NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Business and Summary of Significant Accounting Policies
Business Description
ScanSource
,
Inc. is a leading global provider of technology products and solutions. ScanSource, Inc. and its subsidiaries (the "Company") provide value-added solutions from technology suppliers and sell to resellers and sales partners in specialty technology markets through its Worldwide Barcode, Networking & Security segment and Worldwide Communications & Services segment.
The Company operates in the United States, Canada, Latin America and Europe. The Company sells to the United States and Canada from facilities located in Mississippi; to Latin America principally from facilities located in Florida, Mexico, Brazil and Colombia; and to Europe from facilities located in Belgium, France, Germany and the United Kingdom.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of ScanSource, Inc. have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("US GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position as of
September 30, 2016
and
June 30, 2016
, the results of operations for the
quarters ended
September 30, 2016
and
2015
, the statements of comprehensive income for the
quarters ended
September 30, 2016
and
2015
, and the statements of cash flows for the
three
months ended
September 30, 2016
and
2015
. The results of operations for the
quarters ended
September 30, 2016
and
2015
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, 2016
.
Summary of Significant Accounting Policies
Except as described below, there have been no material changes to the Company’s significant accounting policies for the
quarter ended
September 30, 2016
from the information included 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, 2016
. 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, 2016
.
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 nature of the Company’s banking relationships with these institutions, the Company does not have the right to offset most if not all 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. Checks released but not yet cleared from these accounts in the amounts of
$56.9 million
and
$78.3 million
are included in accounts payable as of
September 30, 2016
and
June 30, 2016
, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard for contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. 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 new standard is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. Early application is prohibited. The standard permits the use of either the retrospective or cumulative effect transition method. This guidance will be applicable to the Company for the fiscal year beginning July 1, 2018. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this new standard.
In February 2016, the FASB issued Accounting Standards Update ("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 must be adopted using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this new guidance.
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: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Currently, the specific issue of contingent consideration payments is 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 finances activities. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows from operating activities. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The standard will be applicable to the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted, provided all eight amendments are adopted in the same period. The guidance requires adoption using a retrospective transition method. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this new guidance.
(2) 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 ended
|
|
September 30,
|
|
2016
|
|
2015
|
|
(in thousands, except per share data)
|
Numerator:
|
|
|
|
Net Income
|
$
|
14,816
|
|
|
$
|
15,996
|
|
Denominator:
|
|
|
|
Weighted-average shares, basic
|
25,523
|
|
|
27,702
|
|
Dilutive effect of share-based payments
|
239
|
|
|
227
|
|
Weighted-average shares, diluted
|
25,762
|
|
|
27,929
|
|
|
|
|
|
Net income per common share, basic
|
$
|
0.58
|
|
|
$
|
0.58
|
|
Net income per common share, diluted
|
$
|
0.58
|
|
|
$
|
0.57
|
|
For the
quarter ended
September 30, 2016
, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were
421,328
. For the
quarter ended
September 30, 2015
, there were
587,728
weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.
(3) Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
June 30,
2016
|
|
(in thousands)
|
Foreign currency translation adjustment
|
$
|
(73,625
|
)
|
|
$
|
(72,687
|
)
|
Accumulated other comprehensive income (loss)
|
$
|
(73,625
|
)
|
|
$
|
(72,687
|
)
|
|
|
|
|
The tax effect of amounts in comprehensive income (loss) reflect a tax expense or benefit as follows:
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Tax expense (benefit)
|
$
|
(53
|
)
|
|
$
|
3,195
|
|
|
|
|
|
(4) Acquisitions
KBZ
On September 4, 2015, the Company acquired substantially all the assets of KBZ Communications, Inc. ("KBZ"), a Cisco Authorized Distributor specializing in video conferencing, services, and cloud. KBZ is part of the Company's Worldwide Barcode, Networking and Security operating segment. This acquisition enables the Company to enhance its focus on Cisco’s solutions, combining the strengths of both companies to provide a more robust portfolio of products, solutions and services.
Under the asset purchase agreement, the Company acquired the assets of KBZ for a cash payment of $
64.6 million
. The Company acquired
$3.1 million
of cash during the acquisition, resulting in
$61.5 million
net cash paid for KBZ. Per the asset purchase agreement, a portion of the purchase price was placed into escrow to indemnify the Company of any pre-acquisition damages. As of
September 30, 2016
, the balance available in escrow was
$5.0 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. Pro forma results of operations have not been presented for this acquisition because the results of this acquisition are not material to our consolidated results. The purchase price allocation is as follows:
|
|
|
|
|
|
KBZ
|
|
(in thousands)
|
Receivables, net
|
$
|
63,131
|
|
Inventory
|
11,227
|
|
Other Current Assets
|
10,303
|
|
Property and equipment, net
|
677
|
|
Goodwill
|
21,639
|
|
Identifiable intangible assets
|
18,400
|
|
Other non-current assets
|
1,399
|
|
|
$
|
126,776
|
|
Accounts payable
|
$
|
48,271
|
|
Accrued expenses and other current liabilities
|
14,863
|
|
Other long-term liabilities
|
2,167
|
|
Consideration transferred, net of cash acquired
|
61,475
|
|
|
$
|
126,776
|
|
Intangible assets acquired include trade names, customer relationships, and non-compete agreements.
Intelisys
On August 29, 2016, the Company acquired substantially all the assets of Intelisys, a technology services company with voice, data, cable, wireless, and cloud services. Intelisys is part of the Company's Worldwide Communications and Services operating segment. With this acquisition, the Company broadens its capabilities in the telecom and cloud services market and generates the opportunity for high-growth recurring revenue.
Under the asset purchase agreement, the Company structured the purchase transaction with an initial cash payment of approximately
$84.6 million
, which consists of an initial purchase price of
$83.6 million
and
$1.0 million
for additional net assets acquired at closing, plus
four
additional annual cash installments based on a form of adjusted EBITDA for the periods ending June 30, 2017 through June 30, 2020. The Company acquired
$0.8 million
of cash during the acquisition, resulting in
$83.8 million
net cash paid for Intelisys initially. Per the asset purchase agreement, a portion of the purchase price was placed into escrow to indemnify the Company of any pre-acquisition damages. As of
September 30, 2016
, the balance available in escrow was
$8.5 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. Due to the proximity of the acquisition date to the end of the quarter, the valuation of tangible assets, identifiable intangible assets, and goodwill is still in process at the date of this filing, therefore, the estimates provided are subject to change.
|
|
|
|
|
|
Intelisys
|
|
(in thousands)
|
Receivables, net
|
$
|
23,494
|
|
Other current assets
|
27
|
|
Property and equipment, net
|
5,198
|
|
Goodwill
|
109,005
|
|
Identifiable intangible assets
|
63,210
|
|
|
$
|
200,934
|
|
Accounts payable
|
21,063
|
|
Accrued expenses and other current liabilities
|
1,067
|
|
Contingent consideration
|
95,000
|
|
Consideration transferred, net of cash acquired
|
83,804
|
|
|
$
|
200,934
|
|
Following the acquisition date, Intelisys contributed net sales of
$2.9 million
, operating income of
$0.7 million
, and net income of
$0.2 million
. Intelisys net income for the period described included
$0.5 million
of amortization expense related to identified intangible assets and a
$0.8 million
loss for the change in fair value of contingent consideration.
The following tables summarize the Company's unaudited consolidated pro forma results of operations as though the acquisition happened on July 1, 2015. The pro forma consolidated financial statements do not necessarily reflect what the combined company's financial condition or results from operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
For the two months ended August 31, 2016 and the quarter ended September 30, 2015, the Company has not provided for a change in fair value of contingent consideration.
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2016
|
|
(in thousands, except per share data)
|
|
|
|
|
|
As Reported, Consolidated
|
|
Pro forma, Consolidated
(1)
|
Net Sales
|
$
|
932,566
|
|
|
$
|
937,782
|
|
Operating income
|
22,875
|
|
|
24,247
|
|
Net Income
|
14,816
|
|
|
15,386
|
|
Earnings per share:
|
|
|
|
Basic
|
$
|
0.58
|
|
|
$
|
0.60
|
|
Diluted
|
$
|
0.58
|
|
|
$
|
0.60
|
|
(1) Includes actual results for Intelisys for the two months ended August 31, 2016. Adjustments include additional amortization expense of
$1.1 million
and depreciation expense of
$0.2 million
for the
quarter ended
September 30, 2016
as if the fair value of identifiable intangible assets, including software, had been recorded on July 1, 2015, and additional income tax expense of
$0.8 million
. In addition, acquisition costs in the amount of
$0.4 million
have been added back.
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2015
|
|
(in thousands, except per share data)
|
|
|
|
|
|
As Reported, Consolidated
|
|
Pro forma, Consolidated
(2)
|
Net Sales
|
$
|
870,829
|
|
|
$
|
878,052
|
|
Operating income
|
24,441
|
|
|
26,554
|
|
Net Income
|
15,996
|
|
|
16,631
|
|
Earnings per share:
|
|
|
|
Basic
|
$
|
0.58
|
|
|
$
|
0.60
|
|
Diluted
|
$
|
0.57
|
|
|
$
|
0.60
|
|
(2) Includes actual results for Intelisys for the three months ended September 30, 2015. Adjustments include intangible amortization expense of
$1.6 million
and depreciation expense of
$0.3 million
for the
quarter ended
September 30, 2015
as if the fair value of identifiable intangible assets, including software, had been recorded on July 1, 2015, and additional income tax expense of
$1.5 million
.
(5) Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the
three
months ended
September 30, 2016
, by reporting segment, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barcode, Networking & Security Segment
|
|
Communications & Services Segment
|
|
Total
|
|
(in thousands)
|
Balance as of June 30, 2016
|
$
|
36,434
|
|
|
$
|
56,281
|
|
|
$
|
92,715
|
|
Additions
|
—
|
|
|
109,005
|
|
|
109,005
|
|
Foreign currency translation adjustment
|
(144
|
)
|
|
(379
|
)
|
|
(523
|
)
|
Balance as of September 30, 2016
|
$
|
36,290
|
|
|
$
|
164,907
|
|
|
$
|
201,197
|
|
The following table shows changes in the amount recognized for net identifiable intangible assets for the
three
months ended
September 30, 2016
.
|
|
|
|
|
|
Net Identifiable Intangible Assets
|
|
(in thousands)
|
Balance as of June 30, 2016
|
$
|
51,127
|
|
Additions
|
63,210
|
|
Amortization expense
|
(3,154
|
)
|
Foreign currency translation adjustment
|
(569
|
)
|
Balance as of September 30, 2016
|
$
|
110,614
|
|
Intangible asset balances include trade names, customer relationships, customer contracts, non-compete agreements, and distributor agreements.
(6) Short-Term Borrowings and Long-Term Debt
Revolving Credit Facility
The Company has a
$300 million
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”) that matures on
November 6, 2018
. The Amended Credit Agreement allows for the issuance of up to
$50 million
for letters of credit and has a
$150 million
accordion feature that allows the Company to increase the availability to
$450 million
, subject to obtaining additional credit commitments for the lenders participating in the increase.
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, taxes, depreciation and amortization ("EBITDA") for the most recently completed four quarters (the "Leverage Ratio"). The Leverage Ratio calculation excludes the Company's subsidiaries in Brazil.
This spread ranges from
1.00%
to
2.25%
for LIBOR-based loans and
0.00%
to
1.25%
for alternate base rate loans. The spread in effect for the period ended
September 30, 2016
was
1.00%
for LIBOR-based loans and
0.00%
for alternate base rate loans. Additionally, the Company is assessed commitment fees ranging from
0.175%
to
0.40%
, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The commitment fee rate in effect for the period ended
September 30, 2016
was
0.175%
. Borrowings are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to
65%
of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement. The Company was in compliance with all covenants under the credit facility as of
September 30, 2016
. There was
$160.7 million
and
$71.4 million
outstanding on the revolving credit facility at
September 30, 2016
and
June 30, 2016
, respectively.
The average daily outstanding balance during the
three
month period ended
September 30, 2016
and
2015
was
$102.3 million
and
$30.7 million
, respectively. There was
$138.9 million
and
$228.2 million
available for additional borrowings as of
September 30, 2016
and
June 30, 2016
, respectively. Letters of credit issued under the multi-currency revolving credit facility totaled
€0.4 million
as of
September 30, 2016
and
June 30, 2016
.
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
September 30, 2016
, the Company was in compliance with all covenants under this bond. The balance on the bond was
$5.4 million
as of
September 30, 2016
and
June 30, 2016
and is included in long-term debt. The interest rate at
September 30, 2016
and
June 30, 2016
was
1.37%
and
1.32%
, respectively.
Debt Issuance Costs
As of
September 30, 2016
, net debt issuance costs associated with the credit facility and bonds totaled
$0.7 million
and are being amortized on a straight-line basis through the maturity date of each respective debt instrument.
(7) 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 US GAAP. The Company records all derivatives on the 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. 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 and Peruvian nuevo sol. 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
$67.1 million
and
$46.2 million
for the exchange of foreign currencies as of
September 30, 2016
and
June 30, 2016
, 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:
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
September 30,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Net foreign exchange derivative contract (gains) losses
|
$
|
(760
|
)
|
|
$
|
(1,702
|
)
|
Net foreign currency transactional and re-measurement (gains) losses
|
1,372
|
|
|
2,529
|
|
Net foreign currency (gains) losses
|
$
|
612
|
|
|
$
|
827
|
|
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 and expense. Foreign exchange gains and losses are generated as the result of fluctuations in the value of the the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, British pound versus the euro, and other currencies versus the U.S. dollar.
The Company used the following derivative instruments, located on its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
Fair Value of
Derivatives
Designated as Hedge
Instruments
|
|
Fair Value of
Derivatives
Not Designated as Hedge
Instruments
|
|
(in thousands)
|
Derivative assets:
(a)
|
|
|
|
Forward foreign currency exchange contracts
|
$
|
—
|
|
|
$
|
107
|
|
Derivative liabilities:
(b)
|
|
|
|
Forward foreign currency exchange contracts
|
$
|
—
|
|
|
$
|
557
|
|
|
|
(a)
|
All derivative assets are recorded as prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.
|
|
|
(b)
|
All derivative liabilities are recorded as accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
|
(8) 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 groups 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 or disclosed at fair value on a recurring basis include the Company’s various debt instruments, deferred compensation plan investments, outstanding foreign exchange forward contracts, and contingent consideration owed to the previous owners of CDC, Imago ScanSource, 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
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
20,463
|
|
|
$
|
20,463
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
107
|
|
|
—
|
|
|
107
|
|
|
—
|
|
Total assets at fair value
|
$
|
20,570
|
|
|
$
|
20,463
|
|
|
$
|
107
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
20,463
|
|
|
$
|
20,463
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
557
|
|
|
—
|
|
|
557
|
|
|
—
|
|
Liability for contingent consideration, current and non-current portion
|
110,835
|
|
|
—
|
|
|
—
|
|
|
110,835
|
|
Total liabilities at fair value
|
$
|
131,855
|
|
|
$
|
20,463
|
|
|
$
|
557
|
|
|
$
|
110,835
|
|
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, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
17,893
|
|
|
$
|
17,893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
Total assets at fair value
|
$
|
17,926
|
|
|
$
|
17,893
|
|
|
$
|
33
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
17,893
|
|
|
$
|
17,893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
551
|
|
|
—
|
|
|
551
|
|
|
—
|
|
Liability for contingent consideration, current and non-current portion
|
24,652
|
|
|
—
|
|
|
—
|
|
|
24,652
|
|
Total liabilities at fair value
|
$
|
43,096
|
|
|
$
|
17,893
|
|
|
$
|
551
|
|
|
$
|
24,652
|
|
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 7 -
Derivatives and Hedging Activities
. Foreign currency contracts and cross currency swap agreements are classified in the consolidated balance sheet 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 CDC, Imago ScanSource, Network1 and Intelisys 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. The final payment for the contingent consideration related to CDC was paid during the prior year, fiscal year 2016. 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 3 -
Accumulated Other Comprehensive Income (Loss)
.
CDC is part of the Company's Worldwide Barcode, Networking and Security Segment, and Imago ScanSource, Network1 and Intelisys are part of the Company's Worldwide Communications and Services segment.
The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the Imago ScanSource, Network1 and Intelisys earnouts for the
quarter ended
September 30, 2016
:
|
|
|
|
|
|
Contingent consideration for the quarter ended
|
|
September 30, 2016
|
|
Communications & Services Segment
|
|
(in thousands)
|
Fair value at beginning of period
|
$
|
24,652
|
|
Issuance of contingent consideration
|
95,000
|
|
Payments
|
(8,634
|
)
|
Change in fair value of contingent consideration
|
169
|
|
Foreign currency translation adjustment
|
(352
|
)
|
Fair value at end of period
|
$
|
110,835
|
|
The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the CDC, Imago ScanSource, and Network1 earnouts for the
quarter ended
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration for the quarter ended
|
|
September 30, 2015
|
|
Barcode, Networking & Security Segment
|
|
Communications & Services Segment
|
|
Total
|
|
(in thousands)
|
Fair value at beginning of period
|
$
|
5,109
|
|
|
$
|
28,851
|
|
|
$
|
33,960
|
|
Change in fair value of contingent consideration
|
126
|
|
|
1,438
|
|
|
1,564
|
|
Foreign currency translation adjustment
|
(1,121
|
)
|
|
(5,346
|
)
|
|
(6,467
|
)
|
Fair value at end of period
|
$
|
4,114
|
|
|
$
|
24,943
|
|
|
$
|
29,057
|
|
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 U.S. dollar amounts of actual disbursements made in connection with future earnout payments are subject to change as the liability is denominated in currencies other than the U.S. dollar and subject to foreign exchange fluctuation risk. 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 share 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 Brazilian and European markets.
|
A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration.
The fair value of the liability for the contingent consideration related to Imago ScanSource recognized at
September 30, 2016
was
$2.5 million
, all of which is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a gain of
$0.3 million
for the
quarter ended
September 30, 2016
. The change for the quarter is primarily driven by actual results that were less than expected. In addition, volatility in the foreign exchange between the British pound and the U.S. dollar has driven changes in the translation of this British pound denominated liability. The recorded liability for the contingent consideration related to Imago as of
September 30, 2016
is undiscounted, based on the Company’s best estimate of the earnout calculated on a multiple of adjusted earnings, before interest expense, income taxes, depreciation and amortization.
The discounted fair value of the liability for the contingent consideration related to Network1 recognized at
September 30, 2016
was
$12.5 million
, of which
$7.6 million
is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a gain of
$0.4 million
for the
quarter ended
September 30, 2016
. The change for the quarter is primarily driven by the less than expected actual results, partially offset by the recurring amortization of the unrecognized fair value discount. 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. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to
$15.8 million
, based on the Company’s best estimate of the earnout calculated on a multiple of adjusted earnings, before interest expense, income taxes, depreciation and amortization, plus the effects of foreign exchange.
The discounted fair value of the liability for the contingent consideration related to Intelisys recognized at
September 30, 2016
was
$95.8 million
, of which
$22.8 million
is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a loss of
$0.8 million
for the
quarter ended
September 30, 2016
. The change for the quarter is driven by the recurring amortization of the unrecognized fair value discount. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to
$132.7 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.
(9) Segment Information
The Company is a leading global provider of technology products and solutions to resellers and sales partners in specialty technology markets. The Company has
two
reportable segments, based on product, customer and service type.
In October 2015, we implemented changes to our reporting structure that moved a portion of our networking business from the Communications & Services segment to the Barcode, Networking & Security segment. We have reclassified prior period results for each of these business segments to provide comparable information.
Worldwide Barcode, Networking & Security Segment
The Barcode, Networking & Security segment focuses on automatic identification and data capture ("AIDC"), point-of-sale ("POS"), networking, electronic physical security, 3D printing technologies and other specialty technologies. We have business units within this segment in North America, Latin America, and Europe. We see adjacencies among these technologies in helping our resellers develop solutions, such as with networking products. AIDC 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. 3D printing solutions replace and complement traditional methods and reduce the time and cost of designing new products by printing real parts directly from digital input.
Worldwide Communications & Services Segment
The Communications & Services segment focuses on communications technologies and services. We have business units within this segment that offer voice, video conferencing, wireless, data networking, cable, collaboration, converged communications, cloud and technology services in North America, Latin America, and Europe. As these solutions come together on IP networks, new opportunities are created for value-added resellers to move into adjacent solutions for all vertical markets, including education, healthcare, and government. Our teams deliver value-added support programs and services, including education and training, network assessments, custom configuration, implementation and marketing to help resellers develop a new technology practice, or to extend their capability and reach.
Selected financial information for each business segment is presented below:
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
September 30,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Sales:
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
633,405
|
|
|
$
|
573,669
|
|
Worldwide Communications & Services
|
299,161
|
|
|
297,160
|
|
|
$
|
932,566
|
|
|
$
|
870,829
|
|
Depreciation and amortization:
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
1,641
|
|
|
$
|
1,026
|
|
Worldwide Communications & Services
|
2,764
|
|
|
2,191
|
|
Corporate
|
819
|
|
|
721
|
|
|
$
|
5,224
|
|
|
$
|
3,938
|
|
Operating income:
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
13,456
|
|
|
$
|
13,812
|
|
Worldwide Communications & Services
|
9,917
|
|
|
10,849
|
|
Corporate
|
(498
|
)
|
|
(220
|
)
|
|
$
|
22,875
|
|
|
$
|
24,441
|
|
Capital expenditures:
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
860
|
|
|
$
|
124
|
|
Worldwide Communications & Services
|
610
|
|
|
253
|
|
Corporate
|
506
|
|
|
56
|
|
|
$
|
1,976
|
|
|
$
|
433
|
|
Sales by Geography Category:
|
|
|
|
United States
|
$
|
720,371
|
|
|
$
|
650,998
|
|
International
|
222,766
|
|
|
228,898
|
|
Less intercompany sales
|
(10,571
|
)
|
|
(9,067
|
)
|
|
$
|
932,566
|
|
|
$
|
870,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30, 2016
|
|
(in thousands)
|
Assets:
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
884,124
|
|
|
$
|
836,674
|
|
Worldwide Communications & Services
|
793,568
|
|
|
595,781
|
|
Corporate
|
66,429
|
|
|
58,730
|
|
|
$
|
1,744,121
|
|
|
$
|
1,491,185
|
|
Property and equipment, net by Geography Category:
|
|
|
|
United States
|
$
|
51,730
|
|
|
$
|
46,935
|
|
International
|
5,350
|
|
|
5,453
|
|
|
$
|
57,080
|
|
|
$
|
52,388
|
|
(10) 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 is in the process of completing several capital projects for fiscal year 2017 that will result in significant cash commitments. Total capital expenditures for fiscal year 2017 are expected to range from
$5 million
to
$10 million
primarily for IT investments.
During the Company's due diligence for the CDC and Network1 acquisitions, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company is able to record indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as they were escrowed or claimed against future earnout payments in the share purchase agreements. However, indemnity claims can be made up to the entire purchase price, which includes the initial payment and all future earnout payments. The table below summarizes the balances and line item presentation of these pre-acquisition contingencies and corresponding indemnification receivables in the Company's Condensed Consolidated Balance Sheets as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
CDC
|
|
Network1
|
|
(in thousands)
|
Assets
|
|
|
|
Prepaid expenses and other current assets
|
$
|
2,320
|
|
|
$
|
589
|
|
Other non-current assets
|
$
|
—
|
|
|
$
|
9,730
|
|
Liabilities
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
2,320
|
|
|
$
|
589
|
|
Other long-term liabilities
|
$
|
—
|
|
|
$
|
9,730
|
|
The table below summarizes the balances and line item presentation of these pre-acquisition contingencies and corresponding indemnification receivables in the Company's Condensed Consolidated Balance Sheets as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
CDC
|
|
Network1
|
|
(in thousands)
|
Assets
|
|
|
|
Prepaid expenses and other current assets
|
$
|
2,346
|
|
|
$
|
595
|
|
Other non-current assets
|
$
|
—
|
|
|
$
|
9,837
|
|
Liabilities
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
2,346
|
|
|
$
|
595
|
|
Other long-term liabilities
|
$
|
—
|
|
|
$
|
9,837
|
|
Changes in these contingent liabilities and receivables from
June 30, 2016
are primarily driven by foreign currency translation.
(11) Income Taxes
The Company had approximately
$2.1 million
of total gross unrecognized tax benefits as of
September 30, 2016
and
June 30, 2016
. Of this total at
September 30, 2016
, approximately
$1.3 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, as a result, 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 state and local, or non-U.S. income tax examinations by tax authorities for the years before June 30,
2011
.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of
September 30, 2016
, the Company had approximately
$1.2 million
accrued for interest and penalties.
Income taxes for the interim period presented have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall tax provision. There were no material discrete items during the period.
The Company’s effective tax rate of
34.8%
for the quarter ended
September 30, 2016
differs from the federal statutory rate of
35%
primarily as a result of income derived from tax jurisdictions with varying income tax rates, nondeductible expenses, and state income taxes.
The Company has provided for U.S. income taxes for the current earnings of its Canadian subsidiary. Earnings from all other geographies will continue to be considered retained indefinitely for reinvestment.
Financial results in Belgium for the
quarter ended
September 30, 2016
produced a pre-tax loss, compared to pre-tax income generated for the quarter ended
September 30, 2015
. In addition, our Belgium business also produced overall positive cumulative earnings over the most recent three-year period. In the judgment of management, the conditions that gave rise to the losses recognized for the current quarter and most recent fiscal year are temporary and it is more likely than not that the deferred tax asset will be realized.
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
ScanSource, Inc. is a leading global provider of technology products and solutions. ScanSource, Inc. and its subsidiaries (the "Company") provide value-added solutions from approximately
500
technology suppliers and sell to over
35,000
resellers and sales partners in the following specialty technology markets: POS and Barcode, networking and security, communications, telecom and cloud services, and emerging technologies.
We operate our business under a management structure that enhances our worldwide technology market focus and growth strategy. As a part of this structure, ScanSource has two technology segments, each with its own president: Worldwide Barcode, Networking & Security and Worldwide Communications & Services.
The Company operates in the United States, Canada, Latin America and Europe. The Company sells to the United States and Canada from its facilities located in Mississippi and Virginia; to Latin America principally from facilities located in Florida, Mexico, Brazil and Colombia; and to Europe principally from facilities in Belgium, France, Germany and the United Kingdom.
The Company's key vendors include Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, Brocade/ Ruckus Wireless, CenturyLink, Cisco, Comcast Business, Datalogic, Dell, Dialogic, Elo, Epson, Honeywell, HID, Ingenico, Jabra, Level 3, March Networks, Mitel, NCR, Oracle, Panasonic, Plantronics, Polycom, Samsung, ShoreTel, Sony, Spectralink, Toshiba Global Commerce Solutions, Ubiquiti, Unify, Verifone, Windstream, XO, and Zebra Technologies.
Recent Developments
On August 29, 2016, the Company acquired substantially all the assets of Intelisys Communications, Inc., a technology services company with voice, data, cable, wireless, and cloud services. Intelisys is part of the Company's Worldwide Communications & Services operating segment. With this acquisition, the Company broadens its capabilities in the telecom and cloud services market and generates the opportunity for high-growth recurring revenue.
On September 4, 2015, the Company acquired substantially all the assets of KBZ Communications, Inc., a Cisco Authorized Distributor specializing in video conferencing, services and cloud. KBZ is part of the Company's Worldwide Barcode, Networking & Security operating segment. This acquisition enables the Company to enhance its focus on Cisco’s solutions, combining the strengths of both companies to provide a more robust portfolio of products, solutions and services.
On October 1, 2015, we branded ScanSource Security as ScanSource Networking and Security to build on the growing demand for networking solutions. With these changes and the acquisition of KBZ, we moved some business operations from our
Communications & Services segment to our Barcode, Networking & Security segment. We have reclassified prior period results to provide comparable information.
Our Future
Our objective is to continue to grow profitable sales in the technologies we sell. We continue to evaluate strategic acquisitions to enhance our technological and geographic portfolios and to expand our capabilities in higher margin, high growth areas. In doing so, we face numerous challenges that require attention and resources. Certain business units and geographies continue to experience increased competition. This competition may come in the form of pricing, credit terms, service levels and product availability. As this competition could affect both our market share and pricing of our products, we may change our strategy in order to effectively compete in the marketplace.
Evaluating Financial Condition and Operating Performance
In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating income, non-GAAP pre-tax income non-GAAP net income, non-GAAP EPS, return on invested capital ("ROIC") and "constant currency." Constant currency is a measure that excludes the translation exchange impact from changes in foreign currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.
These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP.
Non-GAAP Operating Income, Non-GAAP Pre-Tax Income, Non-GAAP Net Income and Non-GAAP EPS
To evaluate current period performance on a clearer and more consistent basis with prior periods, the Company discloses non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share. Non-GAAP results exclude amortization of intangible assets related to acquisitions, changes in fair value of contingent consideration, and acquisition costs. Non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted EPS are useful in better assessing and understanding the Company's operating performance, especially when comparing results with previous periods or forecasting performance for future periods.
Below we are providing a non-GAAP reconciliation of operating income, net income and earnings per share adjusted for the costs and charges mentioned above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2016
|
|
Quarter ended September 30, 2015
|
|
Operating Income
|
|
Pre-Tax Income
|
|
Net Income
|
|
Diluted EPS
|
|
Operating Income
|
|
Pre-Tax Income
|
|
Net Income
|
|
Diluted EPS
|
|
(in thousands, except per share data)
|
GAAP Measures
|
$
|
22,875
|
|
|
$
|
22,724
|
|
|
$
|
14,816
|
|
|
$
|
0.58
|
|
|
$
|
24,441
|
|
|
$
|
24,422
|
|
|
$
|
15,996
|
|
|
$
|
0.57
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
3,154
|
|
|
3,154
|
|
|
2,108
|
|
|
0.08
|
|
|
2,185
|
|
|
2,185
|
|
|
1,597
|
|
|
0.06
|
|
Change in fair value of contingent consideration
|
169
|
|
|
169
|
|
|
46
|
|
|
—
|
|
|
1,564
|
|
|
1,564
|
|
|
1,080
|
|
|
0.04
|
|
Acquisition costs
|
498
|
|
|
498
|
|
|
498
|
|
|
0.02
|
|
|
220
|
|
|
220
|
|
|
220
|
|
|
0.01
|
|
Non-GAAP measures
|
$
|
26,696
|
|
|
$
|
26,545
|
|
|
$
|
17,468
|
|
|
$
|
0.68
|
|
|
$
|
28,410
|
|
|
$
|
28,391
|
|
|
$
|
18,893
|
|
|
$
|
0.68
|
|
Return on Invested Capital
Management uses ROIC as a performance measurement to assess efficiency at allocating capital under the Company's control to generate returns. Management believes this metric balances the Company's operating results with asset and liability management, is not impacted by capitalization decisions and is considered to have a strong correlation with shareholder value creation. In
addition, it is easily computed, communicated and understood. ROIC also provides management a measure of the Company's profitability on a basis more comparable to historical or future periods.
ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year. In addition, the Company's Board of Directors uses ROIC in evaluating business and management performance. Certain management incentive compensation targets are set and measured relative to ROIC.
We calculate ROIC as earnings before interest expense, income taxes, depreciation and amortization, plus change in fair value of contingent consideration and other non-GAAP adjustments ("adjusted EBITDA") divided by invested capital. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. The following table summarizes annualized ROIC for the quarters ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
2016
|
|
2015
|
Return on invested capital ratio, annualized
(a)
|
13.1
|
%
|
|
14.6
|
%
|
|
|
(a)
|
The annualized EBITDA amount is divided by days in the quarter times 365 days per year (366 during leap years). There were 92 days in the current and prior-year quarter.
|
The components of this calculation and reconciliation to our financial statements are shown on the following schedule:
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Reconciliation of net income to EBITDA:
|
|
Net income (GAAP)
|
$
|
14,816
|
|
|
$
|
15,996
|
|
Plus: interest expense
|
589
|
|
|
281
|
|
Plus: income taxes
|
7,908
|
|
|
8,426
|
|
Plus: depreciation and amortization
|
5,224
|
|
|
3,938
|
|
EBITDA (non-GAAP)
|
28,537
|
|
|
28,641
|
|
Plus: Change in fair value of contingent consideration
|
169
|
|
|
1,564
|
|
Plus: Acquisition costs
|
498
|
|
|
220
|
|
Adjusted EBITDA (numerator for ROIC) (non-GAAP)
|
$
|
29,204
|
|
|
$
|
30,425
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Invested capital calculations:
|
|
Equity – beginning of the quarter
|
$
|
774,496
|
|
|
$
|
808,985
|
|
Equity – end of the quarter
|
773,161
|
|
|
764,693
|
|
Add: Change in fair value of contingent consideration, net of tax
|
46
|
|
|
1,080
|
|
Add: Acquisition costs, net of tax
(a)
|
498
|
|
|
220
|
|
Average equity
|
774,101
|
|
|
787,489
|
|
Average funded debt
(b)
|
107,718
|
|
|
39,124
|
|
Invested capital (denominator for ROIC) (non-GAAP)
|
$
|
881,819
|
|
|
$
|
826,613
|
|
|
|
(a)
|
Acquisition costs are nondeductible for tax purposes.
|
|
|
(b)
|
Average funded debt is calculated as the average daily amounts outstanding on our current and long-term interest-bearing debt.
|
Constant Currency
We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the weighted-average foreign exchange rates between reporting periods. Constant currency is calculated by
translating current period results from currencies other than the U.S. dollar using the comparable weighted-average foreign exchange rates from the prior year period. This information is provided to view financial results without the translation impact of fluctuations in foreign currency rates, thereby enhancing comparability between reporting periods.
Results of Operations
Net Sales
The Company has two reportable segments. The following tables summarize the Company’s net sales results by technology segment and by geographic location for the
quarters ended
September 30, 2016
and
2015
. Prior period results have been reclassified in the current year to account for the movement of certain business operations from the Worldwide Communications & Services segment to the Worldwide Barcode, Networking & Security segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
|
Net Sales by Segment:
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
(in thousands)
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
633,405
|
|
|
$
|
573,669
|
|
|
$
|
59,736
|
|
|
10.4
|
%
|
Worldwide Communications & Services
|
299,161
|
|
|
297,160
|
|
|
2,001
|
|
|
0.7
|
%
|
Total net sales
|
$
|
932,566
|
|
|
$
|
870,829
|
|
|
$
|
61,737
|
|
|
7.1
|
%
|
On a constant currency basis and excluding acquisitions, consolidated net sales for the Company decreased
$9.9 million
, or
1.2%
, compared with the prior year quarter.
Worldwide Barcode, Networking & Security
The Barcode, Networking & Security segment consists of sales to technology resellers and sales partners in North America, Europe and Latin America. Sales for the Barcode, Networking & Security segment increased
$59.7 million
compared to the prior-year quarter primarily due to the inclusion of a full quarter of sales from the KBZ acquisition, which was acquired September 4, 2015. Excluding the foreign exchange positive impact of
$3.1 million
and sales from the KBZ acquisition of
$99.3 million
for the quarter ended September 30, 2016 and sales from KBZ of
$34.6 million
for the quarter ended September 30, 2015, adjusted net sales for the Barcode, Networking & Security segment decreased
$8.1 million
, or
1.5%
, for the quarter. The decrease in adjusted net sales is primarily due to lower sales volume in our networking and security businesses, partially offset by increased big deals in our North America POS and Barcode business.
Worldwide Communications & Services
The Communications & Services segment consists of sales to technology resellers and sales partners in North America, Europe and Latin America. Sales for the Communications & Services segment increased
$2.0 million
compared to the prior-year quarter primarily due to the inclusion of Intelisys results. Excluding the foreign exchange positive impact of
$0.9 million
and sales from the Intelisys acquisition of
$2.9 million
, adjusted net sales for the Communications & Services segment decreased
$1.8 million
, or
0.6%
, for the quarter. The decrease in adjusted net sales for quarter is largely due to lower sales volume in Europe and Brazil, partially offset by overall sales growth in North America.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
|
Net Sales by Geography:
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
(in thousands)
|
|
|
United States
|
$
|
709,810
|
|
|
$
|
641,931
|
|
|
$
|
67,879
|
|
|
10.6
|
%
|
International
|
$
|
222,756
|
|
|
$
|
228,898
|
|
|
(6,142
|
)
|
|
(2.7
|
)%
|
Total net sales
|
$
|
932,566
|
|
|
$
|
870,829
|
|
|
$
|
61,737
|
|
|
7.1
|
%
|
Gross Profit
The following table summarizes the Company’s gross profit for the
quarters ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
|
|
|
|
% of Net Sales September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
50,096
|
|
|
$
|
48,048
|
|
|
$
|
2,048
|
|
|
4.3
|
%
|
|
7.9
|
%
|
|
8.4
|
%
|
Worldwide Communications & Services
|
41,438
|
|
|
39,504
|
|
|
1,934
|
|
|
4.9
|
%
|
|
13.9
|
%
|
|
13.3
|
%
|
Gross profit
|
$
|
91,534
|
|
|
$
|
87,552
|
|
|
$
|
3,982
|
|
|
4.5
|
%
|
|
9.8
|
%
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
Gross profit dollars increased, while gross profit margin decreased for the Barcode, Networking & Security segment for the
quarter ended
September 30, 2016
compared to the prior-year quarter. The increase in gross profit dollars is largely due to the inclusion of KBZ results for a full quarter. Gross profit margin decreased primarily due to a less favorable sales mix in the current quarter.
Worldwide Communications & Services
In the Communications & Services segment, gross profit dollars and gross profit margin increased for the
quarter ended
September 30, 2016
primarily due to the results contributed by Intelisys. Excluding the impact of the gross profit from the Intelisys acquisition, gross profit dollars decreased $0.9 million and gross profit margin decreased to 13.0% for the quarter ended September 30, 2016 primarily due to a less favorable sales mix.
Operating Expenses
The following table summarizes our operating expenses for the
quarters ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
|
|
|
|
% of Net Sales September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
68,490
|
|
|
$
|
61,547
|
|
|
$
|
6,943
|
|
|
11.3
|
%
|
|
7.3
|
%
|
|
7.1
|
%
|
Change in fair value of contingent consideration
|
169
|
|
|
1,564
|
|
|
(1,395
|
)
|
|
(89.2
|
)%
|
|
0.0
|
%
|
|
0.2
|
%
|
Operating expenses
|
$
|
68,659
|
|
|
$
|
63,111
|
|
|
$
|
5,548
|
|
|
8.8
|
%
|
|
7.4
|
%
|
|
7.2
|
%
|
Selling, general and administrative expenses ("SG&A") increased
$6.9 million
for the
quarter ended
September 30, 2016
as compared to the prior-year quarter. The increase in SG&A for the quarter compared to the prior year quarter is primarily due to increased employee-related expenses, largely related to acquisitions, bad debt expense and amortization expense on intangible assets.
We present changes in fair value of the contingent consideration owed to the former shareholders of Imago ScanSource, Nework1 and Intelisys as a separate line item in operating expenses. We recorded fair value adjustment of
$0.2 million
for the
quarter ended
September 30, 2016
, which is primarily driven by the recurring amortization of the unrecognized fair value discount, partially offset less-than-expected actual results for Imago ScanSource and Network1 in the current quarter.
Operating Income
The following table summarizes our operating income for the
quarters ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
|
|
|
|
% of Net Sales September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
13,456
|
|
|
$
|
13,812
|
|
|
$
|
(356
|
)
|
|
(2.6
|
)%
|
|
2.1
|
%
|
|
2.4
|
%
|
Worldwide Communications & Services
|
9,917
|
|
|
10,849
|
|
|
(932
|
)
|
|
(8.6
|
)%
|
|
3.3
|
%
|
|
3.7
|
%
|
Corporate
|
(498
|
)
|
|
(220
|
)
|
|
(278
|
)
|
|
nm*
|
|
|
nm*
|
|
|
nm*
|
|
Operating income
|
$
|
22,875
|
|
|
$
|
24,441
|
|
|
$
|
(1,566
|
)
|
|
(6.4
|
)%
|
|
2.5
|
%
|
|
2.8
|
%
|
*nm - percentages are not meaningful
Worldwide Barcode, Networking & Security
For the Barcode, Networking & Security segment, operating income and operating margin decreased for the quarter ended
September 30, 2016
compared to the prior year quarter. The decrease in operating income and operating margin for the quarter was primarily due to lower gross profit margins and increased employee-related operating expenses.
Worldwide Communications & Services
For the Communications & Services segment, operating income and operating margin decreased for the
quarter ended
September 30, 2016
compared to the prior year quarter. The decrease in operating income and margin for the quarter is primarily due to increased bad debt expense, partially offset by higher gross profit dollars and fair value adjustment gains generated on the Imago ScanSource and Network1 contingent considerations, compared with fair value adjustment losses generated in the previous year.
Corporate
Corporate incurred a
$0.5 million
and
$0.2 million
expense relating to acquisition costs during the quarters ended
September 30, 2016
and
2015
, respectively.
Total Other (Income) Expense
The following table summarizes our total other (income) expense for the
quarters ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30,
|
|
|
|
|
|
% of Net Sales September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
Interest expense
|
$
|
589
|
|
|
$
|
281
|
|
|
$
|
308
|
|
|
109.6
|
%
|
|
0.1
|
%
|
|
0.0
|
%
|
Interest income
|
(1,015
|
)
|
|
(942
|
)
|
|
(73
|
)
|
|
7.7
|
%
|
|
(0.1
|
)%
|
|
(0.1
|
)%
|
Net foreign exchange (gains) losses
|
612
|
|
|
827
|
|
|
(215
|
)
|
|
(26.0
|
)%
|
|
0.1
|
%
|
|
0.1
|
%
|
Other, net
|
(35
|
)
|
|
(147
|
)
|
|
112
|
|
|
(76.2
|
)%
|
|
(0.0
|
)%
|
|
(0.0
|
)%
|
Total other (income) expense, net
|
$
|
151
|
|
|
$
|
19
|
|
|
$
|
132
|
|
|
694.7
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Interest expense consists primarily of interest incurred on borrowings and amortization of debt issuance costs. Interest expense increased for the quarter primarily due to higher borrowings on the revolving credit facility.
Interest income consists primarily of interest income generated on longer-term interest bearing receivables and interest earned on cash and cash equivalents.
Net foreign exchange losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange gains and losses are generated from fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, the British pound versus the euro, the Canadian dollar versus the U.S. dollar, the U.S. dollar versus the Colombian peso and other currencies versus the U.S. dollar. While we utilize foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure, our foreign exchange policy prohibits the use of derivative financial instruments for speculative transactions. The Company's net foreign exchange losses are driven by changes in foreign currency exchange rates, partially offset by the use of foreign exchange forward contracts to hedge against currency exposures.
Provision for Income Taxes
For the
quarter ended
September 30, 2016
, income tax expense was
$7.9 million
, reflecting an effective tax rate of
34.8%
. The effective tax rate for the
quarter ended
September 30, 2015
was
34.5%
. The increase in the effective tax rate from the prior year quarter is primarily due to an increase in non-deductible expenses. Our estimated annual effective tax rate range for the full 2017 fiscal year is approximately 34.5% to 35%.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under our $300 million revolving credit facility. Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit. In general, as our sales volumes increase, our net investment in working capital typically increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.
Our cash and cash equivalents balance totaled
$45.1 million
at
September 30, 2016
, compared to
$61.4 million
at
June 30, 2016
, including
$32.6 million
and
$52.7 million
held outside of the United States at
September 30, 2016
and
June 30, 2016
, respectively. Checks released but not yet cleared in the amounts of
$56.9 million
and
$78.3 million
are included in accounts payable as of
September 30, 2016
and
June 30, 2016
, respectively.
We conduct business in many locations throughout the world where we generate and use cash. The Company provides for U.S. income taxes for the earnings of its Canadian subsidiary. The Company does not provide for U.S. income taxes for undistributed earnings from all other geographies which are considered to be retained indefinitely for reinvestment. If these funds were distributed in the operations of the United States, we would be required to record and pay significant additional foreign withholding taxes and additional U.S. federal income taxes upon repatriation.
Our net investment in working capital at
September 30, 2016
was
$624.0 million
compared to
$643.8 million
at
June 30, 2016
and
$674.6 million
at
September 30, 2015
. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels, payments to vendors, as well as cash generated or used by other financing and investing activities.
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
(in thousands)
|
Cash provided by (used in):
|
September 30, 2016
|
|
September 30, 2015
|
Operating activities
|
$
|
6,266
|
|
|
$
|
(57,725
|
)
|
Investing activities
|
(85,780
|
)
|
|
(61,908
|
)
|
Financing activities
|
63,336
|
|
|
44,497
|
|
Effect of exchange rate change on cash and cash equivalents
|
(97
|
)
|
|
(5,271
|
)
|
Increase (decrease) in cash and cash equivalents
|
$
|
(16,275
|
)
|
|
$
|
(80,407
|
)
|
Net cash provided by operating activities was
$6.3 million
for the
three
months ended
September 30, 2016
, compared to net cash used in operating activities of
$57.7 million
in the prior year period. Cash provided by operating activities for the
quarter ended
September 30, 2016
is primarily attributable to net income and increases in accounts payable and accrued expenses, partially offset by increases in accounts receivable. Changes in working capital balances, such as accounts receivable and accounts payable, exclude balances acquired from Intelisys at acquisition.
The number of days sales outstanding ("DSO") was
59
days at
September 30, 2016
, excluding the impact of Intelisys acquired August 29, 2016, compared to
57
days at
June 30, 2016
and
56
days at
September 30, 2015
, excluding the impact of KBZ acquired September 4, 2015. DSO increased due to higher accounts receivable as a percentage of sales. Inventory turned
6.0
times during the
first
quarter of fiscal year 2016 versus
5.6
and
5.3
times in the sequential and prior year quarters, respective
l
y. The prior year quarter excludes the impact of the KBZ acquisition. In prior quarters we had elevated inventory levels due to strategic inventory purchases that did not recur in the current quarter, thus improving inventory turns.
Cash used in investing activities for the
quarter ended
September 30, 2016
was
$85.8 million
, compared to
$61.9 million
used in the prior year period. Cash used in investing activities for the
quarter ended
September 30, 2016
primarily represents the cash used to acquire Intelisys. Cash used in investing activities for the
quarter ended
September 30, 2015
represents cash used to acquire KBZ.
Management expects capital expenditures for fiscal year 2017 to range from
$5 million
to
$10 million
, primarily for IT investments.
For the
quarter ended
September 30, 2016
, cash provided by financing activities totaled to
$63.3 million
compared to
$44.5 million
in the prior year period. Cash provided by financing activities for the
quarter ended
September 30, 2016
was primarily from net
borrowings on the revolving credit facility, partially offset by cash used to repurchase common stock and pay a contingent consideration payment to the former shareholders of Network1. Cash provided by financing activities for the
quarter ended
September 30, 2015
was primarily from net borrowings on the revolving credit facility, partially offset by cash used to repurchase common stock.
In August 2016, our Board of Directors authorized a new three-year $120 million share repurchase program. Under the program through
September 30, 2016
, the Company repurchased approximately 0.5 million shares for approximately $16.9 million.
The Company has a
$300 million
multi-currency senior secured revolving credit facility with JP Morgan Chase Bank, N.A, as administrative agent, and a syndicate of banks that matures on
November 6, 2018
. The Amended Credit Agreement allows for the issuance of up to
$50 million
for letters of credit and has a
$150 million
accordion feature that allows the Company to increase the availability to
$450 million
, subject to obtaining additional credit commitments for the lenders participating in the increase.
At our option, loans denominated in U.S. dollars under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon the Company's ratio of total debt (excluding accounts payable and accrued liabilities) to 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"). This spread ranges from
1.00%
to
2.25%
for LIBOR-based loans and
0.00%
to
1.25%
for alternate base rate loans. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company as well as certain foreign subsidiaries determined to be material under the Amended Credit Agreement and a pledge of up to
65%
of capital stock or other equity interest in each Guarantor (as defined in the Amended Credit Agreement). We were in compliance with all covenants under the credit facility as of
September 30, 2016
.
There was
$160.7 million
and
$71.4 million
in outstanding borrowings on our $300 million revolving credit facility as of
September 30, 2016
and
June 30, 2016
, respectively.
On a gross basis, we borrowed
$476.8 million
and repaid
$387.5 million
on our revolving credit facility in the
three
months ended
September 30, 2016
. In the prior year period, on a gross basis, we borrowed
$236.1 million
and repaid
$149.1 million
. The average daily balance during the
three
month period ended
September 30, 2016
and
2015
was
$102.3 million
and
$30.7 million
, respectively. Letters of credits issued under the multi-currency revolving credit facility totaled
€0.4 million
and there was
$139 million
available for additional borrowings as of
September 30, 2016
.
On September 19, 2014, the Company, through a wholly-owned subsidiary, completed its acquisition of 100% of the shares of Imago ScanSource, pursuant to the share purchase agreement. The purchase price was structured with an initial payment of
$37.4 million
, plus two additional annual cash installments for the twelve months ending September 30, 2015 and 2016, based on the financial performance of Imago ScanSource. The Company acquired
$1.9 million
of cash during the acquisition, resulting in net
$35.5 million
cash paid for Imago ScanSource. The Company has made one payment to the former shareholders. As of
September 30, 2016
, we have
$2.5 million
recorded for the earnout obligation, all of which is classified as current. Future earnout payments will be funded by cash on hand and our existing revolving credit facility.
On January 13, 2015, the Company, through a wholly-owned subsidiary, acquired 100% of the shares Network1, pursuant to the share purchase and sale agreement. The Company structured the purchase transaction with an initial cash payment of approximately
$29.1 million
, plus
four
additional annual cash installments based on a form of adjusted earnings before interest expense, taxes, depreciation and amortization ("adjusted EBITDA") for the periods ending June 30, 2015 through June 30, 2018. The Company acquired
$4.8 million
of cash in connection with the acquisition, resulting in
$24.3 million
net cash paid for Network1. The Company assumed net debt of
$35.2 million
as part of the initial purchase consideration, all of which has been repaid. The Company has made two earnout payments to the former shareholders. As of
September 30, 2016
,
$12.5 million
is recorded for the earnout obligation, of which
$7.6 million
is classified as current. Future earnout payments will be funded by cash on hand and our existing revolving credit facility.
On September 4, 2015, the Company acquired substantially all the assets of KBZ. Under the asset purchase agreement, the Company acquired certain assets of KBZ for a cash payment of $
64.6 million
. The Company acquired
$3.1 million
of cash during the acquisition, resulting in net
$61.5 million
cash paid for KBZ.
On August 29, 2016, the Company acquired substantially all the assets of Intelisys, a technology services company with voice, data, cable, wireless, and cloud services. Under the asset purchase agreement, the Company structured the purchase transaction with an initial cash payment of approximately
$84.6 million
, which consists of an initial purchase price of
$83.6 million
and
$1.0 million
for additional net assets acquired at closing, plus
four
additional annual cash installments based on a form of adjusted EBITDA for the periods ending June 30, 2017 through June 30, 2020. The Company acquired
$0.8 million
of cash during the
acquisition, resulting in
$83.8 million
net cash paid for Intelisys initially. As of
September 30, 2016
,
$95.8 million
is recorded for the earnout obligation, of which
$22.8 million
is classified as current. Future earnout payments will be funded by cash on hand and our existing revolving credit facility.
We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet the present and future working capital and cash requirements for at least the next twelve months.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future affect or change on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
There have been no material changes in our contractual obligations and commitments disclosed in our Annual Report on Form 10-K filed on August 29, 2016.
Accounting Standards Recently Issued
See Note 1 of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on the company's consolidated financial position and results of operations.
Critical Accounting Policies and Estimates
Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. See Management's Discussion and Analysis of Financial Condition and Results from Operations in our Annual Report on Form 10-K for the year ended June 30, 2016 for a complete discussion.