ 580 $ 800


	Quarter ended September 30,
	2023		2022
	(in thousands)
Tax (benefit) expense	$	(54)	$	414

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(6) Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the ~~six months~~quarter ended ~~December 31, 2022,~~September 30, 2023, by reporting segment, are set forth in the table below.

Specialty Technology Solutions Modern Communications & Cloud Total
(in thousands)
Balance at June 30, 2022 $ 16,370 $ 198,065 $ 214,435
Foreign currency translation adjustment — (68) (68)
Balance at December 31, 2022 $ 16,370 $ 197,997 $ 214,367


	Specialty Technology Solutions		Modern Communications & Cloud		Total
	(in thousands)
Balance at June 30, 2023	$	16,370	$	200,336	$	216,706
Foreign currency translation adjustment	—		(1,554)		(1,554)
Balance at September 30, 2023	$	16,370	$	198,782	$	215,152

The following table shows changes in the amount recognized for net identifiable intangible assets for the ~~six~~three months ended ~~December 31, 2022.~~September 30, 2023.


	Net Identifiable Intangible Assets
	(in thousands)
Balance at June 30, ~~2022~~2023	$	~~84,427~~68,495
Amortization expense	~~(8,391)~~(4,193)
Foreign currency translation adjustment	~~(86)~~(627)
Balance at ~~December 31, 2022~~September 30, 2023	$	~~75,950~~63,675

(7) Short-Term Borrowings and Long-Term Debt

The following table presents the Company’s debt at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022.~~2023.

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		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023
		(in thousands)					(in thousands)

Current portion of long-term debt	Current portion of long-term debt	$	5,040	$	11,598	Current portion of long-term debt	$	8,209	$	6,915
Mississippi revenue bond, net of current portion	Mississippi revenue bond, net of current portion	3,381		3,733		Mississippi revenue bond, net of current portion	3,024		3,381
Senior secured term loan facility, net of current portion	Senior secured term loan facility, net of current portion	144,375		120,000		Senior secured term loan facility, net of current portion	138,750		140,625
Borrowings under revolving credit facility	Borrowings under revolving credit facility	230,000		135,839		Borrowings under revolving credit facility	98,125		178,980
Total debt	Total debt	$	382,796	$	271,170	Total debt	$	248,108	$	329,901

Credit Facility

The Company has a multi-currency senior secured credit facility (as amended, the "Amended Credit Agreement") with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks ~~(as amended,~~(collectively the ~~“Amended Credit Agreement”~~"Lenders"). On September 28, 2022, ~~ScanSource, Inc.~~the Company amended and restated the Amended Credit Agreement, which includes (i) a five-year, $350 million multicurrency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. The Amended Credit Agreement extended the credit facility maturity date to September 28, 2027. In addition, pursuant to an “accordion feature,” the Company may increase its borrowings up to an additional $250 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and its domestic subsidiaries. Under the terms of the revolving credit facility, the payment of cash dividends is restricted. The Company incurred debt issuance costs of $1.4 million in connection with the amendment and restatement of the Amended Credit Agreement. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.

Loans denominated in U.S. dollars, other than swingline loans, ~~shall~~ bear interest at a rate per annum equal to, at the Company’s option, (i) the adjusted ~~Term SOFR~~term Secured Overnight Financing Rate ("SOFR") or adjusted daily simple SOFR plus an additional margin ranging from 1.00% to 1.75%, depending upon the Company’s ratio of (A) total consolidated debt less up to $30 million

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of unrestricted domestic cash to (B) trailing four-quarter consolidated EBITDA measured as of the end of the most recent year or quarter, as applicable, for which financial statements have been delivered to the Lenders (the “leverage ratio”); or (ii) the alternate base rate plus an additional margin ranging from 0% to 0.75%, depending upon the Company’s leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars ~~shall~~ bear interest based upon the adjusted daily simple SOFR ~~floating daily,~~ plus an additional margin ranging from 1.00% to 1.75%, depending upon the Company's leverage ratio, or such other rate as the Company and the applicable swingline lender may agree. The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10% over the applicable SOFR reference rate. Loans denominated in foreign currencies ~~shall~~ bear interest at a rate per annum equal to the applicable benchmark rate set forth in the ~~New~~Amended Credit Agreement plus an additional margin ranging from 1.00% to 1.75%, depending upon the Company’s leverage ratio plus, if applicable, certain mandatory costs.

During the quarter ~~and six months~~ ended ~~December 31, 2022,~~September 30, 2023, the Company's borrowings under the credit facility were U.S. dollar loans. The spread in effect as of ~~December 31, 2022~~September 30, 2023 was 1.50%, plus a 0.10% credit spread adjustment for SOFR-based loans and 0.50% for alternate base rate loans. The commitment fee rate in effect at ~~December 31, 2022~~September 30, 2023 was 0.25%. The Amended Credit Agreement includes customary representations, warranties and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, the Company’s Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. The Company was in compliance with all covenants under the credit facility at ~~December 31, 2022.~~September 30, 2023.

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the ~~six~~three month periods ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~ was ~~$219.5~~$200.9 million and ~~$57.1~~$200.5 million, respectively. There was ~~$120.0~~$251.9 million and ~~$214.2~~$171.0 million available for additional borrowings as of ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~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 ~~December 31, 2022~~September 30, 2023 or June 30, ~~2022.~~2023.

Mississippi Revenue Bond

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On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, ~~2032 and~~2032. The bond accrues interest at the ~~30-day LIBOR rate~~one-month term SOFR plus an adjustment of 0.10% plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the ~~agreement, and then, starting~~agreement. Starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100% of the principal amount outstanding. At ~~December 31, 2022,~~September 30, 2023, the Company was in compliance with all covenants under this bond. The interest rates at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022~~2023 were ~~4.97%~~6.28% and ~~1.97%~~6.11%, respectively.

Debt Issuance Costs

At ~~December 31, 2022,~~September 30, 2023, net debt issuance costs associated with the credit facility and bond totaled ~~$1.8~~$1.5 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument.

(8) Derivatives and Hedging Activities

The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the Condensed Consolidated Balance Sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.

Foreign Currency Derivatives – The Company conducts a portion of its business internationally in a variety of foreign currencies and is exposed to market risk for changes in foreign currency exchange rates. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and once these opportunities have been exhausted the Company uses currency options and forward contracts or other hedging instruments with third parties. These contracts will periodically hedge the exchange of various currencies, including the U.S. dollar, Brazilian real, euro, British pound and Canadian dollar.

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The Company had contracts outstanding for purposes of managing cash flows with notional amounts of ~~$47.4~~$34.4 million and ~~$34.5~~$34.3 million for the exchange of foreign currencies at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures included in the Condensed Consolidated Income Statements for the ~~quarters~~quarter ended September 30, 2023 and ~~six months ended December 31,~~ 2022 ~~and 2021~~ are as follows:

Quarter ended Six months ended
December 31, December 31,
2022 2021 2022 2021
(in thousands)
Net foreign exchange derivative contract losses (gains) $ 871 $ (523) $ 1,309 $ (2,175)
Net foreign currency transactional and re-measurement (gains) losses (524) 1,003 (39) 3,141
Net foreign currency exchange losses $ 347 $ 480 $ 1,270 $ 966


	Quarter ended
	September 30,
	2023		2022
	(in thousands)
Net foreign exchange derivative contract (gains) losses	$	(368)	$	438
Net foreign currency transactional and re-measurement losses	1,064		484
Net foreign currency exchange losses	$	696	$	922

Net foreign currency exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses and are included in other income and expense. Foreign exchange gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, the British pound versus the euro, and the Canadian dollar versus the U.S. ~~dollar..~~dollar.

Interest Rates - The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. The Company manages its exposure to changes in interest rates by using interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating rate debt.

On April 30, 2019, the Company entered into an interest rate swap agreement to lock into a fixed LIBOR interest rate, which was amended on September 28, 2022, to change the reference rate from LIBOR to SOFR. The swap agreement has a notional amount of $100.0 million, with a $50.0 million tranche scheduled to mature on April 30, 2024 and a $50.0 million tranche scheduled to mature April 30, 2026. ~~This swap~~

17On March 31, 2023, the Company entered into an interest rate swap agreement to lock into a fixed SOFR interest rate with a notional amount of $25 million and a maturity date of March 31, 2028.

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~~agreement is~~These interest rate swap agreements are designated as a cash flow ~~hedge~~hedges to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap ~~agreement~~agreements are recognized as adjustments to interest expense. To the extent the ~~swap is~~swaps are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the ~~swap~~swaps are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for the ~~quarters~~quarter ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021.~~2022.

The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive Income for the ~~quarters~~quarter ended September 30, 2023 and ~~six months ended December 31,~~ 2022, ~~and 2021,~~ are as follows:


		Quarter ended				Six months ended					Quarter ended
		December 31,				December 31,					September 30,
		2022		2021		2022		2021			2023		2022
		(in thousands)									(in thousands)
Net interest (income) expense recognized as a result of interest rate swap	Net interest (income) expense recognized as a result of interest rate swap	$	(345)	$	579	$	(313)	$	1,157	Net interest (income) expense recognized as a result of interest rate swap	$	(759)	$	32
Unrealized gain in fair value of interest rate swap	Unrealized gain in fair value of interest rate swap	349		999		2,849		983		Unrealized gain in fair value of interest rate swap	974		2,500
Net increase in accumulated other comprehensive income	Net increase in accumulated other comprehensive income	4		1,578		2,536		2,140		Net increase in accumulated other comprehensive income	215		2,532
Income tax effect	Income tax effect	1		406		652		555		Income tax effect	62		653
Net increase in accumulated other comprehensive income, net of tax	Net increase in accumulated other comprehensive income, net of tax	$	3	$	1,172	$	1,884	$	1,585	Net increase in accumulated other comprehensive income, net of tax	$	153	$	1,879

The Company used the following derivative instruments at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:

December 31, 2022 June 30, 2022
Balance Sheet Location Fair Value of
Derivatives
Designated
as Hedge Instruments Fair Value of
Derivatives
Not Designated as Hedge Instruments Fair Value of
Derivatives
Designated
as Hedge Instruments Fair Value of
Derivatives
Not Designated as Hedge Instruments
(in thousands)
Derivative assets:
Interest rate swap agreement Other non-current assets $4,223 — $1,686 —
Derivative liabilities:
Foreign exchange contracts Accrued expenses and other current liabilities — $9 — $5
Foreign currency hedge Accrued expenses and other current liabilities $281 — $93 —

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		September 30, 2023		June 30, 2023
	Balance Sheet Location	Fair Value of Derivatives Designated as Hedge Instruments	Fair Value of Derivatives Not Designated as Hedge Instruments	Fair Value of Derivatives Designated as Hedge Instruments	Fair Value of Derivatives Not Designated as Hedge Instruments
		(in thousands)
Derivative assets:
Foreign exchange contracts	Prepaid expenses and other current assets	—	$27	—	$1
Foreign currency hedge	Prepaid expenses and other current assets	—	—	$100	—
Interest rate swap agreement	Other non-current assets	$4,902	—	$4,687	—
Derivative liabilities:

Foreign currency hedge	Accrued expenses and other current liabilities	$108	—	—	—

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(9) Fair Value of Financial Instruments

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company classifies certain assets and liabilities based on the fair value hierarchy, which aggregates fair value measured assets and liabilities based upon the following levels of inputs:

•Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

•Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The assets and liabilities maintained by the Company that are required to be measured at fair value on a recurring basis include deferred compensation plan investments, forward foreign currency exchange contracts, foreign currency hedge agreements and interest rate swap agreements. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to a variable rate using the market approach (Level 2).

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at ~~December 31, 2022:~~September 30, 2023:


		Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)				Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)
		(in thousands)						(in thousands)
Assets:	Assets:								Assets:
Deferred compensation plan investments, current and non-current portion	Deferred compensation plan investments, current and non-current portion	$	27,387	$	27,387	$	—		Deferred compensation plan investments, current and non-current portion	$	28,773	$	28,773	$	—

Forward foreign currency exchange contracts									Forward foreign currency exchange contracts	27		—		27
Interest rate swap agreement	Interest rate swap agreement	4,223		—		4,223			Interest rate swap agreement	4,902		—		4,902

Total assets at fair value	Total assets at fair value	$	31,610	$	27,387	$	4,223		Total assets at fair value	$	33,702	$	28,773	$	4,929
Liabilities:	Liabilities:								Liabilities:
Deferred compensation plan investments, current and non-current portion	Deferred compensation plan investments, current and non-current portion	$	27,387	$	27,387	$	—		Deferred compensation plan investments, current and non-current portion	$	28,773	$	28,773	$	—
Forward foreign currency exchange contracts		9		—		9

Foreign currency hedge	Foreign currency hedge	281		—		281			Foreign currency hedge	108		—		108

Total liabilities at fair value	Total liabilities at fair value	$	27,677	$	27,387	$	290		Total liabilities at fair value	$	28,881	$	28,773	$	108

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at June 30, ~~2022:~~2023:

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		Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)				Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)
		(in thousands)						(in thousands)
Assets:	Assets:								Assets:
Deferred compensation plan investments, current and non-current portion	Deferred compensation plan investments, current and non-current portion	$	25,178	$	25,178	$	—		Deferred compensation plan investments, current and non-current portion	$	28,209	$	28,209	$	—

Forward foreign currency exchange contracts									Forward foreign currency exchange contracts	1		—		1
Foreign currency hedge									Foreign currency hedge	100		—		100
Interest rate swap agreement	Interest rate swap agreement	1,686		—		1,686			Interest rate swap agreement	4,687		—		4,687
Total assets at fair value	Total assets at fair value	$	26,864	$	25,178	$	1,686		Total assets at fair value	$	32,997	$	28,209	$	4,788
Liabilities:	Liabilities:								Liabilities:
Deferred compensation plan investments, current and non-current portion	Deferred compensation plan investments, current and non-current portion	$	25,178	$	25,178	$	—		Deferred compensation plan investments, current and non-current portion	$	28,229	$	28,229	$	—
Forward foreign currency exchange contracts		5		—		5
Foreign currency hedge		93		—		93

Total liabilities at fair value	Total liabilities at fair value	$	25,276	$	25,178	$	98		Total liabilities at fair value	$	28,229	$	28,229	$	—

The investments in the deferred compensation plan are held in a "rabbi trust" and include mutual funds and cash equivalents for payment of non-qualified benefits for certain retired, terminated and active employees. These investments are recorded to prepaid expenses and other current assets or other non-current assets depending on their corresponding, anticipated distribution dates to recipients, which are reported in accrued expenses and other current liabilities or other long-term liabilities, respectively.

Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including ~~LIBOR~~SOFR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Condensed Consolidated Balance Sheets as prepaid expenses and other non-current assets or accrued expenses and other long-term liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 8 - Derivatives and Hedging Activities.

(10) Segment Information

The Company is a leading provider of technology solutions and services to customers in specialty technology markets. The Company has two reportable segments, based on ~~technology.~~technology type.

Specialty Technology Solutions Segment

The Specialty Technology Solutions segment includes the Company’s business in mobility and barcode, POS, payments, security and networking technologies. Mobility and barcode solutions include mobile computing, barcode scanners and imagers, radio frequency identification devices, barcode printing and related services. POS and payments solutions include POS systems, integrated POS software platforms, self-service kiosks including self-checkout, payment terminals and mobile payment devices. Security solutions include video surveillance and analytics, video management software and access control. Networking solutions include switching, routing and wireless products and software. The Company has business operations within this segment in the United States, Canada and Brazil.

Modern Communications & Cloud Segment

The Modern Communications & Cloud segment includes the Company’s business in communications and collaboration, connectivity and cloud services. Communications and collaboration solutions, delivered in the cloud, on-premise or hybrid, include voice, video, integration of communication platforms and contact center solutions. The Intelisys connectivity and cloud marketplace offers telecom, cable, Unified Communications as a Service (“UCaaS”), Contact Center as a Service (“CCaaS”), Infrastructure as a Service, Software-Defined Wide-Area Network and other cloud services. This segment includes SaaS and subscription services, which the Company offers using digital tools and platforms. The Company has business operations within this segment in the United States, Canada, Brazil and the UK.

Selected financial information for each business segment is presented below:

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		Quarter ended				Six months ended					Quarter ended
		December 31,				December 31,					September 30,
		2022		2021		2022		2021			2023		2022
		(in thousands)									(in thousands)
Sales:	Sales:									Sales:
Specialty Technology Solutions	Specialty Technology Solutions	$	627,548	$	496,920	$	1,203,878	$	998,630	Specialty Technology Solutions	$	509,570	$	576,329
Modern Communications & Cloud	Modern Communications & Cloud	383,693		367,159		751,176		723,032		Modern Communications & Cloud	366,735		367,484
		$	1,011,241	$	864,079	$	1,955,054	$	1,721,662		$	876,305	$	943,813
Depreciation and amortization:	Depreciation and amortization:									Depreciation and amortization:
Specialty Technology Solutions	Specialty Technology Solutions	$	2,758	$	2,897	$	5,462	$	5,867	Specialty Technology Solutions	$	2,756	$	2,702
Modern Communications & Cloud	Modern Communications & Cloud	3,738		3,613		7,385		7,574		Modern Communications & Cloud	3,741		3,649
Corporate	Corporate	561		719		1,438		1,438		Corporate	720		877
		$	7,057	$	7,229	$	14,285	$	14,879		$	7,217	$	7,228
Operating income (loss):	Operating income (loss):									Operating income (loss):
Specialty Technology Solutions	Specialty Technology Solutions	$	19,682	$	16,551	$	41,534	$	30,655	Specialty Technology Solutions	$	11,872	$	21,852
Modern Communications & Cloud	Modern Communications & Cloud	19,750		14,894		32,785		31,201		Modern Communications & Cloud	12,413		13,036
Corporate	Corporate	—		53		—		(30)		Corporate	(201)		—
		$	39,432	$	31,498	$	74,319	$	61,826		$	24,084	$	34,888
Capital expenditures:	Capital expenditures:									Capital expenditures:
Specialty Technology Solutions	Specialty Technology Solutions	$	(524)	$	(318)	$	(1,026)	$	(435)	Specialty Technology Solutions	$	(1,261)	$	(195)
Modern Communications & Cloud	Modern Communications & Cloud	(1,980)		(1,236)		(3,236)		(2,210)		Modern Communications & Cloud	(1,054)		(489)

		$	(2,504)	$	(1,554)	$	(4,262)	$	(2,645)		$	(2,315)	$	(684)
Sales by Geography Category:	Sales by Geography Category:									Sales by Geography Category:
United States and Canada	United States and Canada	$	911,033	$	774,301	$	1,772,637	$	1,546,215	United States and Canada	$	792,464	$	861,602
International	International	102,020		90,419		186,294		178,231		International	85,305		84,275
Less intercompany sales	Less intercompany sales	(1,812)		(641)		(3,877)		(2,784)		Less intercompany sales	(1,464)		(2,064)
		$	1,011,241	$	864,079	$	1,955,054	$	1,721,662		$	876,305	$	943,813


		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023
		(in thousands)					(in thousands)
Assets:	Assets:					Assets:
Specialty Technology Solutions	Specialty Technology Solutions	$	1,181,810	$	1,030,538	Specialty Technology Solutions	$	1,016,749	$	1,104,103
Modern Communications & Cloud	Modern Communications & Cloud	948,719		906,890		Modern Communications & Cloud	881,786		964,066
Corporate	Corporate	—		—		Corporate	—		—

		$	2,130,529	$	1,937,428		$	1,898,535	$	2,068,169
Property and equipment, net by Geography Category:	Property and equipment, net by Geography Category:					Property and equipment, net by Geography Category:
United States and Canada	United States and Canada	$	29,590	$	32,715	United States and Canada	$	26,023	$	27,323
International	International	7,003		4,762		International	10,722		10,056
		$	36,593	$	37,477		$	36,745	$	37,379

(11) Leases

In accordance with Accounting Standards Codification ("ASC") 842, at contract inception the Company determines if a contract contains a lease by assessing whether the contract contains an identified asset and whether the Company has the ability to control the asset. The Company also determines if the lease meets the classification criteria for an operating lease versus a finance lease under ASC 842. Substantially all of the Company's leases are operating leases for real estate, warehouse and office equipment ranging in duration from 1 year to 10 years. The Company has elected not to record short-term operating

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leases with an initial term of 12 months or less on the Condensed Consolidated Balance Sheets. Operating leases are recorded as other non-current assets, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company has finance leases for information technology equipment expiring through fiscal year 2027. Finance leases are recorded as property and equipment, net, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The gross amount of the balances recorded related to finance leases is immaterial to the condensed consolidated financial statements at ~~December 31, 2022~~September 30, 2023 and the consolidated financial statements at June 30, ~~2022.~~2023.

Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the net present value of future minimum lease payments over the lease term. The Company generally is not able to determine the rate implicit in its leases and has elected to apply an incremental borrowing rate as the discount rate for the present value determination, which is based on the Company's cost of borrowings for the relevant terms of each lease and geographical economic factors. Certain operating lease agreements contain options to extend or terminate the lease. The lease term used is adjusted for these options when the Company is reasonably certain it will exercise the option. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments not based on a rate or index, such as costs for common area maintenance, are expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable.

The following table presents amounts recorded on the Condensed Consolidated Balance Sheets related to operating leases at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022:~~2023:


			December 31, 2022		June 30, 2022				September 30, 2023		June 30, 2023
Operating leases	Operating leases	Balance Sheet location	(in thousands)				Operating leases	Balance Sheet location	(in thousands)
Operating lease right-of-use assets	Operating lease right-of-use assets	Other non-current assets	$	14,247	$	16,217	Operating lease right-of-use assets	Other non-current assets	$	11,775	$	12,539
Current operating lease liabilities	Current operating lease liabilities	Accrued expenses and other current liabilities	$	4,541	$	4,499	Current operating lease liabilities	Accrued expenses and other current liabilities	$	4,270	$	4,355
Long-term operating lease liabilities	Long-term operating lease liabilities	Other long-term liabilities	$	10,880	$	13,085	Long-term operating lease liabilities	Other long-term liabilities	$	8,569	$	9,329

The following table presents amounts recorded in operating lease expense as part of selling general and administrative expenses on the Condensed Consolidated Income Statements during the ~~quarters~~quarter ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021.~~2022. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less.


		Quarter ended December 31,				Six months ended December 31,					Quarter ended September 30,
		2022		2021		2022		2021			2023		2022
		(in thousands)									(in thousands)
Operating lease cost	Operating lease cost	$	1,291	$	1,268	$	2,577	$	2,512	Operating lease cost	$	1,209	$	1,286
Variable lease cost	Variable lease cost	419		328		763		650		Variable lease cost	383		344
		$	1,710	$	1,596	$	3,340	$	3,162		$	1,592	$	1,630

Supplemental cash flow information related to the Company's operating leases for the ~~six~~three months ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~ are presented in the table below:


		Six months ended						Quarter ended
		December 31,						September 30,
			2022		2021				2023		2022
		(in thousands)						(in thousands)
Cash paid for amounts in the measurement of lease liabilities	Cash paid for amounts in the measurement of lease liabilities		$	2,697	$	2,652	Cash paid for amounts in the measurement of lease liabilities		$	1,412	$	1,339
Right-of-use assets obtained in exchange for lease obligations	Right-of-use assets obtained in exchange for lease obligations		286		1,782		Right-of-use assets obtained in exchange for lease obligations		230		111

The weighted-average remaining lease term and discount rate at ~~December 31, 2022~~September 30, 2023 are presented in the table below:

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	~~December 31, 2022~~September 30, 2023
Weighted-average remaining lease term	~~3.96~~3.41 years
Weighted-average discount rate	~~3.98~~4.58	%

The following table presents the maturities of the Company's operating lease liabilities at ~~December 31, 2022:~~September 30, 2023:


		Operating leases			Operating leases
		(in thousands)			(in thousands)
2023		$	2,663
2024	2024	4,546		2024	$	3,769
2025	2025	3,417		2025	3,677
2026	2026	2,878		2026	3,096
2027	2027	2,597		2027	2,678
2028				2028	632
Thereafter	Thereafter	632		Thereafter	—
Total future payments	Total future payments	16,733		Total future payments	13,852
Less: amounts representing interest	Less: amounts representing interest	1,312		Less: amounts representing interest	1,013
Present value of lease payments	Present value of lease payments	$	15,421	Present value of lease payments	$	12,839

(12) Commitments and Contingencies

The Company ~~and its subsidiaries are,~~is, from time to time, ~~parties~~party to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

During the Company's due diligence for the Network1 acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company recorded indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as the funds were escrowed as part of the acquisition. The amount available after the impact of foreign currency translation for future pre-acquisition contingency settlements or to be released to the sellers was ~~$3.0 million and $4.1~~$3.4 million at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022, respectively.~~2023.

The table below summarizes the balances and line item presentation of Network1's pre-acquisition contingencies and corresponding indemnification receivables in the Company's Condensed Consolidated Balance Sheets at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022:~~2023:


		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023
		Network1					Network1
		(in thousands)					(in thousands)
Assets	Assets					Assets
Prepaid expenses and other current assets	Prepaid expenses and other current assets	$	15	$	15	Prepaid expenses and other current assets	$	16	$	16
Other non-current assets	Other non-current assets	$	3,833	$	3,818	Other non-current assets	$	3,994	$	4,150
Liabilities	Liabilities					Liabilities
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	$	15	$	15	Accrued expenses and other current liabilities	$	16	$	16
Other long-term liabilities	Other long-term liabilities	$	3,833	$	3,818	Other long-term liabilities	$	3,994	$	4,150

(13) Income Taxes

Income taxes for the quarters ended September 30, 2023 and ~~six months ended December 31,~~ 2022 ~~and 2021~~ have been included in the accompanying condensed consolidated financial statements using an estimated annual effective tax rate. In addition to applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall tax provision. During the quarter ended ~~December 31, 2022, there were no material~~September 30, 2023, a discrete ~~items. For~~net tax benefit of $1.5 million was recorded for additional foreign tax credits permitted for the ~~six months~~2023 fiscal year as a result of the issuance of IRS Notice 2023-55. During the quarter ended ~~December 31,~~September 30, 2022, a discrete net tax benefit of ~~$0.7~~$0.5 million was recorded, which is primarily attributable to a notional interest deduction on the net equity of the Company's Brazilian subsidiary.

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The Company’s effective tax rate of ~~28.9% and 27.3%~~19.4% for the quarter ~~and six months~~ ended ~~December 31, 2022,~~September 30, 2023, differs from the current federal statutory rate of 21% primarily as a result of income derived from tax jurisdictions with varying income tax rates, nondeductible expenses, ~~and~~ state income ~~taxes.~~taxes, and discrete items. The Company's effective tax rate was ~~23.9% and 24.4%~~25.5% for the quarter ~~and six months~~ ended ~~December 31, 2021.~~September 30, 2022.

As of ~~December 31, 2022,~~September 30, 2023, the Company is not permanently reinvested with respect to all earnings generated by foreign operations. The Company has determined that there is no material deferred tax liability for federal, state and withholding tax related to undistributed earnings. During the quarter ended ~~December 31, 2022,~~September 30, 2023, foreign subsidiaries ~~repatriated~~did not repatriate cash ~~of $9.1 million~~ to the United States. There is no certainty to the timing of any future distributions of such earnings to the U.S. in whole or in part.

The Company had approximately ~~$1.1~~$1.2 million of total gross unrecognized tax benefits at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022.~~2023. Of this total at ~~December 31, 2022,~~September 30, 2023, approximately ~~$0.9~~$1 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, the Company had approximately $1.2 million accrued for interest and penalties.

The Company conducts business globally and one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to federal, state and local or non-U.S. income tax examinations by tax authorities for the years before June 30, ~~2017.~~2018.

~~(14) Discontinued Operations~~

On August 20, 2019, the Company announced plans to divest the product distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and the Miami-based export operations ("Divestitures") as these businesses were performing below management's expectations. The Company continues to operate its digital business in these countries. ~~Management determined that the Company did not have sufficient scale in these markets~~ to maximize the value-added model for product distribution, leading the Company to focus and invest in its higher-growth, higher-margin businesses. Results from the Divestitures were included within each reportable segment, which includes the Specialty Technology Solutions and Modern Communications & Cloud segments.

~~The Company signed an agreement on July 23, 2020 with Intcomex for its businesses located in Latin America, outside of Brazil. The Company finalized the sale of the Latin America businesses on~~ ~~October 30, 2020. The Company also finalized the sale of the Europe and UK business on November 12, 2020. Total cash received for the sale of divestitures was $37.5 million.~~

There were no components of net income or loss from discontinued operations for the quarter and six months ended December 31, 2022. During the quarter and six months ended December 31, 2021, the Company recognized a gain from the sale of discontinued operations of $0.1 million.

~~There were no assets or liabilities classified as held-for-sale in the accompanying consolidated balance sheets at December 31, 2022 and June 30, 2022.~~

~~There were no cash flows from discontinued operations for the~~ ~~six~~ ~~months ended~~ ~~December 31, 2022 and 2021.~~

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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 ~~partners~~customers 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, unified communications, ~~and~~ collaboration, connectivity and cloud services to our approximately 30,000 ~~sales partners~~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 ~~solutions and~~ services ~~through channel partners~~from leading technology suppliers to ~~end-customers.~~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 ~~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 HP, 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 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 ~~partners,~~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 ~~sales partners~~customers that solve ~~end-customers’~~end users’ challenges. ScanSource enables ~~sales partners~~customers to deliver solutions for their ~~customers~~end users 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~~customers access to additional services. As a trusted adviser to our ~~sales partners,~~customers, we provide ~~customized~~ solutions through our strong understanding of ~~end-customer~~end user needs.

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Results of Operations

Net Sales

We have two reportable segments, which are based on ~~technology.~~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 ~~six months ended December 31, 2022 and 2021:~~2022:


		Quarter ended December 31,								% Change, Constant Currency, Excluding Divestitures and Acquisitions (a)			Quarter ended September 30,								% Change, Constant Currency, Excluding Divestitures and Acquisitions (a)
Net Sales by Segment:	Net Sales by Segment:	2022		2021		$ Change		% Change				Net Sales by Segment:	2023		2022		$ Change		% Change
		(in thousands)											(in thousands)
Specialty Technology Solutions	Specialty Technology Solutions	$	627,548	$	496,920	$	130,628	26.3	%	26.1	%	Specialty Technology Solutions	$	509,570	$	576,329	$	(66,759)	(11.6)	%	(11.7)	%
Modern Communications & Cloud	Modern Communications & Cloud	383,693		367,159		16,534		4.5	%	3.3	%	Modern Communications & Cloud	366,735		367,484		(749)		(0.2)	%	(1.5)	%
Total net sales	Total net sales	$	1,011,241	$	864,079	$	147,162	17.0	%	16.4	%	Total net sales	$	876,305	$	943,813	$	(67,508)	(7.2)	%	(7.7)	%

		Six months ended December 31,								% Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
		2022		2021		$ Change		% Change
		(in thousands)
Specialty Technology Solutions		$	1,203,878	$	998,630	$	205,248	20.6	%	20.4	%
Modern Communications & Cloud		751,176		723,032		28,144		3.9	%	3.4	%
Total net sales		$	1,955,054	$	1,721,662	$	233,392	13.6	%	13.3	%

(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 ~~and six months~~ ended ~~December 31, 2022,~~September 30, 2023, net sales for the Specialty Technology Solutions segment ~~increased $130.6~~decreased $66.8 million, or ~~26.3%~~11.6%, ~~and $205.2 million, or 20.6%, respectively,~~ compared to the prior-year ~~periods.~~period. Excluding the foreign exchange positive impact, adjusted net sales ~~increased $129.5~~decreased $67.7 million, or ~~26.1%~~11.7% for the quarter ended ~~December 31, 2022 and $204.2 million, or 20.4%, for the six months ended December 31, 2022,~~September 30, 2023, compared to the prior-year ~~periods.~~period. The ~~increase~~decrease in net sales and adjusted net sales ~~for the quarter and six month periods~~ is primarily due to ~~strong growth across technologies~~lower sales volumes in ~~North America.~~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 ~~and six months~~ ended ~~December 31, 2022,~~September 30, 2023, net sales for the Modern Communications & Cloud segment ~~increased $16.5~~decreased $0.7 million, or ~~4.5%~~0.2%, ~~and $28.1 million, or 3.9%, respectively,~~ compared to the prior-year ~~periods.~~period. Excluding the foreign exchange positive impact, adjusted net sales ~~increased $12.0~~decreased $5.4 million, or ~~3.3%~~1.5%, for the quarter ended ~~December 31, 2022 and $24.3 million, or 3.4%, for the six months ended December 31, 2022,~~September 30, 2023, compared to the prior-year ~~periods.~~period. The ~~increase~~decrease in net sales and adjusted net sales for the quarter ~~and six month periods~~ is primarily due to ~~increased demand for~~lower sales volumes in our ~~Cisco products and~~communications hardware, partially offset by growth in ~~Brazil. For our~~Cisco products. Intelisys ~~business,~~net billings increased to approximately $2.51 billion annualized, and Intelisys net sales for the ~~second~~ quarter ~~and six month period of fiscal year~~ended September 30, 2023 increased ~~9.2% and 8.1%, respectively,~~8.8% year-over-year.

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		Quarter ended December 31,								% Change, Constant Currency, Excluding Divestitures and Acquisitions (a)			Quarter ended September 30,								% Change, Constant Currency, Excluding Divestitures and Acquisitions (a)
Net Sales by Geography:	Net Sales by Geography:	2022		2021		$ Change		% Change				Net Sales by Geography:	2023		2022		$ Change		% Change
		(in thousands)											(in thousands)
United States and Canada	United States and Canada	$	909,221	$	773,660	$	135,561	17.5	%	17.5	%	United States and Canada	$	791,000	$	859,538	$	(68,538)	(8.0)	%	(8.0)	%
International	International	102,020		90,419		11,601		12.8	%	6.6	%	International	85,305		84,275		1,030		1.2	%	(5.4)	%
Total net sales	Total net sales	$	1,011,241	$	864,079	$	147,162	17.0	%	16.4	%	Total net sales	$	876,305	$	943,813	$	(67,508)	(7.2)	%	(7.7)	%

		Six months ended December 31,								% Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
		2022		2021		$ Change		% Change
		(in thousands)
United States and Canada		$	1,768,760	$	1,543,431	$	225,329	14.6	%	14.6	%
International		186,294		178,231		8,063		4.5	%	1.7	%
Total net sales		$	1,955,054	$	1,721,662	$	233,392	13.6	%	13.3	%

(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.

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Gross Profit

The following table summarizes our gross profit for the quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021:~~2022:


		Quarter ended December 31,								% of Net Sales December 31,					Quarter ended September 30,								% of Net Sales September 30,
		2022		2021		$ Change		% Change		2022		2021			2023		2022		$ Change		% Change		2023		2022
		(in thousands)													(in thousands)
Specialty Technology Solutions	Specialty Technology Solutions	$	56,732	$	52,048	$	4,684	9.0	%	9.0	%	10.5	%	Specialty Technology Solutions	$	49,183	$	58,404	$	(9,221)	(15.8)	%	9.7	%	10.1	%
Modern Communications & Cloud	Modern Communications & Cloud	58,602		55,605		2,997		5.4	%	15.3	%	15.1	%	Modern Communications & Cloud	57,325		55,081		2,244		4.1	%	15.6	%	15.0	%
Gross profit	Gross profit	$	115,334	$	107,653	$	7,681	7.1	%	11.4	%	12.5	%	Gross profit	$	106,508	$	113,485	$	(6,977)	(6.1)	%	12.2	%	12.0	%

		Six months ended December 31,								% of Net Sales December 31,
		2022		2021		$ Change		% Change		2022		2021
		(in thousands)
Specialty Technology Solutions		$	115,135	$	97,742	$	17,393	17.8	%	9.6	%	9.8	%
Modern Communications & Cloud		113,683		111,483		2,200		2.0	%	15.1	%	15.4	%
Gross profit		$	228,818	$	209,225	$	19,593	9.4	%	11.7	%	12.2	%

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 ~~December 31, 2022,~~September 30, 2023, gross profit dollars for the Specialty Technology Solutions segment ~~increased $4.7~~decreased $9.2 million, or ~~9.0%. Higher~~15.8% compared to the prior year period. Lower sales volume, after considering the associated cost of goods sold, ~~contributed $13.7 million to the growth of~~reduced gross profit ~~dollars.~~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 ~~$9.0~~$2.5 million, largely from decreased vendor program recognition and a less favorable sales ~~mix and decreased vendor program recognition. For the quarter ended December 31, 2022, the gross profit margin decreased 143 basis points over the prior-year to 9.0%.~~

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For the six months ended December 31, 2022, the Specialty Technology Solutions segment achieved gross profit growth of $17.4 million, or 17.8%. Increases in sales volume, after considering the associated cost of goods sold, contributed $20.1 million to the growth of gross profit dollars. Gross margin mix negatively impacted gross profit by $2.7 million, primarily from increased freight costs. For the six months ended December 31, 2022, the gross profit margin decreased 22 basis points over the prior year to 9.6%.mix.

Modern Communications & Cloud

For the quarter ended ~~December 31, 2022,~~September 30, 2023, gross profit dollars for the Modern Communications & Cloud segment ~~gross profit~~ increased ~~by $3.0~~$2.2 million, or ~~5.4%~~4.1%. ~~Higher~~Lower sales volume, after considering the associated cost of goods sold, ~~positively contributed $2.5 million to~~reduced gross profit ~~dollars.~~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 ~~$0.5~~$2.4 million, ~~largely~~ driven by ~~a more favorable sales mix. For the quarter ended December 31, 2022, the gross profit margin increased 13 basis points over the prior year to 15.3%.~~higher vendor program recognition.

For the six months ended December 31, 2022, the Modern Communications & Cloud segment achieved gross profit growth of $2.2 million, or 2.0%. Increases in sales volume, after considering the associated cost of goods sold, contributed $4.3 million to the growth of gross profit dollars. Gross margin mix negatively impacted gross profit by $2.1 million, primarily from increased freight costs. For the six months ended December 31, 2022, the gross profit margin decreased 28 basis points over the prior year to 15.1%.

Operating Expenses

The following table summarizes our operating expenses for the quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021:~~2022:

Quarter ended December 31, % of Net Sales December 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Selling, general and administrative expenses $ 69,074 $ 69,161 $ (87) (0.1) % 6.8 % 8.0 %
Depreciation expense 2,678 2,547 131 5.1 % 0.3 % 0.3 %
Intangible amortization expense 4,150 4,447 (297) (6.7) % 0.4 % 0.5 %
Operating expenses $ 75,902 $ 76,155 $ (253) (0.3) % 7.5 % 8.8 %
Six months ended December 31, % of Net Sales December 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Selling, general and administrative expenses $ 140,667 $ 133,016 $ 7,651 5.8 % 7.2 % 7.7 %
Depreciation expense 5,441 5,427 14 0.3 % 0.3 % 0.3 %
Intangible amortization expense 8,391 8,956 (565) (6.3) % 0.4 % 0.5 %
Operating expenses $ 154,499 $ 147,399 $ 7,100 4.8 % 7.9 % 8.6 %


	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") ~~decreased~~increased by ~~less than $0.1~~$3.8 million, or 5.4%, for the quarter ended December 31, 2022, compared to the prior-year period. The decrease for the quarter ended December 31, 2022 is primarily attributable to a recovery of prior period withholding taxes in Brazil, which reduced SG&A by $2.9 million, partially offset by higher employee costs.

~~For the six months ended December 31, 2022, SG&A expenses increased by $7.7 million, or 5.8%,~~September 30, 2023, compared to the prior-year period. The increase for the ~~six months~~quarter ended ~~December 31, 2022~~September 30, 2023 is primarily attributable to higher ~~employee costs, partially offset by a $2.9 million recovery of prior period withholding taxes~~bad debt expense, due to increases in ~~Brazil.~~specific customer reserves.

Operating Income

The following table summarizes our operating income for the quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021:~~2022:

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		Quarter ended December 31,								% of Net Sales December 31,					Quarter ended September 30,								% of Net Sales September 30,
		2022		2021		$ Change		% Change		2022		2021			2023		2022		$ Change		% Change		2023		2022
		(in thousands)													(in thousands)
Specialty Technology Solutions	Specialty Technology Solutions	$	19,682	$	16,551	$	3,131	18.9	%	3.1	%	3.3	%	Specialty Technology Solutions	$	11,872	$	21,852	$	(9,980)	(45.7)	%	2.3	%	3.8	%
Modern Communications & Cloud	Modern Communications & Cloud	19,750		14,894		4,856		32.6	%	5.1	%	4.1	%	Modern Communications & Cloud	12,413		13,036		(623)		(4.8)	%	3.4	%	3.5	%
Corporate	Corporate	—		53		(53)		nm*		nm*		nm*		Corporate	(201)		—		(201)		nm*		nm*		nm*
Operating income	Operating income	$	39,432	$	31,498	$	7,934	25.2	%	3.9	%	3.6	%	Operating income	$	24,084	$	34,888	$	(10,804)	(31.0)	%	2.7	%	3.7	%

		Six months ended December 31,								% of Net Sales December 31,
		2022		2021		$ Change		% Change		2022		2021
		(in thousands)
Specialty Technology Solutions		$	41,534	$	30,655	$	10,879	35.5	%	3.5	%	3.1	%
Modern Communications & Cloud		32,785		31,201		1,584		5.1	%	4.4	%	4.3	%
Corporate		—		(30)		30		nm*		nm*		nm*
Operating income		$	74,319	$	61,826	$	12,493	20.2	%	3.8	%	3.6	%

*nm - percentages are not meaningful

Specialty Technology Solutions

For the Specialty Technology Solutions segment, operating income ~~increased $3.1~~decreased $10.0 million, ~~and $10.9 million~~or 45.7% for the quarter ~~and six months~~ ended ~~December 31, 2022, respectively,~~September 30, 2023, compared to the prior-year period. Operating margin decreased to ~~3.1%~~2.3% for the quarter ended ~~December 31, 2022. For the six months ended December 31, 2022, operating margin increased to 3.5%.~~September 30, 2023. The ~~increase~~decrease in operating income and margin for the quarter ~~and six month period~~ is primarily due to ~~higher~~lower gross profits.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, operating income ~~increased $4.9 million and $1.6~~decreased $0.6 million for the quarter ~~and six months~~ ended ~~December 31, 2022, respectively,~~September 30, 2023 compared to the prior-year period. Operating margin ~~increased~~decreased to ~~5.1% and 4.4%~~3.4% for the quarter ~~and six months~~ ended ~~December 31, 2022, respectively.~~September 30, 2023. The ~~increase~~decrease in operating income and margin ~~for the quarter and six month period~~ is primarily attributable due to higher ~~gross profits and a $2.9 million recovery of prior period withholding taxes~~bad debt expense, due to increases in ~~Brazil.~~specific customer reserves.

Corporate

~~Corporate recognized no restructuring or divestiture expenses for~~For the quarter ~~and six months~~ ended ~~December 31, 2022, compared to less than $0.1~~September 30, 2023, Corporate operating loss of $0.2 million ~~in the prior-year quarter and six month period.~~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 ~~six months ended December 31, 2022 and 2021:~~2022:

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Quarter ended December 31, % of Net Sales December 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Interest expense $ 5,060 $ 1,493 $ 3,567 238.9 % 0.5 % 0.2 %
Interest income (2,027) (947) (1,080) 114.0 % (0.2) % (0.1) %
Net foreign exchange losses 347 480 (133) (27.7) % 0.0 % 0.1 %
Other, net (140) 63 (203) (322.2) % (0.0) % 0.0 %
Total other expense, net $ 3,240 $ 1,089 $ 2,151 197.5 % 0.3 % 0.1 %
Six months ended December 31, % of Net Sales December 31,
2022 2021 $ Change % Change 2022 2021
(in thousands)
Interest expense $ 8,507 $ 3,153 $ 5,354 169.8 % 0.4 % 0.2 %
Interest income (3,618) (1,973) (1,645) 83.4 % (0.2) % (0.1) %
Net foreign exchange losses 1,270 966 304 31.5 % 0.1 % 0.1 %
Other, net (315) (159) (156) 98.1 % (0.0) % (0.0) %
Total other expense, net $ 5,844 $ 1,987 $ 3,857 194.1 % 0.3 % 0.1 %


	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 ~~and six months~~ ended ~~December 31, 2022~~September 30, 2023 compared to the prior-year periods, primarily from higher ~~borrowings~~interest rates and ~~increases in interest rates~~higher average borrowings on our multi-currency revolving credit facility.

Interest income for the quarter ~~and six months~~ ended ~~December 31, 2022~~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 ~~currency~~ exchange ~~contract~~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 ~~U.S.~~Canadian dollar versus the U.S. dollar, the euro versus the U.S. dollar, and the British pound ~~versus the euro, and the Canadian dollar~~ versus the U.S. dollar. We partially offset foreign currency exposure with the use of

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foreign exchange ~~forward~~ 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 six months~~ ended ~~December 31, 2022,~~September 30, 2023, income tax expense was ~~$10.5 million and $18.7~~$3.7 million reflecting an effective tax rate of ~~28.9% and 27.3%, respectively.~~19.4%. In comparison, for the quarter ~~and six months~~ ended ~~December 31, 2021,~~September 30, 2022, income tax expense was ~~$7.3 million and $14.6~~$8.2 million, reflecting an effective tax rate of ~~23.9% and 24.4%, respectively.~~25.5%. The ~~increase~~decrease in the effective tax rate for the quarter ~~and six months~~ is primarily due to ~~a decrease~~discrete items. A discrete tax benefit of $1.5 million was recognized in ~~forecasted tax exempt income and a decrease in creditable foreign taxes compared~~the September 30, 2023 quarter, primarily attributable to the ~~prior-year quarter.~~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 ~~2023~~2024 to be approximately ~~27.0%~~26.6% to ~~28.0%~~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

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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, ~~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.

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 ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ respectively:

Quarter ended December 31,
2022 2021
Adjusted return on invested capital ratio, annualized (a)
15.6 % 17.6 %


	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:

Quarter ended December 31,
2022 2021
(in thousands)
Reconciliation of net income to adjusted EBITDA:
Net income (GAAP) $ 25,734 $ 23,152
Plus: Interest expense 5,060 1,493
Plus: Income taxes 10,458 7,257
Plus: Depreciation and amortization 7,057 7,229
EBITDA (non-GAAP) 48,309 39,131
Plus: Tax recovery (a)
(2,858) —
Plus: Share-based compensation 3,364 3,464
Plus: Acquisition and divestiture costs (b)
— (53)
Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP) $ 48,815 $ 42,542

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Quarter ended December 31,
2022 2021
(in thousands)
Invested capital calculations:
Equity – beginning of the quarter $ 827,004 $ 746,094
Equity – end of the quarter 862,386 768,525
Plus: Share-based compensation, net 2,496 2,590
Plus: Acquisition and divestiture costs (b)
— (53)
Plus: Tax recovery, net (1,886) —
Plus: Discontinued operations net loss — (100)
Average equity 845,000 758,528
Average funded debt (c)
392,853 200,708
Invested capital (denominator for adjusted ROIC) (non-GAAP) $ 1,237,853 $ 959,236


	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)~~Recovery of prior period withholding taxes in Brazil.~~

~~(b)Acquisition and divestiture costs are generally nondeductible for tax purposes.~~

~~(c)~~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:

Net Sales by Segment:
Quarter ended December 31,
2022 2021 $ Change % Change
Specialty Technology Solutions: (in thousands)
Net sales, reported $ 627,548 $ 496,920 $ 130,628 26.3 %
Foreign exchange impact (a)
(1,120) —
Non-GAAP net sales, constant currency $ 626,428 $ 496,920 $ 129,508 26.1 %
Modern Communications & Cloud:
Net sales, reported $ 383,693 $ 367,159 $ 16,534 4.5 %
Foreign exchange impact (a)
(4,497) —
Non-GAAP net sales, constant currency $ 379,196 $ 367,159 $ 12,037 3.3 %
Consolidated:
Net sales, reported $ 1,011,241 $ 864,079 $ 147,162 17.0 %
Foreign exchange impact (a)
(5,617) —
Non-GAAP net sales, constant currency $ 1,005,624 $ 864,079 $ 141,545 16.4 %

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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 ~~December 31, 2022~~September 30, 2023 into U.S. dollars using the average foreign exchange rates for the quarter ended ~~December 31, 2021.~~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.

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Net Sales by Segment:
Six months ended December 31,
2022 2021 $ Change % Change
Specialty Technology Solutions (in thousands)
Net sales, reported $ 1,203,878 $ 998,630 $ 205,248 20.6 %
Foreign exchange impact (a)
(1,060) —
Non-GAAP net sales, constant currency $ 1,202,818 $ 998,630 $ 204,188 20.4 %
Modern Communications & Cloud
Net sales, reported $ 751,176 $ 723,032 $ 28,144 3.9 %
Foreign exchange impact (a)
(3,884) —
Non-GAAP net sales, constant currency $ 747,292 $ 723,032 $ 24,260 3.4 %
Consolidated:
Net sales, reported $ 1,955,054 $ 1,721,662 $ 233,392 13.6 %
Foreign exchange impact (a)
(4,944) —
Non-GAAP net sales, constant currency $ 1,950,110 $ 1,721,662 $ 228,448 13.3 %
(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, 2022 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2021.

~~Table of Contents~~

Net Sales by Geography:
Quarter ended December 31,
2022 2021 $ Change % Change
United States and Canada: (in thousands)
Net sales, as reported $ 909,221 $ 773,660 $ 135,561 17.5 %
International:
Net sales, reported $ 102,020 $ 90,419 $ 11,601 12.8 %
Foreign exchange impact (a)
(5,617) —
Non-GAAP net sales, constant currency $ 96,403 $ 90,419 $ 5,984 6.6 %
Consolidated:
Net sales, reported $ 1,011,241 $ 864,079 $ 147,162 17.0 %
Foreign exchange impact (a)
(5,617) —
Non-GAAP net sales, constant currency $ 1,005,624 $ 864,079 $ 141,545 16.4 %
(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 quarter ended December 31, 2022 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2021.
Six months ended December 31,
2022 2021 $ Change % Change
United States and Canada: (in thousands)
Net sales, as reported $ 1,768,760 $ 1,543,431 $ 225,329 14.6 %
International:
Net sales, reported $ 186,294 $ 178,231 $ 8,063 4.5 %
Foreign exchange impact (a)
(4,944) —
Non-GAAP net sales, constant currency $ 181,350 $ 178,231 $ 3,119 1.7 %
Consolidated:
Net sales, reported $ 1,955,054 $ 1,721,662 $ 233,392 13.6 %
Foreign exchange impact (a)
(4,944) —
Non-GAAP net sales, constant currency $ 1,950,110 $ 1,721,662 $ 228,448 13.3 %
(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, 2022 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2021.

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Operating Income by Segment:	Operating Income by Segment:													Operating Income by Segment:
		Quarter ended December 31,								% of Net Sales December 31,					Quarter ended September 30,								% of Net Sales September 30,
		2022		2021		$ Change		% Change		2022		2021			2023		2022		$ Change		% Change		2023		2022
Specialty Technology Solutions:	Specialty Technology Solutions:	(in thousands)												Specialty Technology Solutions:	(in thousands)
GAAP operating income	GAAP operating income	$	19,682	$	16,551	$	3,131	18.9	%	3.1	%	3.3	%	GAAP operating income	$	11,872	$	21,852	$	(9,980)	(45.7)	%	2.3	%	3.8	%
Adjustments:	Adjustments:													Adjustments:
Amortization of intangible assets	Amortization of intangible assets	1,266		1,491		(225)								Amortization of intangible assets	1,261		1,341		(80)

Non-GAAP operating income	Non-GAAP operating income	$	20,948	$	18,042	$	2,906	16.1	%	3.3	%	3.6	%	Non-GAAP operating income	$	13,133	$	23,193	$	(10,060)	(43.4)	%	2.6	%	4.0	%

Modern Communications & Cloud:	Modern Communications & Cloud:													Modern Communications & Cloud:
GAAP operating income	GAAP operating income	$	19,750	$	14,894	$	4,856	32.6	%	5.1	%	4.1	%	GAAP operating income	$	12,413	$	13,036	$	(623)	(4.8)	%	3.4	%	3.5	%
Adjustments:	Adjustments:													Adjustments:
Amortization of intangible assets	Amortization of intangible assets	2,884		2,956		(72)								Amortization of intangible assets	2,932		2,900		32

Tax recovery (a)		(2,858)		—		(2,858)

Non-GAAP operating income	Non-GAAP operating income	$	19,776	$	17,850	$	1,926	10.8	%	5.2	%	4.9	%	Non-GAAP operating income	$	15,345	$	15,936	$	(591)	(3.7)	%	4.2	%	4.3	%

Corporate:	Corporate:													Corporate:
GAAP operating loss	GAAP operating loss	$	—	$	53	$	(53)	nm*		nm*		nm*		GAAP operating loss	$	(201)	$	—	$	(201)	nm*		nm*		nm*
Adjustments:	Adjustments:													Adjustments:
Acquisition and divestiture costs		—		(53)		53

Cyberattack restoration costs														Cyberattack restoration costs	201		—		201

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

Consolidated:	Consolidated:													Consolidated:
GAAP operating income	GAAP operating income	$	39,432	$	31,498	$	7,934	25.2	%	3.9	%	3.6	%	GAAP operating income	$	24,084	$	34,888	$	(10,804)	(31.0)	%	2.7	%	3.7	%
Adjustments:	Adjustments:													Adjustments:
Amortization of intangible assets	Amortization of intangible assets	4,150		4,447		(297)								Amortization of intangible assets	4,193		4,241		(48)
Cyberattack restoration costs														Cyberattack restoration costs	201		—		201

Tax recovery (a)		(2,858)		—		(2,858)
Acquisition and divestiture costs		—		(53)		53

Non-GAAP operating income	Non-GAAP operating income	$	40,724	$	35,892	$	4,832	13.5	%	4.0	%	4.2	%	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

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Operating Income by Segment:
Six months ended December 31, % of Net Sales December 31,
2022 2021 $ Change % Change 2022 2021
Specialty Technology Solutions: (in thousands)
GAAP operating income $ 41,534 $ 30,655 $ 10,879 35.5 % 3.5 % 3.1 %
Adjustments:
Amortization of intangible assets 2,608 3,023 (415)
Non-GAAP operating income $ 44,142 $ 33,678 $ 10,464 31.1 % 3.7 % 3.4 %
Modern Communications & Cloud:
GAAP operating income $ 32,785 $ 31,201 $ 1,584 5.1 % 4.4 % 4.3 %
Adjustments:
Amortization of intangible assets 5,783 5,933 (150)
Tax recovery (a)
(2,858) — (2,858)
Non-GAAP operating income $ 35,710 $ 37,134 $ (1,424) (3.8) % 4.8 % 5.1 %
Corporate:
GAAP operating loss $ — $ (30) $ 30 nm* nm* nm*
Adjustments:
Acquisition and divestiture costs — 30 (30)
Non-GAAP operating income $ — $ — $ — nm* nm* nm*
Consolidated:
GAAP operating income $ 74,319 $ 61,826 $ 12,493 20.2 % 3.8 % 3.6 %
Adjustments:
Amortization of intangible assets 8,391 8,956 (565)
Tax recovery (a)
(2,858) — (2,858)
Acquisition and divestiture costs — 30 (30)
Non-GAAP operating income 79,852 70,812 $ 9,040 12.8 % 4.1 % 4.1 %

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

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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, ~~changes in fair value of contingent consideration, acquisition and divestiture~~cyberattack restoration costs ~~restructuring costs, impact of Divestitures~~ 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:

Quarter ended December 31, 2022
GAAP Measure Intangible amortization expense Acquisition and divestiture costs
Tax recovery(a)
Non-GAAP measure
(in thousands, except per share data)
SG&A expenses $ 69,074 $ — $ — $ 2,858 $ 71,932
Operating income 39,432 4,150 — (2,858) 40,724
Pre-tax income 36,192 4,150 — (2,858) 37,484
Net income 25,734 3,093 — (1,886) 26,941
Diluted EPS $ 1.01 $ 0.12 $ — $ (0.07) $ 1.06
Quarter ended December 31, 2021
GAAP Measure Intangible amortization expense Acquisition and divestiture costs Tax recovery Non-GAAP measure
(in thousands, except per share data)
SG&A expenses $ 69,161 $ — $ 53 $ — $ 69,214
Operating income 31,498 4,447 (53) — 35,892
Pre-tax income 30,409 4,447 (53) — 34,803
Net income 23,152 3,347 (53) — 26,446
Diluted EPS $ 0.89 $ 0.13 $ — $ — $ 1.02
~~(a)Recovery of prior period withholding taxes in Brazil~~

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		Six months ended December 31, 2022								Quarter ended September 30, 2023
		GAAP Measure		Intangible amortization expense		Acquisition and divestiture costs		Tax recovery(a)			Non-GAAP measure			GAAP Measure	Intangible amortization expense	Cyberattack restoration costs	Non-GAAP measure
		(in thousands, except per share data)								(in thousands, except per share data)
SG&A expenses	SG&A expenses	$	140,667	$	—	$	—	$	2,858		$	143,525	SG&A expenses	$75,436	—	$(201)	$75,235
Operating income	Operating income	74,319		8,391		—		(2,858)			79,852		Operating income	24,084	4,193	201	28,478
Pre-tax income	Pre-tax income	68,475		8,391		—		(2,858)			74,008		Pre-tax income	19,147	4,193	201	23,541
Net income	Net income	49,776		6,254		—		(1,886)			54,144		Net income	15,432	3,146	150	18,728
Diluted EPS	Diluted EPS	$	1.96	$	0.25	$	—	$	(0.07)		$	2.13	Diluted EPS	$0.61	$0.12	$0.01	$0.74

		Six months ended December 31, 2021								Quarter ended September 30, 2022
		GAAP Measure		Intangible amortization expense		Acquisition and divestiture costs		Tax recovery			Non-GAAP measure			GAAP Measure	Intangible amortization expense	Cyberattack restoration costs	Non-GAAP measure
		(in thousands, except per share data)								(in thousands, except per share data)
SG&A expenses	SG&A expenses	$	133,016	$	—	$	(30)	$	—		$	132,986	SG&A expenses	$71,593	—	—	$71,593
Operating income	Operating income	61,826		8,956		30		—			70,812		Operating income	34,888	4,241	—	39,129
Pre-tax income	Pre-tax income	59,839		8,956		30		—			68,825		Pre-tax income	32,283	4,241	—	36,524
Net income	Net income	45,225		6,740		30		—			51,995		Net income	24,042	3,161	—	27,203
Diluted EPS	Diluted EPS	$	1.75	$	0.26	$	—	$	—		$	2.01	Diluted EPS	$0.94	$0.12	—	$1.07

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

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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 ~~volumes increase,~~volume increases, our net investment in working capital increases, which typically results in decreased cash flow from operating activities. Conversely, when sales ~~volumes decrease,~~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 ~~$66.4~~$42.6 million at ~~December 31, 2022,~~September 30, 2023, compared to ~~$38.0~~$36.2 million at June 30, ~~2022,~~2023, including ~~$44.3~~$31.3 million and ~~$35.0~~$31.0 million held outside of the United States at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, respectively. Checks released but not yet cleared in the amounts of ~~$8.9~~$10.3 million and ~~$18.0~~$8.0 million are included in accounts payable at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, respectively.

We conduct business in ~~many locations throughout~~North America, Brazil, and the ~~world~~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 $172.8~~decreased $63.9 million to ~~$882.3~~$806.4 million at ~~December 31, 2022~~September 30, 2023 from ~~$709.5~~$870.3 million at June 30, ~~2022,~~2023, primarily from ~~increases~~decreases in ~~accounts receivable~~inventory attributable to lower sales volume and ~~inventory.~~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 six months ended December 31, 2022, our working capital investment increased to support our 13.6% year-over-year net sales growth.~~

Six months ended
December 31,
2022 2021
(in thousands)
Cash (used in) provided by:
Operating activities $ (75,346) $ (75,378)
Investing activities (4,262) 480
Financing activities 108,029 51,365

Net cash used in operating activities was $75.3 million for the six months ended December 31, 2022, compared to $75.4 million used in operating activities in the prior-year period. Cash used in operating activities for the six months ended December 31, 2022 is attributable to increases in inventory and accounts receivable, which increased 24% and 7%, respectively, compared to the beginning of the six month period. Cash used in operating activities for the six months ended ~~December 31, 2021 is primarily attributable to increases in inventory and accounts receivable, which increased 20% and 8%, respectively, compared to the beginning of the~~ ~~six~~ ~~month period.~~


	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

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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 6971 days at ~~December 31, 2022,~~September 30, 2023, compared to 6872 days at June 30, ~~2022~~2023 and 6471 days at December 31, 2021. The increase in DSO for the quarter ended December 31, 2022 is primarily due to increased net receivables, driven by project specific customer terms and timing of sales near the end of the reporting period.September 30, 2022. Inventory turned ~~5.0~~4.4 times during the quarter ended ~~December 31, 2022, compared to 5.1 times~~September 30, 2023, unchanged for ~~previous~~the quarter ended ~~September~~June 30, ~~2022~~2023 and ~~5.7~~5.1 times in the prior-year quarter ended ~~December 31, 2021. The decrease in inventory turns for the quarter ended December 31, 2022 is primarily due to increased average inventory.~~September 30, 2022.

Cash used in investing activities for the ~~six months~~quarter ended ~~December 31, 2022~~September 30, 2023 was ~~$4.3~~$2.3 million, compared to ~~$0.5~~$0.7 million ~~provided by~~used in investing activities in the prior-year ~~period.~~quarter. Cash used in investing activities for the ~~six months~~quarter ended ~~December 31, 2022 represents capital expenditures, primarily for IT investments. Cash provided by investing activities for the six months ended~~September 30, 2023 and ~~December 31, 2021~~2022 represents ~~proceeds from the sale of our discontinued operations, partially offset by~~ capital expenditures.

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Management expects capital expenditures for fiscal year ~~2023~~2024 to range from ~~$6.5~~$6.0 million to ~~$9.0~~$8.0 million, primarily for IT investments and facility improvements.

For the ~~six months~~quarter ended ~~December 31, 2022,~~September 30, 2023, cash ~~provided by~~used in financing activities totaled ~~$108.0~~$83.5 million, compared to ~~$51.4~~$53.0 million provided by financing activities for the prior-year ~~period.~~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 ~~six months~~quarter ended ~~December 31,~~September 30, 2022 ~~and~~ ~~2021~~ 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, ~~shall~~ bear interest at a rate per annum equal to, at our option, (i) the adjusted ~~Term~~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 ~~shall~~ bear interest based upon the adjusted daily simple SOFR ~~floating daily,~~ 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 ~~shall~~ bear interest at a rate per annum equal to the applicable benchmark rate set forth in the ~~New~~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 six months~~ ended ~~December 31, 2022,~~September 30, 2023, our borrowings under the credit facility were U.S. dollar loans. The spread in effect as of ~~December 31, 2022~~September 30, 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 ~~December 31, 2022~~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

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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, 2022.~~September 30, 2023.

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the ~~six month periods~~quarters ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~ was ~~$219.5~~$200.9 million and ~~$57.1~~$200.5 million, respectively. There was ~~$120.0~~$251.9 million and ~~$214.2~~$171.0 million available for additional borrowings as of ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~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 ~~December 31, 2022~~September 30, 2023 or June 30, ~~2022.~~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 ~~December 31, 2022,~~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

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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, ~~2022~~2023 for a complete discussion.

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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, ~~2022.~~2023. No material changes have occurred to our market risks since June 30, ~~2022.~~2023.

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Item 4.			Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the effectiveness of our disclosure controls and procedures at ~~December 31, 2022.~~September 30, 2023. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective at ~~December 31, 2022.~~September 30, 2023. During the quarter ended ~~December 31, 2022,~~September 30, 2023, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.			Legal Proceedings

The Company ~~and our subsidiaries are,~~is, from time to time, ~~parties~~party to lawsuits arising out of operations. Although there can be no assurance, based upon information known to us, we believe that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on our financial condition or results of operations. For a description of our material legal proceedings, see Note 12 - Commitments and Contingencies in the notes to the condensed consolidated financial statements, which is incorporated herein by reference.


Item 1A.			Risk Factors

In addition to the risk factors discussed in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, ~~2022,~~2023, which could materially affect our business, financial condition and/or future operating results.

There have been no material changes to the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.


Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds

~~Purchases of Equity Securities by the Issuer~~

~~The following table presents the share-repurchase activity for the quarter ended December 31, 2022:~~

Period
Total number of shares purchased (1)
Average price paid per share Total number of shares purchased as part of the publicly announced plan or program Approximate dollar value of shares that may yet be purchased under the plan or program
October 1 - 31, 2022 2,177 $ 26.41 — $ 81,814,854
November 1 - 30, 2022 52,230 $ 32.05 — $ 81,814,854
December 1 - 31, 2022 134 $ 30.70 — $ 81,814,854
Total 54,541 —

~~(1)~~ ~~Includes 54,541 shares withheld from employees' stock-based awards to satisfy required tax withholding obligations for the months of October through December 2022.~~Share Repurchases

In August 2021, our Board of Directors authorized a $100 million share repurchase program. The authorization does not have any time limit.

The following table presents the share-repurchase activity for the quarter ended September 30, 2023 (in thousands except share and per share data):


Period	Total number of shares purchased (1)	Average price paid per share	Total number of shares purchased as part of the publicly announced plan or program	Approximate dollar value of shares that may yet be purchased under the plan or program

July 1 - 31, 2023	—	—	—	$ 66,157,077
August 1 - 31, 2023	50,305	$ 31.52	—	$ 66,157,077
September 1 - 30, 2023	—	—	—	$ 66,157,077
Total	50,305		—

(1) Includes 50,305 shares withheld from employees' stock-based awards to satisfy required tax withholding obligations for the month of August 2023. There were no shares withheld during the months of July and September 2023.

Dividends

We have never declared or paid a cash dividend. Under the terms of our credit facility, the payment of cash dividends is restricted.

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Item 5.			Other Information

During the three months ended September 30, 2023, none of the Company, our directors or our officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933), except as follows:

On September 2, 2023, Michael Baur, our Chief Executive Officer and Chair of the Board of Directors, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) and that provides for the sale of up to 427,001 shares of our common stock under Rule 144. The duration of such trading arrangement will be until November 20, 2024 (or earlier if all transactions under the trading arrangement had been completed or certain other events occurred).

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Item 6.			Exhibits


Exhibit Number			Description

10.1			Amendment No. 20 to Cisco Nonexclusive Value Added Distributor Agreement

10.2			Amendment No. 21 to Cisco Nonexclusive Value Added Distributor Agreement

10.3			Separation Agreement and General Release, dated as of September 22, 2023, by and between the Company and John Eldh (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on September 26, 2023, File No. 000-26926)

31.1			Certification of the Chief Executive Officer, Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			Certification of the Chief Financial Officer, Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of the Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2			Certification of the Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1			Compensation Recovery Policy

101			The following materials from our Quarterly Report on Form 10-Q for the quarter ended ~~December 31, 2022,~~September 30, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022;~~2023; (ii) the Condensed Consolidated Income Statements for the quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021;~~2022; (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income for the quarters ended September 30, 2023 and ~~six months ended December 31, 2022 and 2021;~~2022; (iv) the Condensed Consolidated Statements of Shareholder's Equity at ~~December 31, 2022~~September 30, 2023 and ~~2021;~~2022; (v) the Condensed Consolidated Statements of Cash Flows for the ~~six months~~quarters ended ~~December 31, 2022~~September 30, 2023 and ~~2021;~~2022; and (vi) the Notes to the Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL

104			Cover page Inline XBRL File (Included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		ScanSource, Inc.

Date:	~~February 7,~~November 9, 2023	/s/ MICHAEL L. BAUR
		Michael L. Baur
		Chairman and Chief Executive Officer (Principal Executive Officer)


Date:	~~February 7,~~November 9, 2023	/s/ STEVE JONES
		Steve Jones
		Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)


Date:	November 9, 2023	/s/ BRANDY FORD
		Brandy Ford
		Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

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