# SCANSOURCE, INC. (SCSC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SCANSOURCE, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/918965/000091896521000022/scsc-20210630.htm
Accession: 0000918965-21-000022
Filing date: 2021-08-24
Report date: 2021-06-30
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/
Next year: /company/SCSC/mda/fy2022/ (FY 2022)

ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

ScanSource is at the center of the technological solution delivery channel, connecting businesses and institutions and providing solutions for their complex needs. We provide technology solutions and services from leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, telecom and cloud services to our customers. We serve approximately 30,000 customers located in the United States, Canada, Brazil, and the UK and provide solutions and services from approximately 500 technology suppliers.

We operate our business under a management structure that enhances our technology market focus and growth strategy. We segment our business into two technology-focused areas that each operate in the United States, Canada, Brazil, and the UK:

•Worldwide Barcode, Networking & Security

•Worldwide Communications & Services

We sell products to the United States and Canada from our facilities located in Mississippi, California and Kentucky; into Brazil primarily from facilities located in the Brazilian states of Paraná, Espírito Santo and Santa Catarina. Some of our digital products and services are provided from our CASCADE platform. We also have drop-shipment arrangements with some of our suppliers, which allow us to offer products to customers without taking physical delivery at our facilities.

Our key suppliers include 8x8, ACC Business, AT&T, Aruba/HPE, AudioCodes, Avaya, Axis, Barco, Bematech, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Equinix, Extreme, F5, Five9, Fortinet, Genesys, Hanwha, Honeywell, HID, Ingenico, Intrado, Jabra, LogMeIn, Lumen, March Networks, Masergy, Microsoft, Mitel, NCR, NICE inContact, Oracle, Palo Alto, Panasonic, Poly, RingCentral, Samsung, Sony, Spectralink, Spectrum, Toshiba Global Commerce Solutions, Ubiquiti, Verifone, Verizon, Windstream, Zebra Technologies and Zoom. We also offer customers significant choices in cloud services through our Intelisys business, including "as a service" offerings in contact center, infrastructure and unified communications.

Recent Developments

Impact of COVID-19 on our Business Environment

The spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders, business shutdowns, and limitations of in-person gatherings. The pandemic and these containment measures have had a substantial impact on businesses around the world and on global, regional and national economies.

Our top priority is protecting the health and safety of our employees. We have transitioned our employees, where possible, to a fully remote working environment and have taken a number of measures to ensure our teams feel secure in their jobs with the flexibility and resources they need to stay safe and healthy.

We have teams monitoring the evolving situation and recommending risk mitigation actions; We are following global guidance from authorities and health officials including travel restrictions and physical distancing guidelines. All of our distribution facilities remain open and operational. Our employees are committed to providing the high level of customer service our partners have grown to expect from us in order to achieve positive results.

In July 2020, we announced actions to address the business impacts of the COVID-19 pandemic and prepare for the next phase of growth. These actions included a $30 million annualized expense reduction plan. During the fiscal year ended June 30, 2021, we recognized approximately $9.3 million for restructuring and other charges, largely for severance and employee benefits for employees who left the Company as part of this plan. These actions were designed to better align the cost structure for our wholesale distribution business with lower sales volumes as a result of the COVID-19 pandemic. As part of the plan, we are continuing to invest in our higher growth agency business, Intelisys. Strong growth for the Intelisys business has continued, even with the COVID-19 pandemic.

See "Risk Factors" for information on additional impacts of COVID-19 as well as other matters that could have a material adverse effect on our results of operations and financial condition.

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Divestitures

We finalized the sale of our Latin American businesses, outside of Brazil, on October 30, 2020. We also finalized the sale of our Europe and UK products distribution businesses on November 12, 2020.

Our Strategy

We rely on a channel sales model offering hardware, software, services and connectivity from leading technology suppliers to sales partners that solve end-customers' challenges. With our CASCADE platform, we also offer customers SaaS and subscription services from leading technology suppliers. While we do not manufacture products, we provide technology solutions and services from leading technology suppliers. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services, such as custom configuration, key injection, integration support, custom development and other services. We also offer the flexibility of on-premise, cloud and hybrid solutions.

As a trusted adviser to our sales partners, we provide more complete solutions through a better understanding of end-customer needs. We drive growth through enhancing our sales partners' capabilities to provide hardware, software, services and connectivity solutions. Our teams deliver value-added support programs and services, including education and training, network assessments, implementation, custom development and marketing to help our sales partners extend their capabilities, develop new technology practices or reach new end customers.

Our objective is to grow profitable sales in the technologies we offer and expand in higher margin and adjacent markets to help our sales partners offer more products and services and increase recurring revenue opportunities. As part of our strategic plan, we consider strategic acquisitions and alliances to enhance our technology offerings and service capabilities.

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,"],["","2021","","2020"],["Statement of income data:"],["Net sales","100.0","%","","100.0","%"],["Cost of goods sold","88.9","","","88.3"],["Gross profit","11.1","","","11.7"],["Selling, general and administrative expenses","7.9","","","8.5"],["Depreciation expense","0.4","","","0.4"],["Intangible amortization expense","0.6","","","0.7"],["Restructuring and other charges","0.3","","","0.0"],["Impairment charges","0.0","","","4.0"],["Change in fair value of contingent consideration","0.0","","","0.2"],["Operating income (loss)","2.0","","","(2.1)"],["Interest expense","0.2","","","0.4"],["Interest income","(0.1)","","","(0.2)"],["Other (income) expense, net","0.0","","","0.0"],["Income (loss) from continuing operations before income taxes","1.8","","","(2.4)"],["Provision for income taxes","0.4","","","0.2"],["Net income (loss) from continuing operations","1.4","","","(2.6)"],["Net (loss) from discontinued operations","(1.1)","","","(3.7)"],["Net income (loss)","0.3","%","","(6.3)","%"]]
[[/GREPCENT_TABLE]]

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

Below is a discussion of fiscal years ended June 30, 2021 and 2020. Please refer to our Form 10-K for the fiscal year ended June 30, 2020 for a discussion of fiscal year ended June 30, 2019.

Net Sales

We have two reportable segments, which are based on the technologies provided to customers. The following table summarizes our net sales results by business segment and by geographic location for the comparable fiscal years ended June 30, 2021 and 2020.

[[GREPCENT_TABLE]]
[["","2021","","2020","","$ Change","","% Change","","% Change Constant Currency, Excluding Divestitures and Acquisitions (a)"],["","(in thousands)"],["Sales by Segment:"],["Worldwide Barcode, Networking & Security","$","2,175,141","","","$","2,093,217","","","$","81,924","","","3.9","%","","4.8","%"],["Worldwide Communications & Services","975,665","","","954,517","","","21,148","","","2.2","%","","7.1","%"],["Total net sales","$","3,150,806","","","$","3,047,734","","","$","103,072","","","3.4","%","","5.5","%"],["Sales by Geography Category:"],["United States","$","2,840,731","","","$","2,755,134","","","$","85,597","","","3.1","%","","3.1","%"],["International","310,075","","","292,600","","","17,475","","","6.0","%","","28.5","%"],["Total net sales","$","3,150,806","","","$","3,047,734","","","$","103,072","","","3.4","%","","5.5","%"],["(a) A reconciliation of non-GAAP net sales in constant currency, excluding acquisitions is presented at the end of Results of Operations, under Non-GAAP Financial Information."]]
[[/GREPCENT_TABLE]]

Worldwide Barcode, Networking & Security

The Worldwide Barcode, Networking & Security segment consists of sales to technology customers in North America and Brazil. During fiscal year 2021, net sales for this segment increased $81.9 million, or 3.9%, compared to fiscal year 2020. Excluding the foreign exchange negative impact of $19.3 million, adjusted net sales for fiscal year 2021 increased $101.2 million, or 4.8%, 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 and Brazil.

Worldwide Communications & Services

The Worldwide Communications & Services segment consists of sales to technology customers in North America, Brazil, Europe and the UK. During fiscal year 2021, net sales for this segment increased $21.1 million or 2.2% compared to fiscal year 2020 primarily due to sales growth in our North America business. Excluding the foreign exchange negative impact of $46.5 million, adjusted net sales increased $67.6 million, or 7.1%, compared to the prior year, with growth across our technologies in North America and Brazil.

In addition, net sales for our master agency business, Intelisys, increased 13% year-over-year. For our Intelisys business, net sales reflect the net commissions received from suppliers after paying sales partner commissions. For fiscal year 2021, Intelisys net billings, which are amounts billed by suppliers to end users and represent annual recurring revenue (ARR), totaled approximately $2.0 billion. The fiscal year 2021 Intelisys net billings resulted in Intelisys net sales of approximately $64.9 million.

Gross Profit

26

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The following table summarizes our gross profit for the fiscal years ended June 30, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2021","","2020","","$ Change","","% Change","","2021","","2020"],["","(in thousands)"],["Worldwide Barcode, Networking & Security","$","178,158","","","$","180,582","","","$","(2,424)","","","(1.3)","%","","8.2","%","","8.6","%"],["Worldwide Communications & Services","172,558","","","174,987","","","(2,429)","","","(1.4)","%","","17.7","%","","18.3","%"],["Total gross profit","$","350,716","","","$","355,569","","","$","(4,853)","","","(1.4)","%","","11.1","%","","11.7","%"]]
[[/GREPCENT_TABLE]]

Worldwide Barcode, Networking & Security

For the Worldwide Barcode, Networking & Security segment, gross profit dollars decreased $2.4 million, and gross profit margin decreased to 8.2% for fiscal year 2021 compared to 8.6% in the prior year. The decrease is due to a less favorable sales mix and lower vendor program recognition compared to the prior year.

Worldwide Communications & Services

For the Worldwide Communications & Services segment, gross profit dollars decreased $2.4 million, and gross profit margin decreased to 17.7% for fiscal year 2021 compared to 18.3% in the prior year. The decrease is primarily due to a less favorable sales mix, partially offset by results contributed by our Intelisys recurring revenue business.

Operating expenses

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

[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2021","","2020","","$ Change","","% Change","","2021","","2020"],["","(in thousands)"],["Selling, general and administrative expenses","$","247,438","","","$","259,535","","","$","(12,097)","","","(4.7)","%","","7.9","%","","8.5","%"],["Depreciation expense","12,533","","","13,033","","","(500)","","","(3.8)","%","","0.4","%","","0.4","%"],["Intangible amortization expense","19,488","","","19,953","","","(465)","","","(2.3)","%","","0.6","%","","0.7","%"],["Restructuring and other charges","9,258","","","604","","","8,654","","","*nm","","0.3","%","","\u2014","%"],["Impairment charges","\u2014","","","120,470","","","(120,470)","","","*nm","","\u2014","%","","4.0","%"],["Change in fair value of contingent consideration","516","","","6,941","","","(6,425)","","","(92.6)","%","","\u2014","%","","0.2","%"],["Operating expenses","289,233","","","420,536","","","(131,303)","","","(31.2)","%","","9.2","%","","13.8","%"]]
[[/GREPCENT_TABLE]]

*nm - percentages are not meaningful

Selling, general and administrative expenses ("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 we announced in July 2020, partially offset by a Brazilian tax recovery in the prior year that did not recur.

Intangible amortization expense decreased $0.5 million for the fiscal year ended June 30, 2021 largely due to Canpango intangible write-offs at the end of the prior fiscal year.

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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 during the fiscal year ended June 30, 2020 include $119.0 million in goodwill impairment charges for our Worldwide Barcode, Networking and Security segment and $1.4 million in intangible asset impairment charges for our Canpango business.

We have elected to present changes in fair value of the contingent consideration owed to former shareholders of businesses we acquire separately from other SG&A expenses. 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

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

[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2021","","2020","","$ Change","","% Change","","2021","","2020"],["","(in thousands)"],["Worldwide Barcode, Networking & Security","$","28,402","","","$","(83,515)","","","$","111,917","","","134.0","%","","1.3","%","","(4.0)","%"],["Worldwide Communications & Services","44,715","","","22,548","","","22,167","","","98.3","%","","4.6","%","","2.4","%"],["Corporate","(11,634)","","","(4,000)","","","(7,634)","","","(190.9)","%","","\u2014","%","","\u2014","%"],["Total operating income (loss)","$","61,483","","","$","(64,967)","","","$","126,450","","","194.6","%","","2.0","%","","(2.1)","%"]]
[[/GREPCENT_TABLE]]

Worldwide Barcode, Networking & Security

For the Worldwide Barcode, Networking & Security segment, operating income increased $111.9 million, and operating margin increased to 1.3% for the fiscal year ended June 30, 2021 compared to the prior year. The increase in operating income and margin for the fiscal year is due to goodwill impairment charges in 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 $7.1 million compared to the prior year. The decrease in adjusted operating income is due to lower gross profits and a Brazilian tax recovery in the prior year that did not recur.

Worldwide Communications & Services

For the Worldwide Communications & Services segment, operating income increased $22.2 million compared to the prior year, and the operating margin increased to 4.6% for the fiscal year ended June 30, 2021. The increase in operating income and margin is largely due to lower employee-related expenses and lower expense from change in fair value of the Intelisys contingent consideration.

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

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

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[[GREPCENT_TABLE]]
[["","","","","","","","","","% of Sales June 30,"],["","2021","","2020","","$ Change","","% Change","","2021","","2020"],["","(in thousands)"],["Interest expense","$","6,929","","","$","12,224","","","$","(5,295)","","","(43.3)","%","","0.2","%","","0.4","%"],["Interest income","(3,097)","","","(5,826)","","","2,729","","","(46.8)","%","","(0.1)","%","","(0.2)","%"],["Net foreign exchange losses (gains)","845","","","525","","","320","","","61.0","%","","\u2014","%","","\u2014","%"],["Other, net","(729)","","","(114)","","","(615)","","","539.5","%","","\u2014","%","","\u2014","%"],["Total other (income) expense","$","3,948","","","$","6,809","","","$","(2,861)","","","(42.0)","%","","0.1","%","","0.2","%"]]
[[/GREPCENT_TABLE]]

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 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.

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.

Provision for Income Taxes

Income tax expense for continuing operations was $12.1 million and $7.5 million for the fiscal years ended June 30, 2021 and 2020, respectively, reflecting effective tax rates of 21.1% and (10.4)%, respectively. The increase in the effective tax rate for fiscal year 2021 compared to fiscal year 2020 is primarily the result of impairment charges, most of which are not deductible for tax purposes.

We expect the fiscal year 2022 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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Quarterly Results

The following tables set forth certain unaudited quarterly financial data. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments.

[[GREPCENT_TABLE]]
[["","Three Months Ended"],["","Fiscal 2021","","Fiscal 2020"],["","Jun. 30 2021","","Mar. 31 2021","","Dec. 31 2020","","Sept. 30 2020","","Jun. 30 2020","","Mar. 31 2020","","Dec. 31 2019","","Sept. 30 2019"],["","(in thousands, except per share data)"],["Net sales","$","852,694","","","$","729,873","","","$","810,897","","","$","757,342","","","$","636,450","","","$","744,584","","","$","823,999","","","$","842,701"],["Cost of goods sold","756,916","","","641,757","","","724,854","","","676,563","","","562,303","","","660,006","","","725,680","","","744,176"],["Gross profit","$","95,778","","","$","88,116","","","$","86,043","","","$","80,779","","","$","74,147","","","$","84,578","","","$","98,319","","","$","98,525"],["Impairment charges","\u2014","","","\u2014","","","\u2014","","","\u2014","","","120,470","","","\u2014","","","\u2014","","","\u2014"],["Change in fair value of contingent consideration","\u2014","","","\u2014","","","\u2014","","","516","","","674","","","618","","","3,176","","","2,472"],["Net income (loss) from continuing operations","20,657","","","13,786","","","11,061","","","(115)","","","(108,859)","","","5,715","","","11,626","","","12,291"],["Net income (loss) from discontinued operations","3,053","","","(688)","","","(25,255)","","","(11,704)","","","(108,403)","","","(4,003)","","","(260)","","","(761)"],["Net income (loss)","$","23,710","","","13,098","","","(14,194)","","","(11,819)","","","$","(217,262)","","","$","1,712","","","$","11,366","","","$","11,530"],["Net income (loss) from continuing operations per common share, basic","$","0.81","","","$","0.54","","","$","0.44","","","$","(0.01)","","","$","(4.29)","","","$","0.23","","","$","0.46","","","$","0.48"],["Net income (loss) from discontinued operations per common share, basic","0.12","","","(0.03)","","","(0.99)","","","(0.46)","","","(4.28)","","","(0.16)","","","(0.01)","","","(0.03)"],["Net income (loss) per common share, basic","$","0.93","","","$","0.51","","","$","(0.56)","","","$","(0.47)","","","$","(8.57)","","","$","0.07","","","$","0.45","","","$","0.45"],["Weighted-average shares outstanding, basic","25,482","","","25,455","","","25,395","","","25,361","","","25,353","","","25,346","","","25,274","","","25,539"],["Net income (loss) from continuing operations per common share, diluted","$","0.80","","","$","0.54","","","$","0.43","","","$","(0.01)","","","$","(4.29)","","","$","0.23","","","$","0.46","","","$","0.48"],["Net income (loss) from discontinued operations per common share, diluted","0.12","","","(0.03)","","","(0.99)","","","(0.46)","","","(4.28)","","","(0.16)","","","(0.01)","","","(0.03)"],["Net income (loss) per common share, diluted","$","0.92","","","$","0.51","","","$","(0.56)","","","$","(0.47)","","","$","(8.57)","","","$","0.07","","","$","0.45","","","$","0.45"],["Weighted-average shares outstanding, diluted","25,664","","","25,572","","","25,475","","","25,361","","","25,353","","","25,363","","","25,358","","","25,617"]]
[[/GREPCENT_TABLE]]

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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, return on invested capital ("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.

Return on Invested Capital

Management uses ROIC as a performance measurement to assess efficiency at allocating capital under our control to generate returns. Management believes this metric balances our operating results with asset and liability management, is not impacted by capitalization decisions and correlates with shareholder value creation. In addition, it is easily computed, communicated and understood. ROIC also provides management a measure of our profitability on a basis more comparable to historical or future periods.

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 ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.

We calculate ROIC as earnings before interest expense, income taxes, depreciation and amortization, plus change in fair value of contingent consideration and other non-GAAP adjustments ("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 ROIC for the fiscal years ended June 30, 2021 and 2020, respectively.

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Return on invested capital ratio","11.8","%","","7.5","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended June 30,"],["","2021","","2020"],["","(in thousands)"],["Reconciliation of net income to EBITDA:"],["Net income (loss) from continuing operations (GAAP)","$","45,389","","","$","(79,227)"],["Plus: Interest expense","6,929","","","12,224"],["Plus: Income taxes","12,146","","","7,451"],["Plus: Depreciation and amortization","33,507","","","35,328"],["EBITDA (non-GAAP)","97,971","","","(24,224)"],["Plus: Change in fair value of contingent consideration","516","","","6,941"],["Plus: Acquisition and divestiture costs(a)","2,376","","","4,000"],["Plus: Restructuring costs","9,047","","","604"],["Plus: Impairment charges","\u2014","","","120,470"],["Plus: Tax recovery","\u2014","","","(10,744)"],["Adjusted EBITDA (numerator for ROIC) (non-GAAP)","$","109,910","","","$","97,047"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Invested capital calculations","Fiscal Year Ended June 30,"],["","2021","","2020"],["","(in thousands)"],["Invested capital calculations:"],["Equity \u2013 beginning of the year","$","678,246","","","$","914,129"],["Equity \u2013 end of the year","731,191","","","678,246"],["Plus: Change in fair value of contingent consideration, net","390","","","5,247"],["Plus: Acquisition and divestiture costs(a)","2,337","","","4,000"],["Plus: Restructuring, net","6,840","","","449"],["Plus: Impairment charges, net","\u2014","","","114,398"],["Plus: Tax recovery, net","\u2014","","","(8,001)"],["Plus: Impact of discontinued operations, net","34,594","","","113,427"],["Average equity","726,799","","","910,948"],["Average funded debt(b)","202,869","","","390,709"],["Invested capital (denominator for ROIC) (non-GAAP)","$","929,668","","","$","1,301,657"]]
[[/GREPCENT_TABLE]]

(a)     Includes acquisition and divestitures costs for the year ended June 30, 2021 and 2020. Acquisition and divestiture costs are generally non-deductible for tax purposes.

(b)    Average funded debt, which includes both continuing operations and discontinued operations, 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 acquisition:

[[GREPCENT_TABLE]]
[["Net Sales by Segment:"],["","Fiscal Year Ended June 30,"],["","2021","","2020","","$ Change","","% Change"],["Worldwide Barcode, Networking & Security:","(in thousands)"],["Net sales, reported","$","2,175,141","","","$","2,093,217","","","$","81,924","","","3.9","%"],["Foreign exchange impact(a)","19,311","","","\u2014"],["Non-GAAP net sales, constant currency","$","2,194,452","","","$","2,093,217","","","$","101,235","","","4.8","%"],["Worldwide Communications & Services:"],["Net sales, reported","$","975,665","","","$","954,517","","","$","21,148","","","2.2","%"],["Foreign exchange impact(a)","46,470","","","\u2014"],["Non-GAAP net sales, constant currency","$","1,022,135","","","$","954,517","","","$","67,618","","","7.1","%"],["Consolidated:"],["Net sales, reported","$","3,150,806","","","$","3,047,734","","","$","103,072","","","3.4","%"],["Foreign exchange impact(a)","65,781","","","\u2014"],["Non-GAAP net sales, constant currency","$","3,216,587","","","$","3,047,734","","","$","168,853","","","5.5","%"],["(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2021 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2020."]]
[[/GREPCENT_TABLE]]

32

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[[GREPCENT_TABLE]]
[["Net Sales by Geography:"],["","Fiscal Year Ended June 30,"],["","2021","","2020","","$ Change","","% Change"],["United States and Canada:","(in thousands)"],["Net sales, as reported","$","2,840,731","","","$","2,755,134","","","$","85,597","","","3.1","%"],["International:"],["Net sales, reported","$","310,075","","","$","292,600","","","$","17,475","","","6.0","%"],["Foreign exchange impact(a)","65,781","","","\u2014"],["Non-GAAP net sales, constant currency","$","375,856","","","$","292,600","","","$","83,256","","","28.5","%"],["Consolidated:"],["Net sales, reported","$","3,150,806","","","$","3,047,734","","","103,072","","","3.4","%"],["Foreign exchange impact(a)","65,781","","","\u2014"],["Non-GAAP net sales, constant currency","$","3,216,587","","","$","3,047,734","","","$","168,853","","","5.5","%"],["(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2021 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2020."]]
[[/GREPCENT_TABLE]]

Income Statement Non-GAAP Metrics

To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP net sales, non-GAAP gross profit, non-GAAP operating income, non-GAAP net other expense, 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, and other non-GAAP adjustments. 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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Operating Income by Segment:

[[GREPCENT_TABLE]]
[["","Fiscal year ended June 30,","","","","","","% of Net Sales June 30,"],["","2021","","2020","","$ Change","","% Change","","2021","","2020"],["Worldwide Barcode, Networking & Security:"],["GAAP operating income (loss)","$","28,402","","","$","(83,515)","","","$","111,917","","","(134.0)","%","","1.3","%","","(4.0)","%"],["Adjustments:"],["Amortization of intangible assets","7,871","","","7,871","","","\u2014"],["Tax recovery","\u2014","","","(5,480)","","","5,480"],["Impairment charges","\u2014","","","119,037","","","(119,037)"],["Non-GAAP operating income","$","36,273","","","$","37,913","","","$","(1,640)","","","(4.3)","%","","1.7","%","","1.8","%"],["Worldwide Communications & Services:"],["GAAP operating income","$","44,715","","","$","22,548","","","$","22,167","","","98.3","%","","4.6","%","","2.4","%"],["Adjustments:"],["Amortization of intangible assets","11,617","","","12,082","","","(465)"],["Change in fair value of contingent consideration","516","","","6,941","","","(6,425)"],["Restructuring costs","\u2014","","","604","","","(604)"],["Tax recovery","\u2014","","","(2,583)","","","2,583"],["Impairment charges","\u2014","","","1,433","","","(1,433)"],["Non-GAAP operating income","$","56,848","","","$","41,025","","","$","15,823","","","38.6","%","","5.8","%","","4.3","%"],["Corporate:"],["GAAP operating loss","$","(11,634)","","","$","(4,000)","","","$","(7,634)","","","nm*","","nm*","","nm*"],["Adjustments:"],["Acquisition and divestiture costs","2,376","","","4,000","","","(1,624)"],["Restructuring costs","9,258","","","\u2014","","","9,258"],["Non-GAAP operating income","$","\u2014","","","$","\u2014","","","$","\u2014","","","nm*","","nm*","","nm*"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Consolidated:"],["GAAP operating income (loss)","$","61,483","","","$","(64,967)","","","$","126,450","","","(194.6)","%","","2.0","%","","(2.1)","%"],["Adjustments:"],["Amortization of intangible assets","19,488","","","19,953","","","(465)"],["Change in fair value of contingent consideration","516","","","6,941","","","(6,425)"],["Acquisition and divestiture costs","2,376","","","4,000","","","(1,624)"],["Restructuring costs","9,258","","","604","","","8,654"],["Tax recovery","\u2014","","","(8,063)","","","8,063"],["Impairment charges","\u2014","","","120,470","","","(120,470)"],["Non-GAAP operating income","$","93,121","","","$","78,938","","","$","14,183","","","18.0","%","","3.0","%","","2.6","%"]]
[[/GREPCENT_TABLE]]

34

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Index to Financial Statements

[[GREPCENT_TABLE]]
[["","","","","","Year ended June 30, 2021"],["","","","","","GAAP Measure","","Intangible amortization expense","","Change in fair value of contingent consideration","","Acquisition, divestiture and restructuring costs(a)","","Tax recovery, net","","Impairment charges","","Non-GAAP measure"],["","","","","","(in thousands, except per share data)"],["Net sales","","","","","$","3,150,806","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","3,150,806"],["Gross profit","","","","","350,716","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","350,716"],["Operating income","","","","","61,483","","","19,488","","","516","","","11,634","","","\u2014","","","\u2014","","","93,121"],["Other expense, net","","","","","3,948","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","3,948"],["Pre-tax income","","","","","57,535","","","19,488","","","516","","","11,634","","","\u2014","","","\u2014","","","89,173"],["Net income from continuing operations","","","","","45,389","","","14,753","","","390","","","9,336","","","\u2014","","","\u2014","","","69,868"],["Diluted EPS from continuing operations","","","","","$","1.78","","","$","0.58","","","$","0.02","","","$","0.36","","","$","\u2014","","","$","\u2014","","","$","2.74"],["(a) Acquisition and divestiture costs totaled $2.3 million for the fiscal year ended June 30, 2021 and are generally nondeductible for tax purposes. Restructuring costs totaled $9.3 million for the fiscal year ended June 30, 2021."],["","","","","","Year ended June 30, 2020"],["","","","","","GAAP Measure","","Intangible amortization expense","","Change in fair value of contingent consideration","","Acquisition, divestiture and restructuring costs(a)","","Tax recovery, net","","Impairment charges","","Non-GAAP measure"],["","","","","","(in thousands, except per share data)"],["Net sales","","","","","$","3,047,734","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","3,047,734"],["Gross profit","","","","","355,569","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","355,569"],["Operating (loss) income","","","","","(64,967)","","","19,953","","","6,941","","","4,604","","","(8,063)","","","120,470","","","78,938"],["Other expense, net","","","","","6,809","","","\u2014","","","\u2014","","","\u2014","","","2,681","","","\u2014","","","9,490"],["Pre-tax (loss) income","","","","","(71,776)","","","19,953","","","6,941","","","4,604","","","(10,744)","","","120,470","","","69,448"],["Net (loss) income from continuing operations","","","","","(79,227)","","","15,091","","","5,247","","","4,449","","","(8,001)","","","114,398","","","51,957"],["Diluted EPS from continuing operations","","","","","$","(3.12)","","","$","0.59","","","$","0.21","","","$","0.18","","","$","(0.32)","","","$","4.51","","","$","2.05"],["(a) Acquisition and divestiture costs totaled $4.0 million for the fiscal year ended June 30, 2020 and are generally nondeductible for tax purposes. Restructuring costs totaled $0.6 million for the fiscal year ended June 30, 2020."]]
[[/GREPCENT_TABLE]]

35

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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

36

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Index to Financial Statements

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, Worldwide Barcode, Networking & Security and Worldwide Communications & Services. 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 weighted-average cost of capital ("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 year 2021, we completed our annual impairment test as of April 30th and determined that our goodwill was not impaired. During fiscal year 2020, we determined that goodwill for our Worldwide Barcode, Networking and Security reporting unit was impaired and recorded an impairment charge of $119.0 million.

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 and Network1, 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. We paid the final earnout payment to the former shareholders of Network1 during fiscal year 2019.

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

37

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Index to Financial Statements

fair value of contingent consideration line item on the Consolidated Income Statement. Current and noncurrent portions of the liability are presented in the current portion of contingent consideration and long-term portion of contingent consideration line items on the Consolidated Balance Sheets.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect or change on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the company is a party, under which the company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

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 $62.7 million and $29.5 million at June 30, 2021 and 2020, respectively, of which $52.1 million and $23.6 million was held outside of the United States as of June 30, 2021 and 2020, respectively. Checks released but not yet cleared from these accounts in the amounts of $14.3 million and $17.1 million are classified as accounts payable as of June 30, 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 for the earnings of our Canadian subsidiary and, starting in the fourth quarter of fiscal year 2021, in Brazil. See Note 14 - Income Taxes in the Notes to the Consolidated Financial Statements for further discussion.

Our net investment in working capital increased $55.5 million to $486.7 million at June 30, 2021 from $431.3 million at June 30, 2020, primarily from increases in accounts receivable and decreases in contingent consideration, partially offset by increases in accounts payable. Increases in accounts receivable and accounts payable in the current year are due to higher sales volumes as a result of general economic recovery following the initial impact of the COVID-19 pandemic. 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, payments to suppliers, as well as cash generated or used by other financing and investing activities.

[[GREPCENT_TABLE]]
[["","Year ended"],["Cash provided by (used in):","June 30, 2021","","June 30, 2020"],["","(in thousands)"],["Operating activities of continuing operations","$","116,767","","","$","182,033"],["Investing activities of continuing operations","31,993","","","(55,308)"],["Financing activities of continuing operations","(118,824)","","","(152,686)"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities was $116.8 million for the year ended June 30, 2021, compared to $182.0 million provided by operating activities for the year ended June 30, 2020. Operating cash flows for the year ended June 30, 2021 is primarily attributable to earnings from operations adjusted for non-cash item and increased accounts payable, partially offset by increased accounts receivable. Operating cash flows for the year ended June 30, 2020 is primarily attributable to reduced inventory and accounts receivable balances and earnings from operations adjusted for non-cash items.

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Index to Financial Statements

Excluding the master agency business, the number of days sales outstanding ("DSO") was 60 at June 30, 2021, compared to 63 at June 30, 2020. The increase in DSO is primarily a result of changes in the aging portfolio of North America. Throughout the current fiscal year, DSO ranged from 60 to 63. Inventory turnover was 6.5 times during the fourth quarter of the current fiscal year, compared to 4.5 times in the fourth quarter of fiscal year 2020. Throughout the current fiscal year, inventory turnover ranged from 5.8 to 6.9 times.

Cash provided by investing activities was $32.0 million in fiscal year June 30, 2021. Cash used in investing activities was $55.3 million for the year ended June 30, 2020. Cash provided by investing activities is primarily attributable to cash received for the disposal of our Latin American and Europe entities. In fiscal year 2020, cash used in investing activities is primarily attributable to cash used to purchase intY.

Cash used in financing activities totaled to $118.8 million and $152.7 million for the fiscal years ended June 30, 2021 and 2020, respectively. For fiscal years 2021 and 2020, cash used in financing activities is primarily attributable to net debt repayments and contingent consideration payments.

Share Repurchase Program

In August 2016, the Board of Directors authorized a three year $120 million share repurchase program. The share repurchase program expired in August 2019. Since the inception of the program, we repurchased 1.1 million shares totaling $35.9 million, of which 0.2 million totaling $5.4 million were repurchased during the year ended June 30, 2020.

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

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. 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, 2021. Including borrowings for both continuing and discontinued operations, there was $0.0 million and $92.4 million outstanding on the revolving credit facility at June 30, 2021 and 2020, respectively.

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Index to Financial Statements

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 and $235.4 million for the years ended June 30, 2021 and 2020, respectively. There were no letters of credit issued as of June 30, 2021. There were letters of credit issued under the multi-currency revolving credit facility for the discontinued operations of $0.3 million as of June 30, 2020. Taking into consideration outstanding borrowings on the multi-currency revolving credit facility for both continuing and discontinued operations, there was $350.0 million and $257.3 million available for additional borrowings as of June 30, 2021 and 2020, 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 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, 2021, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $281.6 million available for borrowing. While we were in compliance with the financial covenants contained in the Credit Facility as of June 30, 2021, 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. See Note 11 - Fair Value of Financial Instruments for a discussion on the liabilities recorded. We paid the final earnout payment to the former shareholders of Network1 in fiscal year 2019.

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.

Commitments

At June 30, 2021, we had contractual obligations in the form of non-cancelable operating leases, a capital lease (including interest payments), and debt (including interest payments). See Notes 9 and 15 of the Notes to the Consolidated Financial Statements. The following table summarizes our future contractual obligations:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["","Total","","Year 1","","Years 2-3","","Years 4-5","","Greater than 5 Years"],["","(in thousands)"],["Contractual Obligations"],["Non-cancelable operating leases(1)","$","20,834","","","$","5,040","","","$","8,838","","","$","5,977","","","$","979"],["Capital lease","1,456","","","1,228","","","229","","","\u2014","","","\u2014"],["Principal debt payments","143,174","","","7,843","","","131,950","","","718","","","2,663"],["Total obligations","$","165,464","","","$","14,111","","","$","141,017","","","$","6,695","","","$","3,642"]]
[[/GREPCENT_TABLE]]

(1)Amounts to be paid in future periods for real estate taxes, insurance and other operating expenses applicable to the properties pursuant to the respective operating leases have been excluded from the table above as the amounts payable in future periods are generally not specified in the lease agreements and are dependent upon amounts which are not known at this time. Such amounts were not material in the current fiscal year.

40

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Index to Financial Statements