# SCANSOURCE, INC. (SCSC) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SCANSOURCE, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/918965/000091896524000029/scsc-20240630.htm
Accession: 0000918965-24-000029
Filing date: 2024-08-27
Report date: 2024-06-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SCSC/
All MD&A years: /company/SCSC/mda/
Previous year: /company/SCSC/mda/fy2023/ (FY 2023)
Next year: /company/SCSC/mda/fy2025/ (FY 2025)

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 customers across hardware, SaaS, connectivity and cloud. We provide technology solutions and services from approximately 500 leading suppliers of mobility, barcode, POS, payments, physical security, networking, unified communications, collaboration, connectivity and cloud services to our approximately 25,000 customers located primarily in the United States, Canada and Brazil.

We operate our business under a management structure that enhances our technology focus and hybrid distribution growth strategy. Our segments operate primarily in the United States, Canada and Brazil:

•Specialty Technology Solutions

•Modern Communications & Cloud

We sell hardware, SaaS, connectivity and cloud solutions and services to customers that are designed to solve end users' challenges. We operate distribution facilities that support our United States and Canada business in Mississippi, California and Kentucky. Brazil distribution facilities are located in the Brazilian states of Paraná, Espirito Santo and Santa Catarina. We provide some of our digital products, which include SaaS and subscriptions, through our digital tools and platforms.

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

Recent Developments

Cost Reduction and Restructuring Program

In January 2024, as part of a strategic review of organizational structure and operations, we executed a cost reduction and restructuring program to align our cost structure with demand expectations in our hardware business. These actions resulted in approximately $10.0 million in annualized savings in selling, general and administrative expenses.

UK Divestitures

On December 19, 2023, we completed the sale of our UK-based intY business. We retained our CASCADE cloud services distribution platform, which has been used to grow the Cisco and Microsoft subscription business in the United States and Brazil.

Impact of the Macroeconomic Environment, Including Inflation

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.

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 customers that solve end users’ challenges. ScanSource enables customers to deliver solutions for their end users to address changing buying and

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consumption patterns. Our solutions may include a combination of offerings from multiple suppliers or give our customers access to additional services. As a trusted adviser to our customers, we provide customized solutions through our strong understanding of end user needs. We have plans to expand our investments in the Agency Channel in the near term.

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.

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended June 30,"],["","2024","","2023","","2022"],["Statement of income data:"],["Net sales","100.0","%","","100.0","%","","100.0","%"],["Cost of goods sold","87.8","","","88.1","","","87.9"],["Gross profit","12.2","","","11.9","","","12.1"],["Selling, general and administrative expenses","8.5","","","7.5","","","7.8"],["Depreciation expense","0.3","","","0.3","","","0.3"],["Intangible amortization expense","0.5","","","0.4","","","0.5"],["Restructuring and other charges","0.1","","","0.0","","","0.0"],["Operating income","2.8","","","3.6","","","3.5"],["Interest expense","0.4","","","0.5","","","0.2"],["Interest income","(0.3)","","","(0.2)","","","(0.1)"],["Gain on sale of business","(0.4)","","","\u2014","","","\u2014"],["Other (income) expense, net","0.0","","","0.0","","","0.0"],["Income from continuing operations before income taxes","3.1","","","3.2","","","3.4"],["Provision for income taxes","0.7","","","0.9","","","0.8"],["Net income from continuing operations","2.4","","","2.3","","","2.5"],["Net income from discontinued operations","0.0","","","0.0","","","0.0"],["Net income","2.4","%","","2.4","%","","2.5","%"]]
[[/GREPCENT_TABLE]]

Comparison of Fiscal Years Ended June 30, 2024 and 2023

Below is a discussion of fiscal years ended June 30, 2024 and 2023. Please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our form 10-K for the fiscal year ended June 30, 2023 for a discussion of fiscal year ended June 30, 2022.

Net Sales

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, 2024 and 2023.

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[[GREPCENT_TABLE]]
[["","2024","","2023","","$ Change","","% Change","","% Change Constant Currency, Excluding Divestitures (a)"],["","(in thousands)"],["Sales by Segment:"],["Specialty Technology Solutions","$","1,998,636","","","$","2,331,030","","","$","(332,394)","","","(14.3)","%","","(14.3)","%"],["Modern Communications & Cloud","1,261,173","","","1,456,691","","","(195,518)","","","(13.4)","%","","(13.7)","%"],["Total net sales","$","3,259,809","","","$","3,787,721","","","$","(527,912)","","","(13.9)","%","","(14.1)","%"],["Sales by Geography Category:"],["United States","$","2,921,172","","","$","3,432,074","","","$","(510,902)","","","(14.9)","%","","(14.9)","%"],["International","338,637","","","355,647","","","(17,010)","","","(4.8)","%","","(6.2)","%"],["Total net sales","$","3,259,809","","","$","3,787,721","","","$","(527,912)","","","(13.9)","%","","(14.1)","%"],["(a) A reconciliation of non-GAAP net sales in constant currency, excluding divestitures is presented at the end of Results of Operations, under Non-GAAP Financial Information."]]
[[/GREPCENT_TABLE]]

Specialty Technology Solutions

The Specialty Technology Solutions segment consists of sales to customers in North America and Brazil. During fiscal year 2024, net sales for this segment decreased $332.4 million, or 14.3%, compared to fiscal year 2023. Excluding the foreign exchange positive impact of $1.3 million, adjusted net sales for fiscal year 2024 decreased $333.7 million, or 14.3%, compared to the prior fiscal year. The decrease in net sales and in adjusted net sales is primarily from lower sales volume due to softer demand in a more cautious technology spending environment.

Modern Communications & Cloud

The Modern Communications & Cloud segment consists of sales to customers in North America and Brazil. During fiscal year 2024, net sales for this segment decreased $195.5 million, or 13.4%, compared to fiscal year 2023. Excluding the foreign exchange positive impact of $8.5 million, adjusted net sales decreased $198.7 million, or 13.7%, compared to the prior year. The decrease in net sales and adjusted net sales is primarily due to decreased lower sales volumes in our communications hardware and Cisco products.

Intelisys connectivity and cloud net sales for fiscal year 2024 increased 6.6% year-over-year. For our Intelisys business, net sales reflect the net commissions received from suppliers after paying sales partner commissions. For fiscal year 2024, Intelisys net billings, which are amounts billed by suppliers to end users and represents annual recurring revenue, totaled approximately $2.67 billion. The fiscal year 2024 Intelisys net billings resulted in Intelisys net sales of approximately $84.7 million.

Gross Profit

The following table summarizes our gross profit for the fiscal years ended June 30, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2024","","2023","","$ Change","","% Change","","2024","","2023"],["","(in thousands)"],["Specialty Technology Solutions","$","187,739","","","$","224,239","","","$","(36,500)","","","(16.3)","%","","9.4","%","","9.6","%"],["Modern Communications & Cloud","211,313","","","225,000","","","(13,687)","","","(6.1)","%","","16.8","%","","15.4","%"],["Total gross profit","$","399,052","","","$","449,239","","","$","(50,187)","","","(11.2)","%","","12.2","%","","11.9","%"]]
[[/GREPCENT_TABLE]]

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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 Specialty Technology Solutions segment, gross profit dollars decreased $36.5 million. Lower sales volume, after considering the associated cost of goods sold, impacted gross profit decline by $32.0 million for the current fiscal year. Gross margin mix negatively impacted gross profit by $4.5 million, largely from unfavorable vendor program recognition partially offset by lower freight costs. For the fiscal year ended June 30, 2024, the gross profit margin decreased 23 basis points over the prior-year to 9.4%.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, gross profit dollars decreased $13.7 million. Lower sales volume, after considering the associated cost of goods sold, unfavorably impacted gross profit dollars by $30.2 million. Gross margin mix positively impacted gross profit by $16.5 million, largely from a more favorable sales mix and lower freight costs. For the fiscal year ended June 30, 2024, the gross profit margin increased 131 basis points over the prior fiscal year to 16.8%.

Operating expenses

The following table summarizes our operating expenses for the periods ended June 30, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2024","","2023","","$ Change","","% Change","","2024","","2023"],["","(in thousands)"],["Selling, general and administrative expenses","$","277,428","","","$","285,695","","","$","(8,267)","","","(2.9)","%","","8.5","%","","7.5","%"],["Depreciation expense","11,219","","","10,912","","","307","","","2.8","%","","0.3","%","","0.3","%"],["Intangible amortization expense","15,723","","","16,746","","","(1,023)","","","(6.1)","%","","0.5","%","","0.4","%"],["Restructuring and other charges","4,358","","","\u2014","","","4,358","","","*nm","","0.1","%","","\u2014","%"],["Operating expenses","$","308,728","","","$","313,353","","","$","(4,625)","","","(1.5)","%","","9.5","%","","8.3","%"]]
[[/GREPCENT_TABLE]]

*nm - not meaningful

Selling, general and administrative expenses (“SG&A”) decreased $8.3 million for the fiscal year ended June 30, 2024 compared to the prior year. The decrease in SG&A expenses is primarily attributable to lower employee costs, partially offset by an increase in bad debt expense as a result of increases in specific customer reserves.

Intangible amortization expense decreased $1.0 million for the fiscal year ended June 30, 2024 compared to the prior fiscal year. Amortization expense decreased during fiscal year 2024 due to primarily due to the removal of intangible assets related to the intY UK divestiture.

Restructuring and other charges of $4.4 million related to employee separation and benefit costs in connection with our expense reduction and restructuring plans implemented during fiscal year 2024.

Operating Income

The following table summarizes our operating income for the periods ended June 30, 2024 and 2023:

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[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2024","","2023","","$ Change","","% Change","","2024","","2023"],["","(in thousands)"],["Specialty Technology Solutions","$","44,726","","","$","75,688","","","$","(30,962)","","","(40.9)","%","","2.2","%","","3.2","%"],["Modern Communications & Cloud","52,547","","","61,658","","","(9,111)","","","(14.8)","%","","4.2","%","","4.2","%"],["Corporate","(6,949)","","","(1,460)","","","(5,489)","","","376.0","%","","\u2014","%","","\u2014","%"],["Total operating income","$","90,324","","","$","135,886","","","$","(45,562)","","","(33.5)","%","","2.8","%","","3.6","%"]]
[[/GREPCENT_TABLE]]

Specialty Technology Solutions

For the Specialty Technology Solutions segment, operating income decreased $31.0 million, and operating margin decreased 101 basis points to 2.2% for the fiscal year ended June 30, 2024, compared to the prior fiscal year. The decrease in operating income and operating margin is primarily due to lower gross profits.

Modern Communications & Cloud

For the Modern Communications & Cloud segment, operating income decreased $9.1 million with the operating margin increasing slightly to 4.2% for the fiscal year ended June 30, 2024, compared to the prior fiscal year. The decrease in operating income is largely due to lower gross profits.

Corporate

For the fiscal year ended June 30, 2024, Corporate operating loss totaled $6.9 million which represents $4.4 million in restructuring expenses, $1.7 million of acquisition and divestiture costs as well as $0.9 million in cyberattack restoration charges. During the fiscal year ended June 30, 2023 Corporate incurred a loss of $1.5 million representing cyberattack restoration charges.

Total Other (Income) Expense

The following table summarizes our total other (income) expense for the fiscal years ended June 30, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2024","","2023","","$ Change","","% Change","","2024","","2023"],["","(in thousands)"],["Interest expense","$","13,031","","","$","19,786","","","$","(6,755)","","","(34.1)","%","","0.4","%","","0.5","%"],["Interest income","(9,381)","","","(7,414)","","","(1,967)","","","26.5","%","","(0.3)","%","","(0.2)","%"],["Net foreign exchange losses","2,198","","","2,168","","","30","","","1.4","%","","0.1","%","","0.1","%"],["Gain on sale of business","(14,155)","","","\u2014","","","(14,155)","","","*nm","","(0.4)","%","","\u2014","%"],["Other, net","(1,210)","","","(504)","","","(706)","","","140.1","%","","\u2014","%","","\u2014","%"],["Total other (income) expense","$","(9,517)","","","$","14,036","","","$","(23,553)","","","(167.8)","%","","(0.3)","%","","0.4","%"]]
[[/GREPCENT_TABLE]]

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 decreased in fiscal 2024 as compared to 2023 primarily from lower average borrowings on our multi-currency revolving credit facility.

Interest income for the fiscal year ended June 30, 2024 increased compared to fiscal year ended June 30, 2023 primarily from interest earned on higher cash balances in North America.

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Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign exchange forward contracts gains and losses. Foreign exchange gains and losses are generated primarily as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real and the Canadian dollar versus the U.S. dollar. We partially offset foreign currency exposure with the use of foreign exchange contracts to hedge against these exposures. The costs associated with foreign exchange contracts are included in the net foreign exchange losses.

For the fiscal year ended June 30, 2024 we recognized a $14.2 million gain on sale of our UK-based intY business.

Provision for Income Taxes

Income tax expense for continuing operations was $22.8 million and $33.8 million for the fiscal years ended June 30, 2024 and 2023, respectively, reflecting effective tax rates of 22.8% and 27.7%, respectively. The decrease in the effective tax rate for fiscal 2024 compared to fiscal 2023 is primarily the result of the tax treatment for the intY divestiture, the creditability of foreign taxes as a result of IRS Notice 2023-55 and a decrease in global intangible low taxed income tax.

In December of 2021, the Organization for Economic Co-operation and Development ("OECD") released Pillar Two Model Rules defining the global minimum tax rules, which contemplate a global minimum tax rate of 15%. Several member countries have enacted Pillar Two provisions that are effective in fiscal year 2025. The Company believes it will qualify for safe harbor exemptions in many of these jurisdictions and any remaining impact to future effective tax rates and corporate tax liability will be minimal.

We expect the fiscal year 2025 effective tax rate from continuing operations to be approximately 27.5% to 28.5%. See Note 13 - 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 and certain impacts related to acquisitions and divestitures. 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, non-cash shared-based compensation expense and other non-GAAP adjustments. Since adjusted EBITDA excludes some non-cash costs of investing in our business and people, we believe that adjusted EBITDA shows the profitability from our business operations more clearly.

We calculate adjusted ROIC as adjusted EBITDA, divided by invested capital. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. The following table summarizes annualized adjusted ROIC for the fiscal years ended June 30, 2024 and 2023.

[[GREPCENT_TABLE]]
[["","2024","","2023"],["Adjusted return on invested capital ratio","12.4","%","","14.6","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended June 30,"],["","2024","","2023"],["","(in thousands)"],["Reconciliation of net income to adjusted EBITDA:"],["Net income from continuing operations (GAAP)","$","77,060","","","$","88,092"],["Plus: Interest expense","13,031","","","19,786"],["Plus: Income taxes","22,781","","","33,758"],["Plus: Depreciation and amortization","28,009","","","28,614"],["EBITDA (non-GAAP)","140,881","","","170,250"],["Plus: Share-based compensation","9,537","","","11,219"],["Plus: Tax recovery","(2,558)","","","(2,986)"],["Plus: Cyberattack restoration costs","874","","","1,460"],["Plus: Gain on sale of business","(14,155)","","","\u2014"],["Plus: Acquisition and divestiture costs(a)","1,717","","","\u2014"],["Plus: Restructuring costs","4,358","","","\u2014"],["Adjusted EBITDA (numerator for adjusted ROIC) (non-GAAP)","$","140,654","","","$","179,943"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Fiscal Year Ended June 30,"],["","2024","","2023"],["","(in thousands)"],["Invested capital calculations:"],["Equity \u2013 beginning of the year","$","905,298","","","$","806,528"],["Equity \u2013 end of the year","924,255","","","905,298"],["Plus: Share-based compensation, net","7,120","","","8,326"],["Plus: Acquisition and divestiture costs(a)","1,717","","","\u2014"],["Plus: Cyberattack restoration costs, net","655","","","1,092"],["Plus: Restructuring, net","3,262","","","\u2014"],["Plus: Gain on sale of business","(14,155)","","","\u2014"],["Plus: Tax recovery, net","(2,566)","","","(3,985)"],["Plus: Impact of discontinued operations, net","\u2014","","","(1,717)"],["Average equity","912,793","","","857,771"],["Average funded debt(b)","220,528","","","372,235"],["Invested capital (denominator for adjusted ROIC) (non-GAAP)","$","1,133,321","","","$","1,230,006"]]
[[/GREPCENT_TABLE]]

(a)     Includes divestiture costs for the fiscal year ended June 30, 2023. 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 fiscal year period. We also exclude the impact of acquisitions and divestitures prior to the first full year of operations from the acquisition or divestiture date in order to show net sales results on an organic basis. This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and the impact of acquisitions or divestitures. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding acquisitions and divestitures:

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[[GREPCENT_TABLE]]
[["Net Sales by Segment:"],["","Fiscal Year Ended June 30,"],["","2024","","2023","","$ Change","","% Change"],["Specialty Technology Solutions:","(in thousands)"],["Net sales, reported","$","1,998,636","","","$","2,331,030","","","$","(332,394)","","","(14.3)","%"],["Foreign exchange impact(a)","(1,341)","","","\u2014"],["Non-GAAP net sales, constant currency","$","1,997,295","","","$","2,331,030","","","$","(333,735)","","","(14.3)","%"],["Modern Communications & Cloud:"],["Net sales, reported","$","1,261,173","","","1,456,691","","","$","(195,518)","","","(13.4)","%"],["Foreign exchange impact(a)","(8,542)","","","\u2014"],["Less: Divestitures","(3,747)","","","(9,140)"],["Non-GAAP net sales, constant currency","$","1,248,884","","","$","1,447,551","","","$","(198,667)","","","(13.7)","%"],["Consolidated:"],["Net sales, reported","$","3,259,809","","","$","3,787,721","","","$","(527,912)","","","(13.9)","%"],["Foreign exchange impact(a)","(9,883)","","","\u2014"],["Less: Divestitures","(3,747)","","","(9,140)"],["Non-GAAP net sales, constant currency","$","3,246,179","","","$","3,778,581","","","$","(532,402)","","","(14.1)","%"],["(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 fiscal year ended June 30, 2024 into U.S. dollars using the average foreign exchange rates for the fiscal year ended June 30, 2023."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Net Sales by Geography:"],["","Fiscal Year Ended June 30,"],["","2024","","2023","","$ Change","","% Change"],["United States and Canada:","(in thousands)"],["Net sales, as reported","$","2,921,172","","","$","3,432,074","","","$","(510,902)","","","(14.9)","%"],["Less: Acquisitions","\u2014","","","\u2014"],["Net sales, excluding acquisitions","$","2,921,172","","","$","3,432,074","","","$","(510,902)","","","(14.9)","%"],["International:"],["Net sales, reported","$","338,637","","","$","355,647","","","$","(17,010)","","","(4.8)","%"],["Foreign exchange impact(a)","(9,883)","","","\u2014"],["Less: Divestitures","(3,747)","","","(9,140)"],["Non-GAAP net sales, constant currency","$","325,007","","","$","346,507","","","$","(21,500)","","","(6.2)","%"],["Consolidated:"],["Net sales, reported","$","3,259,809","","","$","3,787,721","","","$","(527,912)","","","(13.9)","%"],["Foreign exchange impact(a)","(9,883)","","","\u2014"],["Less: Divestitures","(3,747)","","","(9,140)"],["Non-GAAP net sales, constant currency","$","3,246,179","","","$","3,778,581","","","$","(532,402)","","","(14.1)","%"],["(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 fiscal year ended June 30, 2024 into U.S. dollars using the average foreign exchange rates for the fiscal year ended June 30, 2023."]]
[[/GREPCENT_TABLE]]

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Index to Financial Statements

[[GREPCENT_TABLE]]
[["Operating Income by Segment:"],["","Fiscal Year Ended June 30,","","","","","","% of Net Sales June 30,"],["","2024","","2023","","$ Change","","% Change","","2024","","2023"],["Specialty Technology Solutions:","(in thousands)"],["GAAP operating income","$","44,726","","","$","75,688","","","$","(30,962)","","","(40.9)","%","","2.2","%","","3.2","%"],["Adjustments:"],["Amortization of intangible assets","5,046","","","5,136","","","(90)"],["Non-GAAP operating income","$","49,772","","","$","80,824","","","$","(31,052)","","","(38.4)","%","","2.5","%","","3.5","%"],["Modern Communications & Cloud:"],["GAAP operating income","$","52,547","","","$","61,658","","","$","(9,111)","","","(14.8)","%","","4.2","%","","4.2","%"],["Adjustments:"],["Amortization of intangible assets","10,677","","","11,610","","","(933)"],["Tax recovery","(2,558)","","","(2,986)","","","428"],["Non-GAAP operating income","$","60,666","","","$","70,282","","","$","(9,616)","","","(13.7)","%","","4.8","%","","4.8","%"],["Corporate:"],["GAAP operating loss","$","(6,949)","","","$","(1,460)","","","$","(5,489)","","","nm*","","nm*","","nm*"],["Adjustments:"],["Divestiture costs","1,717","","","\u2014","","","1,717"],["Cyberattack restoration costs","874","","","1,460","","","(586)"],["Restructuring costs","4,358","","","\u2014","","","4,358"],["Non-GAAP operating income","$","\u2014","","","$","\u2014","","","$","\u2014","","","nm*","","nm*","","nm*"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Consolidated:"],["GAAP operating income","$","90,324","","","$","135,886","","","$","(45,562)","","","(33.5)","%","","2.8","%","","3.6","%"],["Adjustments:"],["Amortization of intangible assets","15,723","","","16,746","","","(1,023)"],["Cyberattack restoration costs","874","","","1,460","","","(586)"],["Divestiture costs","1,717","","","\u2014","","","1,717"],["Restructuring costs","4,358","","","\u2014","","","4,358"],["Tax recovery","(2,558)","","","(2,986)","","","428"],["Non-GAAP operating income","$","110,438","","","$","151,106","","","$","(40,668)","","","(26.9)","%","","3.4","%","","4.0","%"]]
[[/GREPCENT_TABLE]]

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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:

[[GREPCENT_TABLE]]
[["","","","","","Year ended June 30, 2024"],["","","","","","GAAP Measure","","Intangible amortization expense","","Acquisition and Divestiture costs (a)","","Restructuring costs","","Tax recovery","","Cyberattack restoration costs","","Gain on sale of business (b)","","Non-GAAP measure"],["","","","","","(in thousands, except per share data)"],["SG&A expenses","","","","","$","277,428","","","$","\u2014","","","$","(1,717)","","","$","\u2014","","","$","2,558","","","$","(874)","","","$","\u2014","","","$","277,395"],["Operating income","","","","","90,324","","","15,723","","","1,717","","","4,358","","","(2,558)","","","874","","","\u2014","","","110,438"],["Pre-tax income","","","","","99,841","","","15,723","","","1,717","","","4,358","","","(2,558)","","","874","","","(14,155)","","","105,800"],["Net income","","","","","77,060","","","11,697","","","1,717","","","3,262","","","(2,566)","","","655","","","(14,155)","","","77,670"],["Diluted EPS","","","","","$","3.06","","","$","0.46","","","$","0.07","","","$","0.13","","","$","(0.10)","","","$","0.03","","","$","(0.56)","","","$","3.08"],["","","","","","Year ended June 30, 2023"],["","","","","","GAAP Measure","","Intangible amortization expense","","Acquisition and Divestiture costs (a)","","Restructuring costs","","Tax recovery","","Cyberattack restoration costs","","Gain on sale of business (b)","","Non-GAAP measure"],["","","","","","(in thousands, except per share data)"],["SG&A expenses","","","","","$","285,695","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","2,986","","","$","(1,460)","","","$","\u2014","","","$","287,221"],["Operating income","","","","","135,886","","","16,746","","","\u2014","","","\u2014","","","(2,986)","","","1,460","","","\u2014","","","151,106"],["Pre-tax income","","","","","121,850","","","16,746","","","\u2014","","","\u2014","","","(2,986)","","","1,460","","","\u2014","","","137,070"],["Net income","","","","","88,092","","","12,489","","","\u2014","","","\u2014","","","(3,985)","","","1,092","","","\u2014","","","97,688"],["Diluted EPS","","","","","$","3.47","","","$","0.49","","","$","\u2014","","","$","\u2014","","","$","(0.16)","","","$","0.04","","","$","\u2014","","","$","3.85"]]
[[/GREPCENT_TABLE]]

(a) Acquisition and divestiture costs for the fiscal year ended June 30, 2024 are generally nondeductible for tax purposes.

(b) Reflects gain on the sale of the UK-based intY business. This transaction resulted in a capital loss for tax purposes. The Company did not record a tax provision on the capital loss as there were no offsetting capital gains.

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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. We account for credit losses based upon ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326). 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. Refer to Note 2 - Accounts Receivable and Notes Receivable, Net for further details.

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.

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In addition, we may receive early payment discounts from certain suppliers. We record early payment discounts received as a 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. As of June 30, 2024, the Specialty Technology and Modern Communications & Cloud reporting units' goodwill balances are $16.4 million and $189.9 million, respectively. The fair value of the reporting units exceeded its carrying value by 11% and 33%, respectively, as of the annual goodwill impairment testing date. 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 2024 and 2023, we completed our annual impairment test as of April 30th and determined that our goodwill was not impaired.

See Note 7 - Goodwill and Other Identifiable Intangible Assets in the Notes to Consolidated Financial Statements for further discussion on our goodwill impairment testing and results.

Purchase Price Allocation

The Company accounts for business combinations in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations. For each acquisition, the Company allocates the purchase price to assets acquired, liabilities assumed and goodwill and intangibles. The Company recognizes assets and liabilities acquired at their estimated fair values. Management uses judgment to (i) identify the acquired assets and liabilities assumed, (ii) estimate the fair value of these assets, (iii) estimate the useful life of the assets and (iv) assess the appropriate method for recognizing depreciation or amortization expense over the assets' useful life.

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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 $185.5 million and $36.2 million at June 30, 2024 and 2023, respectively, of which $20.0 million and $31.0 million was held outside of the United States as of June 30, 2024 and 2023, respectively. Checks released but not yet cleared from these accounts in the amounts of $5.9 million and $8.0 million are classified as accounts payable as of June 30, 2024 and 2023, respectively.

We conduct business primarily in North America and Brazil where we generate and use cash. We provide for United States income taxes from the earnings of our Canadian and Brazilian subsidiaries. See Note 13 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.

Our net investment in working capital, defined as accounts receivable plus inventories less accounts payable, decreased $313.5 million to $506.2 million at June 30, 2024 from $819.7 million at June 30, 2023, primarily as a result of lower sales volumes and our multi-quarter working capital improvement plan. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels and payments to vendors. For the fiscal year ended June 30, 2024, our working capital investment decreased in return growing our availability and cash on hand to help finance future growth.

[[GREPCENT_TABLE]]
[["","Year ended"],["Cash (used in) provided by:","June 30, 2024","","June 30, 2023"],["","(in thousands)"],["Operating activities of continuing operations","$","371,647","","","$","(35,769)"],["Investing activities of continuing operations","9,045","","","(8,262)"],["Financing activities of continuing operations","(227,767)","","","39,531"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities was $371.6 million for the fiscal year ended June 30, 2024 and cash used in operating activities was $35.8 million for the fiscal years ended June 30, 2023, respectively. Cash provided by operating activities for the fiscal year ended June 30, 2024 is primarily due to decreases in inventory and accounts receivable, which decreased 32.3% and 22.8%, respectively compared to the beginning of the fiscal year. Cash provided by operating activities for the fiscal year ended June 30, 2023 is primarily due to increases in inventory, which increased 23.2% compared to the beginning of the fiscal year, partially offset by earnings from operations.

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

The number of days sales outstanding ("DSO") was 71 at June 30, 2024 compared to 72 at June 30, 2023. Throughout fiscal year 2024, DSO ranged from 68 to 72. Inventory turnover was 5.0 times during the fourth quarter fiscal year 2024, compared to 4.4 times in the fourth quarter of fiscal year 2023. Throughout fiscal year 2024, inventory turnover ranged from 4.4 to 5.1 times.

Cash provided by investing activities was $9.0 million for the fiscal year ended June 30, 2024 compared to cash used in investing activities of $8.3 million for the fiscal year ended June 30, 2023. Cash provided by investing activities for fiscal year 2024 is largely due to cash received from the sale of our intY UK business, partially offset by capital expenditures. Cash used in

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investing activities for the fiscal year 2023 represents capital expenditures, partially offset by proceeds from the sale of our discontinued operations.

Management expects capital expenditures for fiscal year 2025 to range from $10.0 million to $15.0 million, primarily for IT investments.

Cash used in financing activities totaled $227.8 million for the fiscal year ended June 30, 2024 primarily due to repayments on the revolving line of credit and the repurchase of common stock. Cash provided by financing activities of $39.5 million for the fiscal year ended June 30, 2023 was primarily from net borrowings on the revolving line of credit.

Share Repurchase Program

In May 2024, our Board approved an additional $100.0 million share repurchase authorization, which supplements the existing $100 million repurchase program authorized in August 2021. The share repurchase authorizations do not have any time limits. In fiscal year 2024, we repurchased 980,539 shares totaling $43.3 million. As of June 30, 2024, the Company had approximately $123.1 million available for repurchases under Board approved authorizations.

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 amendment extended the revolving credit facility maturity date to September 28, 2027. In addition, pursuant to an “accordion feature,” we may increase our borrowings up to an additional $250 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of our domestic assets and our domestic subsidiaries. Under the terms of the revolving credit facility, the payment of cash dividends is restricted. We incurred debt issuance costs of $1.4 million in connection with the amendment and restatement of the Amended Credit Agreement. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.

Loans denominated in U.S. dollars, other than swingline loans, bear interest at a rate per annum equal to, at our option, (i) the adjusted term Secured Overnight Financing Rate (“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 (“Credit Facility Net Debt”) to (B) trailing four-quarter consolidated EBITDA measured as of the end of the most recent year or quarter, as applicable (Credit Facility EBITDA”), for which financial statements have been delivered to the Lenders (the “leverage ratio”); or (ii) the alternate base rate plus an additional margin ranging from 0% to 0.75%, depending upon our leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars bear interest based upon the adjusted daily simple SOFR plus an additional margin ranging from 1.00% to 1.75% depending upon our leverage ratio, or such other rate as agreed upon with the applicable swingline lender. The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10% over the applicable SOFR reference rate. Loans denominated in foreign currencies bear interest at a rate per annum equal to the applicable benchmark rate set forth in the Amended Credit Agreement plus an additional margin ranging from 1.00% to 1.75%, depending upon our leverage ratio plus, if applicable, certain mandatory costs.

During the fiscal year ended June 30, 2024, our borrowings under the credit facility were U.S. dollar loans. The spread in effect as of June 30, 2024 was 1.00%, plus a 0.10% credit spread adjustment for SOFR-based loans and 0.00% for alternate base rate loans. The commitment fee rate in effect as of June 30, 2024 was 0.15%. 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 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 Amended Credit Agreement as of June 30, 2024.

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The average daily balance on the revolving credit facility, excluding the term loan facility, was $71.1 million and $223.5 million during the fiscal years ended June 30, 2024 and June 30, 2023, respectively. There was $349.9 million and $171.0 million available for additional borrowings as of June 30, 2024 and June 30, 2023, respectively. There were no letters of credit issued under the multi-currency revolving credit facility as of June 30, 2024 and June 30, 2023.

Availability to use this borrowing capacity depends upon, among other things, the levels of our Leverage Ratio and Interest Coverage Ratio, which, in turn, will depend upon (1) our Credit Facility Net Debt relative to our 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, 2024, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $349.9 million available for borrowing. While we were in compliance with the financial covenants contained in the Credit Facility as of June 30, 2024, 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.

Contractual Obligations

At June 30, 2024, we had less than $0.1 million outstanding under our revolving credit facility. We also had $140.6 million outstanding under our term loan facility, $7.5 million of which matures in fiscal year 2024. Our revolving credit facility and our term loan facility have a maturity date September 28, 2027. The remaining principal debt payments on our industrial development revenue bond, which total $3.4 million, have maturity dates in 2025 through 2032. See Footnote 8 - Short Term Borrowings and Long Term Debt.

We also had a non-cancelable operating lease agreement of $9.9 million at June 30, 2024, of which $4.2 million is expected to be paid within the next 12 months. Remaining amounts are expected to be paid through 2030. See Footnote 14 - 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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Index to Financial Statements