SCANSOURCE, INC. (SCSC) FY 2022 MD&A

ITEM 7.    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 across hardware, SaaS, connectivity and cloud. We provide technology solutions and services from more than 500 leading suppliers of mobility and barcode, POS and payments, physical security and networking, communications and collaboration, connectivity and cloud services to our approximately 30,000 sales partners located in the United States, Canada, Brazil, the UK and Europe.

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 to end-customers. 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, 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 leveraging our people, processes and tools. Our goal is to provide exceptional experiences for our partners, suppliers and employees, and we strive for operational excellence. Our hybrid distribution strategy relies on a channel sales model to offer hardware, SaaS, connectivity and cloud services from leading technology suppliers to sales partners that solve end-customers’ challenges. ScanSource enables sales partners to deliver solutions for their customers to address changing end-customer buying and consumption patterns. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services. As a trusted adviser to our sales partners, we provide customized solutions through our strong understanding of end-customer needs.

Results of Operations from Continuing Operations

The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales. Totals may not sum due to rounding.

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Comparison of Fiscal Years Ended June 30, 2022, 2021 and 2020

Below is a discussion of fiscal years ended June 30, 2022, 2021 and 2020.

Net Sales

Fiscal year 2022 compared to fiscal year 2021

We have two reportable segments, which are based on technology. The following table summarizes our net sales results by business segment and by geographic location for the comparable fiscal years ended June 30, 2022 and 2021.

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Specialty Technology Solutions

The Specialty Technology Solutions segment consists of sales to customers in North America and Brazil. During fiscal year 2022, net sales for this segment increased $266.4 million, or 14.7%, compared to fiscal year 2021. Excluding the foreign exchange positive impact of $1.7 million, adjusted net sales for fiscal year 2022 increased $264.7 million, or 14.6%, compared to the prior year. The increase in net sales and in adjusted net sales is primarily due to increased broad-based demand across our technologies.

Modern Communications & Cloud

The Modern Communications & Cloud segment consists of sales to customers in North America, Brazil, Europe and the UK. During fiscal year 2022, net sales for this segment increased $112.7 million, or 8.4%, compared to fiscal year 2021. Excluding the foreign exchange positive impact of $7.1 million, adjusted net sales increased $105.6 million, or 7.9%, compared to the prior year. The increase in net sales and adjusted net sales is primarily due to increased demand across our communications solutions.

Intelisys connectivity and cloud net sales for fiscal year 2022 increased 14.4% year-over-year. For our Intelisys business, net sales reflect the net commissions received from suppliers after paying sales partner commissions. For fiscal year 2022, Intelisys net billings, which are amounts billed by suppliers to end users and represents annual recurring revenue, totaled approximately $2.25 billion. The fiscal year 2022 Intelisys net billings resulted in Intelisys net sales of approximately $74.3 million.

Fiscal year 2021 compared to fiscal year 2020

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Specialty Technology Solutions

During fiscal year 2021, net sales for this segment increased $235.5 million, or 14.9%, compared to fiscal year 2020. Excluding the foreign exchange negative impact of $19.3 million, adjusted net sales for fiscal year 2021 increased $254.8 million, or 16.1%, compared to the prior year. The increase in net sales and in adjusted net sales is primarily due to higher sales volume across our technologies in North America.

Modern Communications & Cloud

During fiscal year 2021, net sales for this segment decreased $132.4 million, or 9.0%, compared to fiscal year 2020. Excluding the foreign exchange negative impact of $46.5 million, adjusted net sales decreased $86.0 million, or 5.9%, compared to the prior year. The decrease in net sales and adjusted net sales is primarily due to lower sales volume across our communications technologies. Intelisys connectivity and cloud net sales for fiscal year 2021 increased 13.1% year-over-year.

Gross Profit

Fiscal year 2022 compared to fiscal year 2021

The following table summarizes our gross profit for the fiscal years ended June 30, 2022 and 2021:

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.

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Specialty Technology Solutions

For the Specialty Technology Solutions segment, gross profit dollars increased $46.9 million. Higher sales volume, after considering the associated cost of goods sold, contributed $23.3 million to the growth of gross profit dollars. Gross margin mix positively impacted gross profit by $23.6 million, largely from higher vendor program recognition. For the year ended June 30, 2022, the gross profit margin increased 113 basis points over the prior-year to 9.9%.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, gross profit dollars increased $28.9 million. Higher sales volume, after considering the associated cost of goods sold, contributed $16.2 million to the growth of gross profit dollars. Gross margin mix positively impacted gross profit by $12.7 million, largely from a more favorable sales mix. For the year ended June 30, 2022, the gross profit margin increased 87 basis points over the prior year to 15.3%.

Fiscal year 2021 compared to fiscal year 2020

Specialty Technology Solutions

For the Specialty Technology Solutions segment, gross profit dollars increased $5.3 million. Higher sales volume, after considering the associated cost of goods sold, contributed $22.9 million to the growth of gross profit dollars. Gross margin mix negatively impacted gross profit by $17.6 million, largely from lower vendor program recognition. For the year ended June 30, 2021, the gross profit margin decreased 96 basis points over the prior-year to 8.7%.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, gross profit dollars decreased $10.2 million. Lower sales volume, after considering the associated cost of goods sold, negatively impacted gross profit by $18.2 million. This impact was partially offset by a more favorable sales mix, which positively impacted gross profit by $8.0 million. For the year ended June 30, 2021, the gross profit margin increased 60 basis points over the prior year to 14.4%.

Operating expenses

Fiscal year 2022 compared to fiscal year 2021

The following table summarizes our operating expenses for the periods ended June 30, 2022 and 2021:

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Selling, general and administrative expenses ("SG&A") increased $28.0 million for the fiscal year ended June 30, 2022 compared to the prior year. The increase in SG&A expenses is primarily attributable to higher employee costs.

Restructuring and other charges incurred of $9.3 million during the fiscal year ended June 30, 2021 primarily related to employee severance and benefit costs in connection with our expense reduction plan implemented at the end of July 2020.

We recorded expense of $0.5 million for the change in fair value of contingent consideration for the fiscal year ended June 30, 2021, all of which relates to Intelisys. The final Intelisys earnout payment was paid in October 2020.

Fiscal year 2021 compared to fiscal year 2020

The following table summarizes our operating expenses for the periods ended June 30, 2021 and 2020:

*nm - percentages are not meaningful

SG&A decreased $12.1 million for the fiscal year ended June 30, 2021 compared to the prior year. The decrease in SG&A expenses is primarily due to the expense reduction plan announced in July 2020, partially offset by a Brazilian tax recovery in the prior year that did not recur.

Restructuring and other charges incurred of $9.3 million during the fiscal year ended June 30, 2021 primarily related to employee severance and benefit costs in connection with our expense reduction plan implemented at the end of July 2020.

No impairment charges were recorded in the fiscal year ended June 30, 2021. Impairment charges for the fiscal year ended June 30, 2020 include $119.0 million in goodwill impairment charges and $1.4 million in intangible asset impairment charges for our Canpango business.

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In fiscal 2021, we recorded a $0.5 million expense from change in fair value of contingent consideration, all of which is related to Intelisys. The expense is due to the recurring amortization of the unrecognized fair value discount and a reduction in the discount rate for the Intelisys liability.

Operating Income

Fiscal year 2022 compared to fiscal year 2021

The following table summarizes our operating income for the periods ended June 30, 2022 and 2021:

Specialty Technology Solutions

For the Specialty Technology Solutions segment, operating income increased $37.1 million, and operating margin increased to 3.2% for the fiscal year ended June 30, 2022 compared to the prior year. The increase in operating income and operating margin is primarily due to higher gross profits.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, operating income increased $12.0 million and the operating margin increased to 3.8% for the fiscal year ended June 30, 2022, compared to the prior year. The increase in operating income and margin is largely due to higher gross profits.

Corporate

Corporate incurred less than $0.1 million in divestiture costs for fiscal year ended June 30, 2022, compared to $11.6 million in divestiture and restructuring costs for the year ended June 30, 2021.

Fiscal year 2021 compared to fiscal year 2020

The following table summarizes our operating income for the periods ended June 30, 2021 and 2020:

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Specialty Technology Solutions

For the Specialty Technology Solutions segment, operating income increased $97.3 million, and operating margin increased to 1.6% for the fiscal year ended June 30, 2021 compared to the prior-year. The increase in operating income and operating margin for the fiscal year is due to goodwill impairment charges in the fiscal year 2020. Excluding goodwill impairment charges of $119.0 million in fiscal year 2020, adjusted operating income for the fiscal year ended June 30, 2021 decreased $21.7 million compared to the prior-year. The decrease in adjusted operating income is due to a Brazilian tax recovery in the prior year that did not recur.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, operating income increased $36.8 million and the operating margin increased to 3.3% for the fiscal year ended June 30, 2021, compared to the prior year. The increase in operating income and margin is largely due to lower employee-related expenses, which decreased year-over-year by $16.4 million, or 11.5%. The increase in operating income and margin is also due to impairment charges of $23.1 million in fiscal year 2020, which did not recur in fiscal year 2021.

Corporate

Corporate incurred $11.6 million in divestiture and restructuring costs for fiscal year ended June 30, 2021, compared to $4.0 million in acquisition and divestiture costs for the year ended June 30, 2020.

Total Other (Income) Expense

Fiscal year 2022 compared to fiscal year 2021

The following table summarizes our total other (income) expense for the fiscal years ended June 30, 2022 and 2021:

Interest expense reflects interest incurred on borrowings, non-utilization fees from our revolving credit facility and amortization of debt issuance costs. Interest expense decreased in fiscal 2022 as compared to 2021 primarily from lower interest rates including the spread during the first nine months of fiscal year 2022.

Interest income for the year ended June 30, 2022 and 2021 was generated on interest-bearing customer receivables principally in Brazil.

Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. 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, the Canadian dollar versus the U.S. dollar and other currencies versus the U.S. dollar. We partially offset foreign currency exposure with the use of 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.

Fiscal year 2021 compared to fiscal year 2020

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The following table summarizes our total other (income) expense for the fiscal years ended June 30, 2021 and 2020:

Interest expense decreased in fiscal year 2021 as compared to 2020 principally from reduced borrowings on our multi-currency revolving credit facility.

Interest income for the year ended June 30, 2021 and 2020 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents, principally in Brazil.

Provision for Income Taxes

Income tax expense for continuing operations was $29.9 million and $12.1 million for the fiscal years ended June 30, 2022 and 2021, respectively, reflecting effective tax rates of 25.2% and 21.1%, respectively. The increase in the effective tax rate for fiscal year 2022 compared to fiscal year 2021 is primarily the result of an increase in non-deductible expenses and an inclusion for global intangible low taxed income.

We expect the fiscal year 2023 effective tax rate from continuing operations to be approximately 25.0% to 26.0%. See Note 14 - Income Taxes in the Notes to Consolidated Financial Statements for further discussion including an effective tax rate reconciliation.

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Non-GAAP Financial Information

Evaluating Financial Condition and Operating Performance

In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating income; non-GAAP pre-tax income; non-GAAP net income; non-GAAP EPS; adjusted earnings before interest expense, income taxes, depreciation, and amortization ("adjusted EBITDA"); adjusted return on invested capital ("adjusted ROIC"); and constant currency. Constant currency is a measure that excludes the translation exchange impact from changes in foreign currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.

These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP.

Adjusted Return on Invested Capital

Adjusted ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of adjusted ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.

Adjusted EBITDA starts with net income and adds back interest expense, income tax expense, depreciation expense, amortization of intangible assets, 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. Effective with the first quarter of fiscal year 2022, non-cash share-based compensation expense is also added back in calculating adjusted EBITDA. The presentation for adjusted EBITDA for all periods presented has been recast to reflect this change to enhance comparability between periods.

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 fiscal years ended June 30, 2022 and 2021, respectively.

The components of our adjusted ROIC calculation and reconciliation to our financial statements are shown, as follows:

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(a)     Includes divestiture costs for the year ended June 30, 2022 and 2021. Divestiture costs are generally non-deductible for tax purposes.

(b)    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:

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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 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:

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with US GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable, inventory reserves to reduce inventories to the lower of cost or net realizable value, supplier incentives and goodwill. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. For further discussion of our significant accounting policies, refer to Note 1 - Business and Summary of Significant Accounting Policies.

Allowances for Trade and Notes Receivable

We adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326) effective July 1, 2020. The adoption did not have a material impact on our consolidated financial statements. Our policy for estimating allowances for doubtful accounts receivable is described below.

We maintain an allowance for uncollectible accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due us. 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 us on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables are recorded at inception and adjusted over the contractual life.

Inventory Reserves

Management determines the inventory reserves required to reduce inventories to the lower of cost or net realizable value based principally on the effects of technological changes, quantities of goods and length of time on hand and other factors. An estimate is made of the net realizable value, less cost to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. The estimates used to calculate these reserves are applied consistently. The adjustments are recorded in the period in which the loss of utility of the inventory occurs, which establishes a new cost basis for the inventory. This new cost basis is maintained until such time that the reserved inventory is disposed of, returned to the supplier or sold. To the extent that specifically reserved inventory is sold, cost of goods sold is expensed for the new cost basis of the inventory sold.

Supplier Programs

We receive incentives from suppliers related to cooperative advertising allowances, volume rebates and other incentive programs. These incentives are generally under quarterly, semi-annual or annual agreements with the suppliers. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the supplier. Suppliers generally require that we use the suppliers' cooperative advertising allowances for advertising or other marketing programs. Incentives received from suppliers for specifically identified incremental cooperative advertising programs are recorded as adjustments to selling, general and administrative expenses. ASC 606– Revenue from Contracts with Customers addresses accounting for consideration payable to a customer, which the Company interprets and applies as the customer (i.e., the Company) receives advertising funds from a supplier. The portion of these supplier funds in excess of our costs are reflected as a reduction of inventory. Such funds are recognized as a reduction of the cost of goods sold when the related inventory is sold.

We record unrestricted volume rebates received as a reduction of inventory and reduces the cost of goods sold when the related inventory is sold. Amounts received or receivables from suppliers that are not yet earned are deferred in the Consolidated Balance Sheets. Supplier receivables are generally collected through reductions to accounts payable authorized by the supplier. In addition, we may receive early payment discounts from certain suppliers. We record early payment discounts received as a

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reduction of inventory, thereby resulting in a reduction of cost of goods sold when the related inventory is sold. ASC 606 requires management to make certain estimates of the amounts of supplier consideration that will be received. Estimates are based on the terms of the incentive program and historical experiences. Actual recognition of the supplier consideration may vary from management estimates.

Goodwill

We account for recorded goodwill in accordance with ASC 350, Goodwill and Other Intangible Assets, which requires that goodwill be reviewed annually for impairment or more frequently if impairment indicators exist. Goodwill testing utilizes an impairment analysis, whereby we compare the carrying value of each identified reporting unit to its fair value. The carrying value of goodwill is reviewed at a reporting unit level at least annually for impairment, or more frequently if impairment indicators exist. Our goodwill reporting units align directly with our operating segments, Specialty Technology Solutions and Modern Communications & Cloud. The fair values of the reporting units are estimated using the net present value of discounted cash flows generated by each reporting unit. Considerable judgment is necessary in estimating future cash flows, discount rates and other factors affecting the estimated fair value of the reporting units, including the operating and macroeconomic factors. Historical financial information, internal plans and projections and industry information are used in making such estimates.

Under ASC 350, if fair value of goodwill fair value is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting units' fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, we would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We also assess the recoverability of goodwill if facts and circumstances indicate goodwill may be impaired. In our most recent annual test, we estimated the fair value of our reporting units primarily based on the income approach utilizing the discounted cash flow method. We also utilized fair value estimates derived from the market approach utilizing the public company market multiple method to validate the results of the discounted cash flow method, which required us to make assumptions about the applicability of those multiples to our reporting units. The discounted cash flow method requires us to estimate future cash flows and discount those amounts to present value. The key assumptions utilized in determining fair value included:

•Industry WACC: We utilized a WACC relative to each reporting unit's respective geography and industry as the discount rate for estimated future cash flows. The WACC is intended to represent a rate of return that would be expected by a market place participant in each respective geography.

•Operating income: We utilized historical and expected revenue growth rates, gross margins and operating expense percentages, which varied based on the projections of each reporting unit being evaluated.

•Cash flows from working capital changes: We utilized a projected cash flow impact pertaining to expected changes in working capital as each of our goodwill reporting units grow.

While we believe our assumptions are appropriate, they are subject to uncertainty and by nature include judgments and estimates regarding future events, including projected growth rates, margin percentages and operating efficiencies. Key assumptions used in determining fair value include projected growth and operating margin, working capital requirements and discount rates. During fiscal years 2022 and 2021, we completed our annual impairment test as of April 30th and determined that our goodwill was not impaired.

See Note 8 - Goodwill and Other Identifiable Intangible Assets in the Notes to Consolidated Financial Statements for further discussion on our goodwill impairment testing and results.

Liability for Contingent Consideration

In addition to the initial cash consideration paid to former shareholders of Intelisys, we agreed to make additional earnout payments based on future results through a specified date based on a multiple of the subsidiary’s pro forma earnings as defined in the respective purchase agreements. We paid the final earnout payments to the former shareholders of Intelisys in fiscal year 2021.

In accordance with ASC Topic 805, Business Combinations, we determine the fair value of this liability for contingent consideration at each reporting date throughout the term of the earnout using a form of a probability weighted discounted cash flow model. Each period we reflect the contingent consideration liability at fair value with changes recorded in the change in fair value of contingent consideration line item on the Consolidated Income Statement. Current and noncurrent portions of the

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liability are presented in the current portion of contingent consideration and long-term portion of contingent consideration line items on the Consolidated Balance Sheets.

Accounting Standards Recently Issued

See Note 1 in the Notes to Consolidated Financial Statements for the discussion on recent accounting pronouncements.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and borrowings under the $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 suppliers. In general, as our sales volumes increase, our net investment in working capital typically increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.

Cash and cash equivalents totaled $38.0 million, $62.7 million and $29.5 million at June 30, 2022, 2021 and 2020, respectively, of which $35.0 million, $52.1 million and $23.6 million was held outside of the United States as of June 30, 2022, 2021 and 2020, respectively. Checks released but not yet cleared from these accounts in the amounts of $18.0 million, $14.3 million and $17.1 million are classified as accounts payable as of June 30, 2022, 2021 and 2020, respectively.

We conduct business in many locations throughout the world where we generate and use cash. We provide for United States income taxes from the earnings of our Canadian and Brazilian subsidiaries. See Note 14 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.

Our net investment in working capital increased $222.8 million to $709.5 million at June 30, 2022 from $486.7 million at June 30, 2021, primarily from increases in accounts receivable and inventory. Our net investment in working capital totaled $431.3 million at June 30, 2020. 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 fiscal year ended June 30, 2022, our working capital investment increased to support our 12.0% year-over-year net sales growth.

Net cash used in operating activities was $124.4 million for the year ended June 30, 2022, compared to $116.8 million provided by operating activities for the year ended June 30, 2021. The decrease of $241.1 million was primarily due to increased accounts receivable, which were 28% higher than in 2021, attributable to net sales growth year-over-year. Also contributing to the decrease in operating cash flows were increased inventory levels, which were 31% higher than in 2021, to support net sales growth. Cash provided by operating activities is subject to variability period over period as a result of the timing of payments related to accounts receivable, accounts payable and other working capital items.

The number of days sales outstanding ("DSO") was 68 at June 30, 2022, compared to 60 at June 30, 2021 and 63 at June 30, 2020. The increase in DSO for fiscal year 2022 is primarily a result of the timing of sales resulting in higher net receivables at period end. Throughout the current fiscal year, DSO ranged from 62 to 69. Inventory turnover was 5.6 times during the fourth quarter of the current fiscal year, compared to 6.5 times and 4.5 times in the fourth quarter of fiscal year 2021 and 2020, respectively. Throughout the current fiscal year, inventory turnover ranged from 5.1 to 6.3 times.

Cash used in investing activities was $3.7 million in fiscal year June 30, 2022, as compared to cash provided by investing activities of $32.0 million for the year ended June 30, 2021. Cash used in investing activities for fiscal year 2020 was $55.3 million. Cash used in investing activities for fiscal year 2022 represents capital expenditures, partially offset by proceeds from

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the sale of our discontinued operations. Cash provided by investing activities for fiscal year 2021 is primarily attributable to cash received for the disposal of our Latin American and Europe entities. Cash used in investing activities for fiscal year 2020 is primarily attributable to cash used to purchase intY.

Management expects capital expenditures for fiscal year 2023 to range from $6.5 million to $8.5 million, primarily for IT investments and facility improvements.

Cash provided by financing activities totaled $108.1 million for the fiscal year ended June 30, 2022, primarily from net borrowings on the revolving line of credit, partially offset by our stock repurchases. Cash used in financing activities totaled $118.8 million and $152.7 million for the fiscal years ended June 30, 2021 and 2020, primarily from net repayments on the revolving line of credit.

Share Repurchase Program

In August 2021, our Board of Directors authorized a $100 million share repurchase program. The authorization does not have any time limit. Since the inception of the program, in fiscal year 2022, we repurchased 550,194 shares totaling $18.2 million.

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. On April 30, 2019, we amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. On December 23, 2021, we entered into an amendment to the Amended Credit Agreement which, among other things, replaced LIBOR as the benchmark rate for non-U.S. Dollar loans and provided for an interpolated rate for 7-day LIBOR for U.S. Dollar loans. The Amended Credit Agreement includes (i) a five-year $350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. Pursuant to an “accordion feature,” we may increase our borrowings by up to an additional $250 million, for a total of up to $750 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, subject to obtaining additional credit commitments from the lenders participating in the increase.

At our option, loans denominated in U.S. dollars under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the LIBOR or alternate base rate depending upon the Company's net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash to trailing four-quarter adjusted earnings before interest expense, taxes, depreciation and amortization ("EBITDA") (the "Leverage Ratio"). This spread ranges from 1.00% to 1.750% for LIBOR-based loans and 0.00% to 0.750% for alternate base rate loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent. The Amended Credit Agreement contains customary yield protection provisions. Additionally, the Company is assessed commitment fees ranging from 0.15% to 0.30%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65% of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement.

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 3.00:1.00 as of the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. We were in compliance with all covenants under the credit facility as of June 30, 2022. There was $135.8 million and $0.0 million outstanding on the revolving credit facility at June 30, 2022 and 2021, respectively.

The average daily balance on the revolving credit facility, excluding the term loan facility, was $69.0 million for the year ended June 30, 2022. Including borrowings for both continuing and discontinued operations, the average daily balance on the revolving credit facility, excluding the term loan facility was $54.6 million for the year ended 2021. There were no letters of credit issued as of June 30, 2022 and 2021. There was $214.2 million and $350.0 million available for additional borrowings as of June 30, 2022 and 2021, respectively. 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

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relative to our 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. At June 30, 2022, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $214.2 million available for borrowing. While we were in compliance with the financial covenants contained in the Credit Facility as of June 30, 2022, 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.

Earnout Payments

In fiscal year 2021, we paid the final earnout payment to the former shareholders of Intelisys related to their acquisition on August 29, 2016.

Contractual Obligations

At June 30, 2022, we had $135.8 million outstanding under our revolving credit facility. We also had $135.3 million outstanding under our term loan facility, $11.25 million of which matures in fiscal year 2023. Our revolving credit facility and our term loan facility have an April 30, 2024 maturity date. The remaining principal debt payments, which total $4.1 million, have maturity dates in 2024 through 2032. See Footnote 9 - Short Term Borrowings and Long Term Debt.

We also had a non-cancelable operating lease agreement of $17.6 million at June 30, 2022, of which $5.2 million is expected to be paid within the next 12 months. Remaining amounts are expected to be paid through 2028. See Footnote 15 - Leases.

Summary

We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet our present and future working capital and cash requirements for at least the next twelve months. We also believe that our longer-term working capital, planned expenditures and other general funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities.

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