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Form 10-Q SCANSOURCE, INC. For: Dec 31

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Quarterly period ended December 31, 2022

OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission File Number: 000-26926
scsc-20221231_g1.jpg
ScanSource, Inc.

South Carolina
(State of Incorporation)

57-0965380
(I.R.S. Employer Identification No.)

6 Logue Court
Greenville, South Carolina 29615
(864) 288-2432
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading Symbol:Name of exchange on which registered:
Common stock, no par valueSCSCNASDAQ Global Select Market

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

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

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

Emerging growth company☐
Non-accelerated filer
☐




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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding at February 1, 2023
Common Stock, no par value per share
25,349,304 shares


SCANSOURCE, INC.
INDEX TO FORM 10-Q
December 31, 2022
 
  Page #
Item 1.
Financial Statements
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.

3
FORWARD-LOOKING STATEMENTS

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

4
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share information)
December 31, 2022June 30, 2022
Assets
Current assets:
Cash and cash equivalents$66,445 $37,987 
Accounts receivable, less allowance of $13,353 at December 31, 2022
and $16,806 at June 30, 2022
779,562 729,442 
Inventories761,936 614,814 
Prepaid expenses and other current assets111,119 141,562 
Total current assets1,719,062 1,523,805 
Property and equipment, net36,593 37,477 
Goodwill214,367 214,435 
Identifiable intangible assets, net75,950 84,427 
Deferred income taxes14,751 15,668 
Other non-current assets69,806 61,616 
Total assets$2,130,529 $1,937,428 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable$748,662 $714,177 
Accrued expenses and other current liabilities76,985 88,455 
Income taxes payable6,049 34 
Current portion of long-term debt5,040 11,598 
Total current liabilities836,736 814,264 
Deferred income taxes3,132 3,144 
Long-term debt, net of current portion147,756 123,733 
Borrowings under revolving credit facility230,000 135,839 
Other long-term liabilities50,519 53,920 
Total liabilities1,268,143 1,130,900 
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued
— — 
Common stock, no par value; 45,000,000 shares authorized, 25,343,014 and 25,187,351 shares issued and outstanding at December 31, 2022 and June 30, 2022, respectively
68,313 64,297 
Retained earnings896,645 846,869 
Accumulated other comprehensive loss(102,572)(104,638)
Total shareholders’ equity862,386 806,528 
Total liabilities and shareholders’ equity$2,130,529 $1,937,428 
June 30, 2022 amounts are derived from audited consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.
5
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(In thousands, except per share data)
 
Quarter endedSix months ended
 December 31,December 31,
 2022202120222021
Net sales$1,011,241 $864,079 $1,955,054 $1,721,662 
Cost of goods sold895,907 756,426 1,726,236 1,512,437 
Gross profit115,334 107,653 228,818 209,225 
Selling, general and administrative expenses69,074 69,161 140,667 133,016 
Depreciation expense2,678 2,547 5,441 5,427 
Intangible amortization expense4,150 4,447 8,391 8,956 
Operating income39,432 31,498 74,319 61,826 
Interest expense5,060 1,493 8,507 3,153 
Interest income(2,027)(947)(3,618)(1,973)
Other expense, net207 543 955 807 
Income before income taxes36,192 30,409 68,475 59,839 
Provision for income taxes10,458 7,257 18,699 14,614 
Net income from continuing operations25,734 23,152 49,776 45,225 
Net income from discontinued operations— 100 — 100 
Net income$25,734 $23,252 $49,776 $45,325 
Per share data:
Net income from continuing operations per common share, basic$1.02 $0.91 $1.97 $1.77 
Net income from discontinued operations per common share, basic— — — — 
Net income per common share, basic$1.02 $0.91 $1.97 $1.77 
Weighted-average shares outstanding, basic25,287 25,585 25,244 25,549 
Net income from continuing operations per common share, diluted$1.01 $0.89 $1.96 $1.75 
Net income from discontinued operations per common share, diluted— — — — 
Net income per common share, diluted$1.01 $0.90 $1.96 $1.76 
Weighted-average shares outstanding, diluted25,502 25,895 25,454 25,806 
See accompanying notes to these condensed consolidated financial statements.

6
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)

Quarter endedSix months ended
December 31,December 31,
 2022202120222021
Net income$25,734 $23,252 $49,776 $45,325 
Unrealized gain on hedged transaction, net of tax3 1,172 1,882 1,585 
Foreign currency translation adjustment7,401 (2,759)184 (13,906)
Comprehensive income$33,138 $21,665 $51,842 $33,004 
See accompanying notes to these condensed consolidated financial statements.

7
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share information)

Common
Stock
(Shares)		Common
Stock
(Amount)		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Balance at June 30, 202225,187,351 $64,297 $846,869 $(104,638)$806,528 
Net income— — 24,042 — 24,042 
Unrealized gain on hedged transaction, net of tax— — — 1,879 1,879 
Foreign currency translation adjustment— — — (7,217)(7,217)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes38,551 (586)— — (586)
Share-based compensation— 2,358 — — 2,358 
Balance at September 30, 202225,225,902 $66,069 $870,911 $(109,976)$827,004 
Net income— — 25,734 — 25,734 
Unrealized gain on hedged transaction, net of tax— — — 3 3 
Foreign currency translation adjustment— — — 7,401 7,401 
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes117,112 (1,112)— — (1,112)
Share-based compensation— 3,356 — — 3,356 
Balance at December 31, 202225,343,014 $68,313 $896,645 $(102,572)$862,386 
See accompanying notes to these condensed consolidated financial statements.

8
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share information)

Common
Stock
(Shares)		Common
Stock
(Amount)		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Balance at June 30, 202125,499,465 $71,253 $758,071 $(98,133)$731,191 
Net income— — 22,073 — 22,073 
Unrealized gain on hedged transaction, net of tax— — — 413 413 
Foreign currency translation adjustment— — — (11,147)(11,147)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes29,086 994 — — 994 
Share-based compensation— 2,570 — — 2,570 
Balance at September 30, 202125,528,551 $74,817 $780,144 $(108,867)$746,094 
Net income— — 23,252 — 23,252 
Unrealized gain on hedged transaction, net of tax— — — 1,172 1,172 
Foreign currency translation adjustment— — — (2,759)(2,759)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes134,897 (2,513)— — (2,513)
Common stock repurchased(5,903)(183)— — (183)
Share-based compensation— 3,462 — — 3,462 
Balance at December 31, 202125,657,545 $75,583 $803,396 $(110,454)$768,525 
See accompanying notes to these condensed consolidated financial statements.

9
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six months ended
 December 31,
 20222021
Cash flows from operating activities:
Net income$49,776 $45,325 
Net income from discontinued operations— 100 
Net income from continuing operations49,776 45,225 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization14,285 14,879 
Amortization of debt issue costs385 209 
Provision for doubtful accounts33 921 
Share-based compensation5,679 6,032 
Deferred income taxes932 (109)
Finance lease interest24 26 
Changes in operating assets and liabilities:
Accounts receivable(49,541)(54,370)
Inventories(146,826)(95,531)
Prepaid expenses and other assets30,487 (11,236)
Other non-current assets(7,168)(1,561)
Accounts payable33,820 25,444 
Accrued expenses and other liabilities(13,268)(5,130)
Income taxes payable6,036 (177)
Net cash used in operating activities(75,346)(75,378)
Cash flows from investing activities:
Capital expenditures(4,262)(2,645)
Proceeds from the sale of discontinued operations— 3,125 
Net cash (used in) provided by investing activities(4,262)480 
Cash flows from financing activities:
Borrowings on revolving credit, net of expenses1,232,058 1,115,161 
Repayments on revolving credit, net of expenses(1,137,897)(1,057,376)
Borrowings (repayments) on long-term debt, net17,465 (4,093)
Repayments on finance lease obligation(492)(624)
Debt issuance costs(1,407)— 
Exercise of stock options634 1,114 
Taxes paid on settlement of equity awards(2,332)(2,634)
Common stock repurchased— (183)
Net cash provided by financing activities108,029 51,365 
Effect of exchange rate changes on cash and cash equivalents37 (5,062)
Increase (decrease) in cash and cash equivalents28,458 (28,595)
Cash and cash equivalents at beginning of period37,987 62,718 
Cash and cash equivalents at end of period$66,445 $34,123 
See accompanying notes to these condensed consolidated financial statements.
10
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) Business and Summary of Significant Accounting Policies

Business Description

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

Basis of Presentation

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

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

Summary of Significant Accounting Policies

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

Cash and Cash Equivalents

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

Long-lived Assets

11
The Company presents depreciation expense and intangible amortization expense on the Condensed Consolidated Income Statements. The Company's depreciation expense related to selling, general and administrative costs totaled $2.7 million and $5.4 million for the quarter and six months ended December 31, 2022 and $2.5 million and $5.4 million for the quarter and six months ended December 31, 2021. Depreciation expense reported as part of cost of goods sold on the Condensed Consolidated Income Statements totaled $0.2 million and $0.5 million for the quarter and six months ended December 31, 2022 and 2021. The Company's intangible amortization expense reported on the Condensed Consolidated Income Statements relates to selling, general and administrative costs, not the cost of selling goods. Intangible amortization expense totaled $4.2 million and $8.4 million for the quarter and six months ended December 31, 2022 and $4.4 million and $9.0 million for the quarter and six months ended December 31, 2021.

Recent Accounting Pronouncements

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

(2) Trade Accounts and Notes Receivable, Net

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

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

The changes in the allowance for doubtful accounts for the six months ended December 31, 2022 are set forth in the table below.
June 30, 2022Amounts Charged to ExpenseWrite-offs
Other (1)
December 31, 2022
(in thousands)
Trade accounts and current notes receivable allowance$16,806 $33 $(2,842)$(644)$13,353 
(1)"Other" amounts include recoveries and the effect of foreign currency fluctuations for the six months ended December 31, 2022.


(3) Revenue Recognition

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

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

Principal versus Agent Considerations

12
The Company is the principal for sales of all hardware and certain software and services. The Company considers itself the principal in those transactions where it has control of the product or service before it is transferred to the customer. The Company recognizes the principal-associated revenue and cost of goods sold on a gross basis.

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

Variable Considerations

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

Contract Balances

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

Disaggregation of Revenue

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

Quarter ended December 31, 2022
Specialty Technology SolutionsModern Communications & CloudTotal
(in thousands)
Revenue by product/service
Hardware, software and cloud (excluding Intelisys)$627,548 $363,743 $991,291 
Intelisys connectivity and cloud— 19,950 19,950 
$627,548 $383,693 $1,011,241 
Six months ended December 31, 2022
Specialty Technology SolutionsModern Communications & CloudTotal
(in thousands)
Revenue by product/service:
Hardware, software and cloud (excluding Intelisys)$1,203,878 $712,373 $1,916,251 
Intelisys connectivity and cloud— 38,803 38,803 
$1,203,878 $751,176 $1,955,054 
13
Quarter ended December 31, 2021
Specialty Technology SolutionsModern Communications & CloudTotal
(in thousands)
Revenue by product/service
Hardware, software and cloud (excluding Intelisys)$496,920 $348,893 $845,813 
Intelisys connectivity and cloud— 18,266 18,266 
$496,920 $367,159 $864,079 
Six months ended December 31, 2021
Specialty Technology SolutionsModern Communications & CloudTotal
(in thousands)
Revenue by product/service:
Hardware, software and cloud (excluding Intelisys)$998,630 $687,142 $1,685,772 
Intelisys connectivity and cloud— 35,890 35,890 
$998,630 $723,032 $1,721,662 


(4) Earnings Per Share

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

Quarter endedSix months ended
 December 31,December 31,
 2022202120222021
 (in thousands, except per share data)
Numerator:
Net income from continuing operations$25,734 $23,152 $49,776 $45,225 
Net income from discontinued operations— 100 — 100 
Net income$25,734 $23,252 $49,776 $45,325 
Denominator:
Weighted-average shares, basic25,287 25,585 25,244 25,549 
Dilutive effect of share-based payments215 310 210 257 
Weighted-average shares, diluted25,502 25,895 25,454 25,806 
Net income from continuing operations per common share, basic$1.02 $0.91 $1.97 $1.77 
Net loss from discontinued operations per common share, basic— — — — 
Net income per common share, basic$1.02 $0.91 $1.97 $1.77 
Net income from continuing operations per common share, diluted$1.01 $0.89 $1.96 $1.75 
Net loss from discontinued operations per common share, diluted— — — — 
Net income per common share, diluted$1.01 $0.90 $1.96 $1.76 

14
For the quarters and six months ended December 31, 2022, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 847,651 and 1,268,455, respectively. For the quarters and six months ended December 31, 2021, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 847,484 and 1,149,352, respectively.

(5) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following: 
December 31, 2022June 30, 2022
 (in thousands)
Foreign currency translation adjustment$(105,715)$(105,899)
Unrealized gain on hedged transaction, net of tax3,143 1,261 
Accumulated other comprehensive loss$(102,572)$(104,638)

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

Quarter ended December 31,Six months ended December 31,
2022202120222021
(in thousands)
Tax expense$166 $517 $580 $800 

(6) Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the six months ended December 31, 2022, by reporting segment, are set forth in the table below.
Specialty Technology SolutionsModern Communications & CloudTotal
 (in thousands)
Balance at June 30, 2022$16,370 $198,065 $214,435 
Foreign currency translation adjustment— (68)(68)
Balance at December 31, 2022$16,370 $197,997 $214,367 

The following table shows changes in the amount recognized for net identifiable intangible assets for the six months ended December 31, 2022.
Net Identifiable Intangible Assets
(in thousands)
Balance at June 30, 2022$84,427 
Amortization expense(8,391)
Foreign currency translation adjustment(86)
Balance at December 31, 2022$75,950 


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

The following table presents the Company’s debt at December 31, 2022 and June 30, 2022.
15
December 31, 2022June 30, 2022
(in thousands)
Current portion of long-term debt$5,040 $11,598 
Mississippi revenue bond, net of current portion3,381 3,733 
Senior secured term loan facility, net of current portion144,375 120,000 
Borrowings under revolving credit facility230,000 135,839 
Total debt$382,796 $271,170 

Credit Facility

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

Loans denominated in U.S. dollars, other than swingline loans, shall bear interest at a rate per annum equal to, at the Company’s option, (i) the adjusted Term SOFR or adjusted daily simple SOFR plus an additional margin ranging from 1.00% to 1.75%, depending upon the Company’s ratio of (A) total consolidated debt less up to $30 million of unrestricted domestic cash to (B) trailing four-quarter consolidated EBITDA measured as of the end of the most recent year or quarter, as applicable, for which financial statements have been delivered to the Lenders (the “leverage ratio”); or (ii) the alternate base rate plus an additional margin ranging from 0% to 0.75%, depending upon the Company’s leverage ratio, plus, if applicable, certain mandatory costs. All swingline loans denominated in U.S. dollars shall bear interest based upon the adjusted daily simple SOFR, floating daily, plus an additional margin ranging from 1.00% to 1.75%, depending upon the Company's leverage ratio, or such other rate as the Company and the applicable swingline lender may agree. The adjusted term SOFR and adjusted daily simple SOFR include a fixed credit adjustment of 0.10% over the applicable SOFR reference rate. Loans denominated in foreign currencies shall bear interest at a rate per annum equal to the applicable benchmark rate set forth in the New Credit Agreement plus an additional margin ranging from 1.00% to 1.75%, depending upon the Company’s leverage ratio, plus, if applicable, certain mandatory costs.

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

The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the six month periods ended December 31, 2022 and 2021 was $219.5 million and $57.1 million, respectively. There was $120.0 million and $214.2 million available for additional borrowings as of December 31, 2022 and June 30, 2022, respectively. There were no letters of credit issued under the multi-currency revolving credit facility at December 31, 2022 or June 30, 2022.

Mississippi Revenue Bond

16
On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100% of the principal amount outstanding. At December 31, 2022, the Company was in compliance with all covenants under this bond. The interest rates at December 31, 2022 and June 30, 2022 were 4.97% and 1.97%, respectively.

Debt Issuance Costs

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

(8) Derivatives and Hedging Activities

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

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

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

 Quarter endedSix months ended
December 31,December 31,
 2022202120222021
 (in thousands)
Net foreign exchange derivative contract losses (gains)$871 $(523)$1,309 $(2,175)
Net foreign currency transactional and re-measurement (gains) losses(524)1,003 (39)3,141 
Net foreign currency exchange losses$347 $480 $1,270 $966 

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

Interest Rates - The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. The Company manages its exposure to changes in interest rates by using interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating rate debt. On April 30, 2019, the Company entered into an interest rate swap agreement, which was amended on September 28, 2022 to change the reference rate from LIBOR to SOFR. The swap agreement has a notional amount of $100.0 million, with a $50.0 million tranche scheduled to mature on April 30, 2024 and a $50.0 million tranche scheduled to mature April 30, 2026. This swap
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agreement is designated as a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for the quarters and six months ended December 31, 2022 and 2021.

The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive Income for the quarters and six months ended December 31, 2022 and 2021, are as follows:
Quarter endedSix months ended
December 31,December 31,
 2022202120222021
(in thousands)
Net interest (income) expense recognized as a result of interest rate swap$(345)$579 $(313)$1,157 
Unrealized gain in fair value of interest rate swap349 999 2,849 983 
Net increase in accumulated other comprehensive income4 1,578 2,536 2,140 
Income tax effect1 406 652 555 
Net increase in accumulated other comprehensive income, net of tax$3 $1,172 $1,884 $1,585 

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

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

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(9) Fair Value of Financial Instruments

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

•Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
•Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

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

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

TotalQuoted
prices in
active
markets
(Level 1)		Significant
other
observable
inputs
(Level 2)
 (in thousands)
Assets:
Deferred compensation plan investments, current and non-current portion$27,387 $27,387 $— 
Interest rate swap agreement4,223 — 4,223 
Total assets at fair value$31,610 $27,387 $4,223 
Liabilities:
Deferred compensation plan investments, current and non-current portion$27,387 $27,387 $— 
Forward foreign currency exchange contracts9 — 9 
Foreign currency hedge281 — 281 
Total liabilities at fair value$27,677 $27,387 $290