Company Quick10K Filing
Quick10K
Scansource
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.32 26 $908
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-07-01 Other Events, Exhibits
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-04-30 Off-BS Arrangement, Exhibits
8-K 2019-02-05 Earnings, Exhibits
8-K 2019-02-01 Officers, Exhibits
8-K 2018-11-29 Officers, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-08-28 Earnings, Exhibits
SAFM Sanderson Farms 3,330
FOLD Amicus Therapeutics 3,000
TIBR Tiberius Acquisition 219
CIDM Cinedigm 66
CLRB Cellectar Biosciences 11
MWF MWF Global 0
GGRO Golden Growers Cooperative 0
DD DuPont 0
ANVI Anvi Global Holdings 0
KBSGI KBS Growth & Income REIT 0
SCSC 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 scansourceex1013312019.htm
EX-10.2 scansourceex1023312019.htm
EX-31.1 scansourceex3113312019.htm
EX-31.2 scansourceex3123312019.htm
EX-32.1 scansourceex3213312019.htm
EX-32.2 scansourceex3223312019.htm

Scansource Earnings 2019-03-31

SCSC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 scansource331201910q.htm 10-Q Document
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 for the
Quarterly period ended March 31, 2019

Commission File Number: 000-26926
 
 
 
scansourcelogo4a291a01.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 value
SCSC
NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    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  x    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
x
 
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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 7, 2019
Common Stock, no par value per share
 
25,705,842



SCANSOURCE, INC.
INDEX TO FORM 10-Q
March 31, 2019
 
 
 
Page #
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1
Item 1A.
Item 2
Item 6.
 
 
 
 
 


2


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, except as required by law. 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, changes in interest and exchange rates and regulatory regimes impacting our overseas operations, the failure of acquisitions to meet our expectations, the failure to manage and implement our organic growth strategy, credit risks involving our larger customers and suppliers, termination of our relationship with key suppliers or a significant modification of the terms under which we operate with a key supplier, the decline in demand for the products and services that we provide, reduced prices for the products and services that we provide due both to competitor and customer actions and the other factors set forth in "Risk Factors" contained in our Annual Report on Form 10-K for the year ended June 30, 2018.


3


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share information)
 
March 31, 2019
 
June 30, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,400

 
$
25,530

Accounts receivable, less allowance of $43,124 at March 31, 2019 and $45,561 at June 30, 2018
632,539

 
678,940

Inventories
760,711

 
595,948

Prepaid expenses and other current assets
52,544

 
61,744

Total current assets
1,466,194

 
1,362,162

Property and equipment, net
71,282

 
73,042

Goodwill
319,042

 
298,174

Identifiable intangible assets, net
133,014

 
136,806

Deferred income taxes
20,660

 
22,199

Other non-current assets
51,963

 
52,912

Total assets
$
2,062,155

 
$
1,945,295

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
585,121

 
$
562,564

Accrued expenses and other current liabilities
86,910

 
90,873

Current portion of contingent consideration
39,445

 
42,975

Income taxes payable
1,664

 
13,348

Current portion of long-term debt
335

 
551

Total current liabilities
713,475

 
710,311

Deferred income taxes
1,607

 
1,769

Long-term debt
4,764

 
4,878

Borrowings under revolving credit facility
342,573

 
244,000

Long-term portion of contingent consideration
34,814

 
65,258

Other long-term liabilities
53,859

 
52,703

Total liabilities
1,151,092

 
1,078,919

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, 25,705,842 and 25,593,122 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively
72,903

 
68,220

Retained earnings
928,352

 
882,333

Accumulated other comprehensive income (loss)
(90,192
)
 
(84,177
)
Total shareholders’ equity
911,063

 
866,376

Total liabilities and shareholders’ equity
$
2,062,155

 
$
1,945,295

 
 
 
 
June 30, 2018 amounts are derived from audited consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.


4


SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(In thousands, except per share data)
 
 
Quarter ended
 
Nine months ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
893,357

 
$
895,637

 
$
2,912,278

 
$
2,852,408

Cost of goods sold
783,342

 
791,749

 
2,569,570

 
2,529,632

Gross profit
110,015

 
103,888

 
342,708

 
322,776

Selling, general and administrative expenses
77,688

 
72,691

 
236,569

 
220,642

Depreciation expense
3,417

 
3,352

 
9,954

 
10,059

Intangible amortization expense
5,005

 
5,103

 
14,708

 
15,600

Change in fair value of contingent consideration
5,101

 
4,801

 
11,535

 
28,595

Operating income
18,804

 
17,941

 
69,942

 
47,880

Interest expense
3,670

 
2,784

 
9,415

 
6,655

Interest income
(682
)
 
(887
)
 
(1,397
)
 
(2,349
)
Other expense, net
21

 
252

 
254

 
691

Income before income taxes
15,795

 
15,792

 
61,670

 
42,883

Provision for income taxes
4,080

 
5,143

 
15,651

 
20,118

Net income
$
11,715

 
$
10,649

 
$
46,019

 
$
22,765

Per share data:
 
 
 
 
 
 
 
Net income per common share, basic
$
0.46

 
$
0.42

 
$
1.79

 
$
0.89

Weighted-average shares outstanding, basic
25,704

 
25,572

 
25,647

 
25,503

 
 
 
 
 
 
 
 
Net income per common share, diluted
$
0.45

 
$
0.42

 
$
1.79

 
$
0.89

Weighted-average shares outstanding, diluted
25,762

 
25,606

 
25,755

 
25,607

See accompanying notes to these condensed consolidated financial statements.


5


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

 
Quarter ended
 
Nine months ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
11,715

 
$
10,649

 
$
46,019

 
$
22,765

Unrealized (loss) gain on hedged transaction, net of tax
(350
)
 
561

 
(819
)
 
910

Foreign currency translation adjustment
(1,797
)
 
4,194

 
(5,196
)
 
11,644

Comprehensive income
$
9,568

 
$
15,404

 
$
40,004

 
$
35,319

See accompanying notes to these condensed consolidated financial statements.


6



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, 2018
25,593,122

 
$
68,220

 
$
882,333

 
$
(84,177
)
 
$
866,376

Net income

 

 
14,322

 

 
14,322

Unrealized gain on hedged transaction, net of tax

 

 

 
146

 
146

Foreign currency translation adjustment

 

 

 
(4,762
)
 
(4,762
)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
14,542

 
425

 

 

 
425

Share-based compensation

 
1,390

 

 

 
1,390

Balance at September 30, 2018
25,607,664

 
70,035

 
896,655

 
(88,793
)
 
877,897

Net income

 

 
19,982

 

 
19,982

Unrealized loss on hedged transaction, net of tax

 

 

 
(615
)
 
(615
)
Foreign currency translation adjustment

 

 

 
1,363

 
1,363

Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
104,065

 
(321
)
 

 

 
(321
)
Stock repurchased
(9,387
)
 
(308
)
 

 

 
(308
)
Share-based compensation

 
1,506

 

 

 
1,506

Balance at December 31, 2018
25,702,342

 
70,912

 
916,637

 
(88,045
)
 
899,504

Net income

 

 
11,715

 

 
11,715

Unrealized loss on hedged transaction, net of tax

 

 

 
(350
)
 
(350
)
Foreign currency translation adjustment

 

 

 
(1,797
)
 
(1,797
)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
3,500

 
(2
)
 

 

 
(2
)
Share-based compensation

 
1,993

 

 

 
1,993

Balance at March 31, 2019
25,705,842

 
$
72,903

 
$
928,352

 
$
(90,192
)
 
$
911,063
























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, 2017
25,431,845

 
$
61,169

 
$
849,180

 
$
(73,204
)
 
$
837,145

Net income

 

 
4,147

 

 
4,147

Unrealized gain on hedged transaction, net of tax

 

 

 
29

 
29

Foreign currency translation adjustment

 

 

 
9,885

 
9,885

Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
8,471

 
193

 

 

 
193

Share based compensation

 
1,577

 

 

 
1,577

Balance at September 30, 2017
25,440,316

 
62,939

 
853,327

 
(63,290
)
 
852,976

Net income

 

 
7,969

 

 
7,969

Unrealized loss on hedged transaction, net of tax

 

 

 
320

 
320

Foreign currency translation adjustment

 

 

 
(2,435
)
 
(2,435
)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
131,039

 
317

 

 

 
317

Share based compensation

 
1,640

 

 

 
1,640

Balance at December 31, 2017
25,571,355

 
64,896

 
861,296

 
(65,405
)
 
860,787

Net income

 

 
10,649

 

 
10,649

Unrealized loss on hedged transaction, net of tax

 

 

 
561

 
561

Foreign currency translation adjustment

 

 

 
4,194

 
4,194

Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
807

 
(6
)
 

 

 
(6
)
Share based compensation

 
1,611

 

 

 
1,611

Balance at March 31, 2018
25,572,162

 
$
66,501

 
$
871,945

 
$
(60,650
)
 
$
877,796



8


SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine months ended
 
March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
46,019

 
$
22,765

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
27,566

 
28,204

Amortization of debt issuance costs
252

 
242

Provision for doubtful accounts
3,199

 
5,939

Share-based compensation
4,906

 
4,855

Deferred income taxes
1,132

 
(3,061
)
Change in fair value of contingent consideration
11,535

 
28,595

Contingent consideration paid in excess of acquisition fair value
(10,190
)
 
(3,066
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
40,530

 
(16,950
)
Inventories
(169,031
)
 
(22,570
)
Prepaid expenses and other assets
10,116

 
(2,904
)
Other non-current assets
413

 
(3,114
)
Accounts payable
25,138

 
(32,418
)
Accrued expenses and other liabilities
(4,082
)
 
(9,452
)
Income taxes payable
(12,050
)
 
(3,295
)
Net cash (used in) operating activities
(24,547
)
 
(6,230
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(10,977
)
 
(5,307
)
Cash paid for business acquisitions, net of cash acquired
(32,161
)
 
(143,768
)
Net cash (used in) investing activities
(43,138
)
 
(149,075
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit
1,602,568

 
1,734,973

Repayments on revolving credit
(1,503,654
)
 
(1,550,460
)
Debt issuance costs

 
(296
)
Repayments on long-term debt
(330
)
 

Repayments on capital lease obligation
(495
)
 
(437
)
Contingent consideration payments
(35,606
)
 
(50,959
)
Exercise and issuance of equity awards
1,509

 
2,126

Taxes paid on settlement of equity awards
(1,406
)
 
(1,622
)
Repurchase of common stock
(308
)
 

Net cash provided by financing activities
62,278

 
133,325

Effect of exchange rate changes on cash and cash equivalents
277

 
1,247

Decrease in cash and cash equivalents
(5,130
)
 
(20,733
)
Cash and cash equivalents at beginning of period
25,530

 
56,094

Cash and cash equivalents at end of period
$
20,400

 
$
35,361

 
 
 
 
See accompanying notes to these condensed consolidated financial statements.

9


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 at the center of the solution delivery channel, connecting businesses and institutions, and providing technology solutions. The Company brings technology solutions and services from the world’s leading suppliers of point-of-sale (POS), payments, barcode, physical security, unified communications and collaboration, and telecom and cloud services to market. The Company operates in the United States, Canada, Latin America and Europe. The Company's two operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services, are based on product, customer and service type.

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 as of March 31, 2019 and June 30, 2018, the results of operations for the quarters and nine months ended March 31, 2019 and 2018, the statements of comprehensive income for the quarters and nine months ended March 31, 2019 and 2018, the statements of shareholders' equity for the quarters and nine months ended March 31, 2019 and 2018 and the statements of cash flows for the nine months ended March 31, 2019 and 2018. The results of operations for the quarters and nine months ended March 31, 2019 and 2018 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, 2018.

Summary of Significant Accounting Policies

Except as described below, there have been no material changes to the Company’s significant accounting policies for the nine months ended March 31, 2019 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, 2018. 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, 2018.

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 $16.8 million and $5.7 million are included in accounts payable as of March 31, 2019 and June 30, 2018, respectively.













10


Long-lived Assets

The Company presents depreciation expense and intangible amortization expense individually on the Condensed Consolidated Income Statements. The Company's depreciation expense related to selling, general and administrative costs totaled $3.4 million and $10.0 million for the quarter and nine months ended March 31, 2019, respectively, and $3.4 million and $10.1 million for the quarter and nine months ended March 31, 2018, respectively. Depreciation expense reported as part of cost of goods sold on the Condensed Consolidated Income Statements totaled $0.9 million and $2.9 million for the quarter and nine months ended March 31, 2019, respectively, and $1.0 million and $2.5 million for the quarter and nine months ended March 31, 2018, respectively. The Company's 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 $5.0 million and $14.7 million for the quarter and nine months ended March 31, 2019, respectively, and $5.1 million and $15.6 million for the quarter and nine months ended March 31, 2018, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued a comprehensive new revenue recognition standard for contracts with customers that superseded the most current revenue recognition guidance, including industry-specific guidance under Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). In March, April, May and December 2016 the FASB issued additional ASUs to provide supplemental adoption guidance and clarification to ASU 2014-09. The core principle of this standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The Company adopted the standard on July 1, 2018 using the full retrospective method. The adoption of this standard had no material impact on the Company's consolidated financial statements. See Note 2 Revenue Recognition for additional information.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) requiring lessees to reflect most leases on their balance sheets and recognize expenses on their income statements in a manner similar to current guidance. Under the new guidance, lessees will be required to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The asset will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs. For leases with a lease term of 12 months or less, as long as the lease does not include options to purchase the underlying assets, lessees can elect not to recognize a lease liability and right-of-use asset. Under the new guidance, lessor accounting is largely unchanged, and the accounting for sale and leaseback transactions is simplified. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This guidance will be applicable to the Company for the fiscal year beginning July 1, 2019. The guidance can be adopted using a modified retrospective approach or a cumulative-effect adjustment to the opening balance sheet of retained earnings in the period of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company has established a lease implementation team and is in the process of reviewing leases to determine an implementation approach. Currently, the Company is evaluating the impact on its consolidated financial statements upon the adoption of this new guidance.

In June 2016, the FASB issues ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326: Financial Instruments - Credit Losses, which provides supplemental guidance and clarification to ASU 2016-13 and must be adopted concurrently. The pronouncement revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance is effective for the Company beginning in the first quarter of fiscal year 2021 with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) intended to reduce diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update addresses eight specific cash flow issues, with the treatment of contingent consideration payments made after a business combination being the most directly applicable to the Company. The update requires that cash payments made approximately three months or less after an acquisition's consummation date should be classified as cash outflows for investing activities. Payment made thereafter up to the amount of the original contingent consideration liability should be classified as cash outflows from financing activities. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows

11


from operating activities. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the standard for the fiscal year beginning July 1, 2018 using the retrospective transition method. For fiscal year 2018, the Company classified the amount of the Network1 earnout payment paid in excess of the originally anticipated liability at the acquisition date as an operating cash outflow. For fiscal year 2019, the Company classified the amounts of the Intelisys and Network1 earnout payments in excess as an operating cash outflow.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) that amends and simplifies guidance related to hedge accounting to more accurately portray the economics of an entity’s risk management activities in its financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. This guidance will be applicable to the Company for the fiscal year beginning July 1, 2019. The guidance requires adoption using a modified retrospective approach. The presentation and disclosure requirements apply prospectively. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this new guidance.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning July 1, 2020. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. Under this ASU, a customer will determine whether to capitalize implementation costs of the cloud computing arrangement that is a service contract or expense them as incurred. This guidance is applicable to the Company’s fiscal year beginning July 1, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.

In August 2018, the SEC adopted a final rule that amends certain of its disclosure requirements. The rule requires registrants to include in the interim financial reporting an analysis of changes in shareholders' equity for the current and comparative year-to-date interim periods. The final rule was effective on November 5, 2018 with registrants required to provide interim reporting in the first period beginning after the effective date. The Company provided an interim analysis of changes in shareholders' equity for the quarter ending March 31, 2019 in this Form 10-Q.

The Company has reviewed other 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.

Reclassifications

Certain reclassifications have been made on the Consolidated Statements of Cash Flows to classify contingent consideration payments made in excess of the original contingent liability as an operating activity in accordance with ASU 2016-15. These reclassifications had no effect on consolidated financial results.

(2) Revenue Recognition

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

The Company adopted ASC 606 effective July 1, 2018 utilizing the full retrospective method. 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 the Company's warehouse, (ii) drop-shipment directly from the supplier, or (iii) electronic delivery for software licenses.

Significant Judgments:


12


Principal versus Agent Considerations

The Company is the principal for sales of all hardware, software and certain services, including self-branded warranty programs. The Company considers itself the principal in these transactions as it has control of the product or service before it is transferred to the customer. When the Company provides self-branded warranty programs, it engages a third party, generally the original equipment manufacturer, to cover the fulfillment of any obligations arising from these contracts. These revenues and associated third-party costs are amortized over the life of the contract on a straight-line basis. The Company recognizes the previously described 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.

Related to the Company’s Intelisys business, the Company acts as a master agent partnering suppliers with sales agents to provide telecom and cloud services to end customers. Commission revenue received from the supplier is recognized net of cost associated with commissions the Company pays to sales agents at the time of sale.

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 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 or the most likely amount 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.

Practical Expedients & Accounting Policy Elections
Incremental costs of obtaining a contract - These costs are included in selling, general and administrative expenses as the amortization period is generally one year or less. The Company expenses costs associated with obtaining and fulfilling contracts as incurred.
Shipping costs - The Company accounts for certain shipping and handling activities as fulfillment costs and expenses them as incurred.
Significant financing components - The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.
Sales tax and other related taxes - Sales and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue.
Disaggregation of Revenue

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

13


 
 
Quarter ended March 31, 2019
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
596,913

 
$
282,124

 
$
879,037

Master agency and professional services
 

 
14,320

 
14,320

 
 
$
596,913

 
$
296,444

 
$
893,357

 
 
 
 
 
 
 
 
 
Nine months ended March 31, 2019
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
1,953,664

 
$
917,727

 
$
2,871,391

Master agency and professional services
 

 
40,887

 
40,887

 
 
$
1,953,664

 
$
958,614

 
$
2,912,278


 
 
Quarter ended March 31, 2018
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
604,322

 
$
280,644

 
$
884,966

Master agency and professional services
 

 
10,671

 
10,671

 
 
$
604,322

 
$
291,315

 
$
895,637

 
 
 
 
 
 
 
 
 
Nine months ended March 31, 2018
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
1,944,436

 
$
877,197

 
$
2,821,633

Master agency and professional services
 

 
30,775

 
30,775

 
 
$
1,944,436

 
$
907,972

 
$
2,852,408


(3) 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.

14


 
Quarter ended
 
Nine months ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income
$
11,715

 
$
10,649

 
$
46,019

 
$
22,765

Denominator:
 
 
 
 
 
 
 
Weighted-average shares, basic
25,704

 
25,572

 
25,647

 
25,503

Dilutive effect of share-based payments
58

 
34

 
108

 
104

Weighted-average shares, diluted
25,762

 
25,606

 
25,755

 
25,607

 
 
 
 
 
 
 
 
Net income per common share, basic
$
0.46

 
$
0.42

 
$
1.79

 
$
0.89

Net income per common share, diluted
$
0.45

 
$
0.42

 
$
1.79

 
$
0.89


For the quarter and nine months ended March 31, 2019, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 592,411 and 459,189, respectively. For the quarter and nine months ended March 31, 2018, there were 952,351 and 534,082, respectively, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.

(4) Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following: 
 
March 31, 2019
 
June 30, 2018
 
(in thousands)
Foreign currency translation adjustment
$
(90,475
)
 
$
(85,279
)
Unrealized gain (loss) on hedged transaction, net of tax
283

 
1,102

Accumulated other comprehensive income (loss)
$
(90,192
)
 
$
(84,177
)
 
 
 
 

The tax effect of amounts in comprehensive income (loss) reflect a tax expense or benefit as follows:
 
Quarter ended March 31,
 
Nine months ended March 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Tax expense (benefit)
$
307

 
$
(108
)
 
$
905

 
$
(487
)
 
 
 
 
 
 
 
 
(5) Acquisitions
RPM, Canpango and Intelisys Global

During the quarter ended December 31, 2018, the Company acquired the assets of RPM Software ("RPM"), a business process software developer with focus in the telecom channel business for calculating and paying agency commissions in an automated cloud-based system. During the quarter ended September 30, 2018, Company completed the acquisition of Canpango, a global Salesforce implementation and consulting business with deep knowledge of customer relationship management (CRM) and integration with telecom systems. Intelisys Global was also acquired during the quarter ended September 30, 2018. The total combined purchase price for all companies, net of cash acquired, was approximately $32.2 million. The impact of these acquisitions was not material to the consolidated financial statements. The allocation of the RPM purchase price to the assets and liabilities acquired, including the valuation of the identifiable intangible assets, has not been completed as of the reporting date.




15


POS Portal

On July 31, 2017, the Company acquired all of the outstanding shares of POS Portal, Inc. ("POS Portal"), a leading provider of payment devices and services primarily to the small and midsized ("SMB") market segment in the United States. POS Portal joined the Worldwide Barcode, Networking & Security segment.

Under the purchase agreement, the all-cash transaction included an initial purchase price of approximately $144.9 million paid in cash at closing. The Company paid an additional $3.4 million for customary closing adjustments during the six months ended December 31, 2017. The Company acquired $4.6 million in cash, net of debt payoff and other customary closing adjustments, resulting in $143.8 million net cash paid for POS Portal. The agreement also included a cash earn-out payment up to $13.2 million based on POS Portal's earnings before interest expense, taxes, depreciation and amortization (EBITDA) for the trailing twelve months (TTM) ending September 30, 2017, which was paid in full during the quarter ended December 31, 2017. A portion of the purchase price was placed into escrow to indemnify the Company for certain pre-acquisition damages. As of March 31, 2019, the balance available in escrow was $0.2 million.

The purchase price of this acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date. Purchase accounting for this acquisition was finalized during the quarter ended December 31, 2017. The goodwill balance is primarily attributed to expanding the Company's high-value capabilities and market reach across all payment channels. Goodwill, identifiable intangible assets and the related deferred tax liability are not deductible for tax purposes. Pro forma results of operations have not been presented for the acquisition of POS Portal because such results are not material to our consolidated results.
 
POS Portal
 
(in thousands)
Receivables
$
8,914

Inventory
8,352

Other current assets
917

Property and equipment
24,963

Goodwill
101,198

Identifiable intangible assets
57,000

Other non-current assets
100

 
$
201,444

 
 
Accounts payable
$
10,897

Accrued expenses and other current liabilities
5,130

Contingent consideration
13,098

Other long-term liabilities
102

Long-term deferred taxes
28,449

Consideration transferred, net of cash acquired
143,768

 
$
201,444


Intangible assets acquired include trade names, customer relationships, non-compete agreements and an encryption key library. The weighted-average amortization period for these identified intangible assets after purchase accounting adjustments, other than goodwill, was 10 years.
(6) Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended March 31, 2019, by reporting segment, are set forth in the table below. Additions to goodwill for the current year are due to recent acquisitions.

16


 
Barcode, Networking & Security Segment
 
Communications & Services Segment
 
Total
 
(in thousands)
Balance as of June 30, 2018
$
137,214

 
$
160,960

 
$
298,174

Additions

 
21,618

 
21,618

     Foreign currency translation adjustment
(75
)
 
(675
)
 
(750
)
Balance as of March 31, 2019
$
137,139

 
$
181,903

 
$
319,042


The following table shows changes in the amount recognized for net identifiable intangible assets for the nine months ended March 31, 2019.
 
Net Identifiable Intangible Assets
 
(in thousands)
Balance as of June 30, 2018
$
136,806

Additions
11,127

Amortization expense
(14,708
)
Foreign currency translation adjustment
(211
)
Balance as of March 31, 2019
$
133,014


The Company acquired customer relationships, trade names and non-compete agreements related to the Canpango acquisition. With the RPM acquisition, the Company acquired trade names, customer relationships and developed technology. The allocation of the purchase price to the assets and liabilities acquired for the RPM acquisition has not been completed as of the reporting date.

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

The following table presents the Company’s debt as of March 31, 2019 and June 30, 2018.
 
March 31, 2019
 
June 30, 2018
 
(in thousands)
Current portion of long-term debt
$
335

 
$
551

Long-term debt, net of current portion
4,764

 
4,878

Borrowings under revolving credit facility
342,573

 
244,000

Total debt
$
347,672

 
$
249,429


Revolving Credit Facility

The Company has a multi-currency senior secured revolving credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (the “Amended Credit Agreement”). On April 3, 2017, the Company amended this credit facility to extend its maturity to April 3, 2022. On August 8, 2017, the Company amended the Amended Credit Agreement to increase the committed credit facility from $300 million to $400 million. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit and has a $200 million accordion feature that allows the Company to increase the availability to $600 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Company incurred $0.9 million and $0.3 million in connection with the amendments to the Amended Credit Agreement on April 3, 2017 and August 8, 2017, respectively. These costs were capitalized to other assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.

At the Company's 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 London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon the Company's ratio of total debt (excluding accounts payable and accrued liabilities), measured as of the end of the most recent quarter, to adjusted earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") for the most recently completed four quarters (the "Leverage Ratio"). This spread ranges from 1.00% to 2.125% for LIBOR-based loans and 0.00% to 1.125% for alternate base rate loans. Additionally, the Company is assessed commitment fees ranging from 0.175% to 0.35%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. Borrowings are guaranteed

17


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.

At March 31, 2019, the spread in effect was 1.875% for LIBOR-based loans and 0.875% for alternate base rate loans. The commitment fee rate in effect as of March 31, 2019 was 0.30%. The Company was in compliance with all covenants under the credit facility as of March 31, 2019.

The average daily outstanding balance during the nine month periods ended March 31, 2019 and 2018 was $313.6 million and $277.3 million, respectively. There was $57.4 million and $156.0 million available for additional borrowings as of March 31, 2019 and June 30, 2018, respectively. There were no letters of credit issued under the multi-currency revolving credit facility as of March 31, 2019 and June 30, 2018.

On April 30, 2019, the Company amended and restated the Amended Credit Agreement as described in Note 13.

Long-Term Debt

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. As of March 31, 2019, the Company was in compliance with all covenants under this bond. The interest rate at March 31, 2019 and June 30, 2018 was 3.318% and 2.855%, respectively.
 
Debt Issuance Costs

As of March 31, 2019, net debt issuance costs associated with the credit facility and bond totaled $1.1 million and are being amortized on a straight-line basis through the maturity date of each respective debt instrument.

(8) Derivatives and Hedging Activities

In an effort to manage the exposure to foreign currency exchange rates and interest rates, 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 balance sheet at fair value. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges designated as hedging instruments 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. The exposure to market risk for changes in foreign currency exchange rates arises from foreign currency-denominated assets and liabilities and transactions arising from non-functional currency financing or trading activities. The Company’s objective is to preserve the economic value of non-functional currency-denominated cash flows. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through forward contracts or other hedging instruments with third parties. These contracts hedge the exchange of various currencies, including the U.S. dollar, Brazilian real, euro, British pound, Canadian dollar, Mexican peso, Chilean peso, Colombian peso, Peruvian nuevo sol and South African rand. While the Company utilizes foreign exchange contracts to hedge foreign currency exposure, the Company's foreign exchange policy prohibits the use of derivative financial instruments for speculative purposes.

The Company had contracts outstanding for purposes of managing cash flows with notional amounts of $104.9 million and $74.6 million for the exchange of foreign currencies as of March 31, 2019 and June 30, 2018, 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 are as follows:

18


 
Quarter ended
 
Nine months ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Net foreign exchange derivative contract (gains) losses
$
1,125

 
$
1,115

 
$
178

 
$
2,057

Net foreign currency transactional and re-measurement (gains) losses
(654
)
 
(622
)
 
810

 
(782
)
Net foreign currency (gains) losses
$
471

 
$
493

 
$
988

 
$
1,275


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 and are included in other (income) expense, net in the accompanying condensed consolidated income statements. 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 other currencies versus the U.S. dollar.

Interest Rates - The Company's earnings are affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure, the Company has entered into an interest rate swap agreement with a notional amount of $50.0 million scheduled to mature on April 3, 2022. This swap 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 quarter and nine months ended March 31, 2019 and 2018.

The components of the cash flow hedge included in accumulated other comprehensive income (loss), net of income taxes, in the Condensed Consolidated Balance Sheets, are as follows:

 
 
Quarter ended
 
Nine months ended
 
 
March 31,
 
March 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Net interest (income) expense recognized as a result of interest rate swap
 
$
(79
)
 
$
28

 
$
(161
)
 
$
174

Unrealized gain (loss) in fair value of interest rate swap
 
(385
)
 
725

 
(919
)
 
1,136

Net increase (decrease) in accumulated other comprehensive income (loss)
 
$
(464
)
 
$
753

 
$
(1,080
)
 
$
1,310

Income tax effect
 
(114
)
 
192

 
(261
)
 
400

Net increase (decrease) in accumulated other comprehensive income (loss), net of tax
 
$
(350
)
 
$
561

 
$
(819
)
 
$
910


The Company used the following derivative instruments as of March 31, 2019 and June 30, 2018, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:

19


 
 
 
March 31, 2019
 
June 30, 2018
 
Balance Sheet Location
 
Fair Value  of
Derivatives
Designated 
as Hedge Instruments
 
Fair Value  of
Derivatives
Not Designated as  Hedge Instruments
 
Fair Value  of
Derivatives
Designated
as Hedge Instruments
 
Fair Value  of
Derivatives
Not Designated as Hedge Instruments
 
 
 
(in thousands)
Derivative assets:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$

 
$
581

 
$

 
$
157

Interest rate swap agreement
Other non-current assets
 
$
524

 
$

 
$
1,604

 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued expenses and other current liabilities
 
$

 
$
112

 
$

 
$
156




20


(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;
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 or disclosed at fair value on a recurring basis include the Company’s various debt instruments, deferred compensation plan investments, outstanding forward foreign currency exchange contracts, interest rate swap agreements and contingent consideration owed to the previous owners of Network1 and Intelisys. 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 criteria).

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis as of March 31, 2019:
 
Total
 
Quoted
prices in
active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan investments, current and non-current portion
$
24,574

 
$
24,574

 
$

 
$

Forward foreign currency exchange contracts
581

 

 
581

 

Interest rate swap agreement
524

 

 
524

 

Total assets at fair value
$
25,679

 
$
24,574

 
$
1,105

 
$

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan investments, current and non-current portion
$
24,574

 
$
24,574

 
$

 
$

Forward foreign currency exchange contracts
112

 

 
112

 

Liability for contingent consideration, current and non-current portion
74,259

 

 

 
74,259

Total liabilities at fair value
$
98,945

 
$
24,574

 
$
112

 
$
74,259


















21



The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis as of June 30, 2018:
 
Total
 
Quoted
prices in
active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan investments, current and non-current portion
$
23,352

 
$
23,352

 
$

 
$

Forward foreign currency exchange contracts
157

 

 
157

 

Interest rate swap agreement
1,604

 

 
1,604

 

Total assets at fair value
$
25,113

 
$
23,352

 
$
1,761

 
$

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan investments, current and non-current portion
$
23,352

 
$
23,352

 
$

 
$

Forward foreign currency exchange contracts
156

 

 
156

 

Liability for contingent consideration, current and non-current portion
108,233

 

 

 
108,233

Total liabilities at fair value
$
131,741

 
$
23,352

 
$
156

 
$
108,233


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

Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). See Note 8 - Derivatives and Hedging Activities. Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including LIBOR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Condensed Consolidated Balance Sheets as prepaid expenses and other current assets or accrued expenses and other current liabilities, depending on the respective instruments' favorable or unfavorable positions.
 
The Company recorded contingent consideration liabilities at the acquisition date of Network1, Intelisys and POS Portal representing the amounts payable to former shareholders, as outlined under the terms of the purchase agreements, based upon the achievement of a projected earnings measure, net of specific pro forma adjustments. A final contingent consideration payment was paid to the former shareholders of Network1 during the quarter ended March 31, 2019. The contingent consideration for POS Portal was paid in full during the quarter ended December 31, 2017. The current and non-current portions of these obligations are reported separately on the Condensed Consolidated Balance Sheets. The fair value of the contingent considerations (Level 3) are determined using a form of a probability weighted discounted cash flow model. Subsequent changes in the fair value of the contingent consideration liabilities are recorded to the change in fair value of contingent consideration line item in the Condensed Consolidated Income Statements. Fluctuations due to foreign currency translation are captured in other comprehensive income through the changes in foreign currency translation adjustments line item as seen in Note 4 - Accumulated Other Comprehensive Income (Loss).

POS Portal is part of the Company's Worldwide Barcode, Networking & Security Segment. Network1 and Intelisys are part of the Company's Worldwide Communications & Services segment.







22




The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the Network1 and Intelisys earnouts for the quarter and nine months ended March 31, 2019.
 
Contingent consideration for the quarter ended
 
Contingent consideration for the nine months ended
 
March 31, 2019
 
March 31, 2019
 
Barcode, Networking & Security Segment
 
Communications & Services Segment
 
Total
 
Barcode, Networking & Security Segment
 
Communications & Services Segment
 
Total
 
(in thousands)
Fair value at beginning of period
$

 
$
71,886

 
$
71,886

 
$

 
$
108,233

 
$
108,233

Issuance of contingent consideration

 

 

 

 

 

Payments

 
(2,736
)
 
(2,736
)
 

 
(45,796
)
 
(45,796
)
Change in fair value of contingent consideration

 
5,101

 
5,101

 

 
11,535

 
11,535

Foreign currency translation adjustment

 
8

 
8

 

 
287

 
287

Fair value at end of period
$

 
$
74,259

 
$
74,259

 
$

 
$
74,259

 
$
74,259


The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the Network1, Intelisys and POS Portal earnouts for the quarter and nine months ended March 31, 2018.

 
Contingent consideration for the quarter ended
 
Contingent consideration for the nine months ended
 
March 31, 2018
 
March 31, 2018
 
Barcode, Networking & Security Segment
 
Communications & Services Segment
 
Total
 
Barcode, Networking & Security Segment
 
Communications & Services Segment
 
Total
 
(in thousands)
Fair value at beginning of period
$

 
$
97,031

 
$
97,031

 
$

 
$
114,036

 
$
114,036

Issuance of contingent consideration

 

 

 
13,098

 

 
13,098

Payments

 

 

 
(13,167
)
 
(40,858
)
 
(54,025
)
Change in fair value of contingent consideration

 
4,801

 
4,801

 
69

 
28,526

 
28,595

Foreign currency translation adjustment

 
(54
)
 
(54
)
 

 
74

 
74

Fair value at end of period
$

 
$
101,778

 
$
101,778

 
$

 
$
101,778

 
$
101,778


The fair values of amounts owed are recorded in current portion of contingent consideration and long-term portion of contingent consideration in the Company’s Condensed Consolidated Balance Sheets. The Company will revalue the contingent consideration liabilities at each reporting date through the last payment, with changes in the fair value of the contingent consideration reflected in the change in fair value of contingent consideration line item on the Company’s Condensed Consolidated Income Statements that is included in the calculation of operating income. The fair value of the contingent consideration liabilities associated with future earnout payments is based on several factors, including:

estimated future results, net of pro forma adjustments set forth in the purchase agreements;
the probability of achieving these results; and
a discount rate reflective of the Company’s creditworthiness and market risk premium associated with the United States markets.


23


A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Valuation techniques and significant observable inputs used in recurring Level 3 fair value measurements for our contingent consideration liability related to Intelisys as of March 31, 2019 and June 30, 2018 were as follows.

Reporting Period
 
Valuation Technique
 
Significant Unobservable Inputs
 
Weighted Average Rates
March 31, 2019
 
Discounted cash flow
 
Weighted average cost of capital
 
14.9
%
 
 
 
 
Adjusted EBITDA growth rate
 
15.3
%
 
 
 
 
 
 
 
June 30, 2018
 
Discounted cash flow
 
Weighted average cost of capital
 
14.8
%
 
 
 
 
Adjusted EBITDA growth rate
 
18.2
%

The weighted average cost of capital ("WACC") as of June 30, 2018 has been adjusted to exclude Network1 as the earnout period ended as of June 30, 2018.

Worldwide Barcode, Networking & Security

POS Portal

The contingent consideration due to the former shareholders of POS Portal was paid in full during the quarter ended December 31, 2017. For the quarter ended March 31, 2018, the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a loss of less than $0.1 million.

Worldwide Communications & Services Segment

Intelisys

The discounted fair value of the liability for the contingent consideration due to the former shareholders of Intelisys recognized at March 31, 2019 was $74.3 million, of which $39.4 million is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement contributed a loss of $2.6 million and $9.0 million for the quarter and nine months ended March 31, 2019. The change in fair value for the quarter is primarily driven by the recurring amortization of the unrecognized fair value discount. The change in the fair value for the nine month period is primarily the result of recurring amortization of the unrecognized fair value discount as well as improved financial results. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $85.0 million, based on the Company’s best estimate of the earnout calculated on a multiple of earnings, before interest expense, income taxes, depreciation and amortization.

The discounted fair value of the liability for the contingent consideration related to Intelisys recognized at March 31, 2018 was $93.7 million, of which $32.7 million is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement contributed a loss of $3.0 million and $12.2 million for the quarter and nine months ended March 31, 2018, respectively. The change in fair value for the quarter is primarily driven by the recurring amortization of the unrecognized fair value discount. The change in fair value for the nine month period is largely driven by the recurring amortization of the unrecognized fair value discount and an adjustment to the probability weights in the discounted cash flow model.

Network1

Two final payments were made the former shareholders of Network1 during the quarter and nine months ended March 31, 2019. The change in the fair value of the contingent consideration for the quarter and nine months ended March 31, 2019 recognized in the Condensed Consolidated Income Statements contributed to a loss of $2.5 million for agreed upon adjustments in the final payments.


24


The discounted fair value of the liability for the contingent consideration related to Network1 recognized at March 31, 2018 was $8.1 million, all of which is classified as current. For the quarter and nine months ended March 31, 2018, the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a loss of $1.8 million and $16.3 million, respectively. The change in fair value for the quarter is primarily due to improved actual results. The change in fair value for the nine month period is primarily driven by a change in estimate of the current year payment to the former shareholders of Network1, additional agreed upon adjustments to the projected final settlement and improved actual results for the nine month period. In addition, volatility in the foreign exchange between the Brazilian real and the U.S. dollar has driven changes in the translation of this Brazilian real denominated liability.
  
(10) Segment Information

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

Worldwide Barcode, Networking & Security Segment

The Worldwide Barcode, Networking & Security segment includes a portfolio of solutions primarily for enterprise mobile computing, data capture, barcode printing, POS, payments, networking, electronic physical security, cyber security and other technologies. We have business operations within this segment in North America, Latin America and Europe. We see adjacencies among these technologies in helping our customers develop solutions. Data capture and POS products interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling, warehouse management and health care applications. Electronic physical security products include identification, access control, video surveillance, intrusion-related and wireless and networking infrastructure products.

Worldwide Communications & Services Segment

The Worldwide Communications & Services segment includes a portfolio of solutions primarily for communications technologies and services. We have business operations within this segment in North America, Latin America and Europe. The offerings include voice, video conferencing, wireless, data networking, cable, unified communications and collaboration and cloud and technology services. As these solutions come together on IP networks, new opportunities are created for customers to move into adjacent solutions for all vertical markets, such as education, healthcare and government.











25


Selected financial information for each business segment is presented below:
 
Quarter ended
 
Nine months ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Sales:
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
596,913

 
$
604,322

 
$
1,953,664

 
$
1,944,436

Worldwide Communications & Services
296,444

 
291,315

 
958,614

 
907,972

 
$
893,357

 
$
895,637

 
$
2,912,278

 
$
2,852,408

Depreciation and amortization:
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
4,371

 
$
4,830

 
$
13,387

 
$
13,413

Worldwide Communications & Services
4,097

 
3,740

 
11,494

 
12,172

Corporate
895

 
868

 
2,685

 
2,619

 
$
9,363

 
$
9,438

 
$
27,566

 
$
28,204

Change in fair value of contingent consideration:
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$

 
$

 
$

 
$
69

Worldwide Communications & Services
5,101

 
$
4,801

 
$
11,535

 
$
28,526

 
$
5,101

 
$
4,801

 
$
11,535

 
$
28,595

Operating income (loss):
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
16,865

 
$
11,566

 
$
48,974

 
$
41,143

Worldwide Communications & Services
2,161

 
6,375

 
21,956

 
6,909

Corporate
(222
)
 

 
(988
)
 
(172
)
 
$
18,804

 
$
17,941

 
$
69,942

 
$
47,880

Capital expenditures:
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
2,298

 
$
1,293

 
$
6,038

 
$
3,033

Worldwide Communications & Services
2,899

 
529

 
4,935

 
1,237

Corporate

 
189

 
4

 
1,037

 
$
5,197

 
$
2,011

 
$
10,977

 
$
5,307

Sales by Geography Category:
 
 
 
 
 
 
 
United States and Canada
$
678,078

 
$
660,139

 
$
2,210,729

 
$
2,118,963

International(1)
221,202

 
242,243

 
722,715

 
757,070

Less intercompany sales
(5,923
)
 
(6,475
)
 
(21,166
)
 
(23,625
)
 
$
893,357

 
$
895,637

 
$
2,912,278

 
$
2,852,408

 
 
 
 
 
 
 
 
(1) For the quarters and nine months ended March 31, 2019 and 2018, no sales exceeded 10% of consolidated net sales to any single international country.


26


 
March 31, 2019
 
June 30, 2018
 
(in thousands)
Assets:
 
 
 
Worldwide Barcode, Networking & Security
$
1,079,812

 
$
1,062,143

Worldwide Communications & Services
937,517

 
841,490

Corporate
44,826

 
41,662

 
$
2,062,155

 
$
1,945,295

Property and equipment, net by Geography Category:
 
 
 
United States and Canada
$
67,111

 
$
69,032

International
4,171

 
4,010

 
$
71,282

 
$
73,042


(11) Commitments and Contingencies

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

The Company expects total capital expenditures to range from $10 million to $12 million for fiscal year 2019, primarily for information technology investments.

During the Company's due diligence for the Network1 acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company recorded indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as the funds were escrowed as part of the acquisition. The amount available after the impact of foreign currency translation to future pre-acquisition contingency settlements or to be released to the sellers was $6.4 million and $24.1 million, as of March 31, 2019 and June 30, 2018, respectively.

The table below summarizes the balances and line item presentation of Network1's pre-acquisition contingencies and corresponding indemnification receivables in the Company's Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018:
 
March 31, 2019
 
June 30, 2018
 
Network1
 
(in thousands)
Assets
 
 
 
Prepaid expenses and other current assets
$
528

 
$
1,385

Other non-current assets
$
5,133

 
$
5,700

Liabilities
 
 
 
Accrued expenses and other current liabilities
$
528

 
$
1,385

Other long-term liabilities
$
5,133

 
$
5,700


(12) Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduces the corporate federal tax rate from 35% to 21% effective January 1, 2018 and implements a modified territorial tax system. Since the Company has a June 30th fiscal year-end, the lower tax rate resulted in a blended U.S. statutory federal rate of approximately 28% for the fiscal year ending June 30, 2018. The U.S. statutory federal rate is 21% for the year ending June 30, 2019 and subsequent fiscal years. As part of the Tax Act, U.S. companies are required to pay a one-time transition tax on the deemed repatriation of undistributed foreign earnings and remeasure deferred tax assets and liabilities.

27


Income taxes for the quarter and nine months ended March 31, 2019 have been included in the accompanying condensed consolidated financial statements using an estimated annual effective tax rate. In addition to applying the estimated annual effective tax rate to pre-tax income, the Company also includes certain items treated as discrete events to arrive at an estimated overall tax provision. During the nine months ended March 31, 2019, the Company recognized discrete tax benefits of $0.7 million related to the reversal of an unrecognized tax benefit and $0.2 million related to the completion of the accounting for the Tax Act.

The Company’s effective tax rate of 25.4% for the nine months ended March 31, 2019 differs from the current federal statutory rate of 21% primarily as a result of income derived from tax jurisdictions with varying income tax rates, nondeductible expenses and state income taxes.

The Tax Act includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax as part of the transition. For the fiscal year ended June 30, 2018, the Company recognized provisional income tax expense of $9.6 million for a one-time transition tax liability on total post-1986 foreign subsidiaries’ earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. The Company completed its analysis for this item within the permitted measurement period under the guidance of Staff Accounting Bulletin ("SAB") 118 and determined that the provisional amount should be adjusted to the final amount of $9.4 million. As a result, a discrete tax benefit for $0.2 million was recorded during the quarter ended December 31, 2018. The Company will continue to distribute the earnings of its Canadian subsidiary, but earnings from all other geographies will continue to be considered retained indefinitely for reinvestment. It has been the practice of the Company to reinvest those earnings in the business outside the United States. Apart from the one-time transition tax, any incremental deferred income taxes on the unremitted foreign earnings are not expected to be material.

As part of accounting for the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which such deferred taxes are expected to reverse in the future, which is generally 21%. For the fiscal year ended June 30, 2018, the Company recognized a provisional discrete income tax benefit of $1.6 million for the remeasurement of the Company’s net deferred tax asset and liability balances. The Company completed its analysis for this item within the permitted measurement period under the guidance of SAB 118 and determined that the provisional amount should not be adjusted.

The Tax Act created a provision known as global intangible low-tax income ("GILTI") that imposes a tax on certain earnings of foreign subsidiaries. The GILTI tax became effective for the Company during fiscal year 2019 and an accounting policy election was made to treat the tax as a current period expense.

The Company had approximately $1.2 million and $2.1 million of total gross unrecognized tax benefits as of March 31, 2019 and June 30, 2018, respectively. Of this total at March 31, 2019, approximately $1.0 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company conducts business globally and one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before June 30, 2013.