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 providing technology solutions. The Company brings technology solutions and services from the world’s leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, telecom and cloud services to market. The Company operates in the United States, Canada, Brazil and the UK. During the quarter ended December 31, 2020, the Company completed the divestitures of its products distribution business in the UK, Europe and Latin America, outside of Brazil. The Company's two operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services, are based on product, customer and service type.
COVID-19
In early March 2020, the World Health Organization characterized the novel coronavirus ("COVID-19") as a pandemic. The rapid spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The Company moved quickly to transition its employees, where possible, to a fully remote working environment. The Company took steps to deploy teams to monitor the rapidly evolving situation and recommend risk mitigation actions; implement travel restrictions; and have employees follow physical distancing practices. The Company is following guidance from authorities and health officials including, but not limited to, checking the temperature of associates when entering its facilities, requiring associates to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitation routines. All of the Company's distribution facilities have remained open and operational. Most of the Company's office-based employees around the world are working remotely.
The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on businesses around the world, including the Company, and on global, regional and national economies. The Company is unable to predict the ultimate impact that COVID-19 will have on its business due to the inability to predict the duration or magnitude of the virus' impact. In fiscal year 2020, the Company experienced decreased revenue and increased employee-related healthcare and prevention costs as a result of the COVID-19 pandemic. While the Company has made adjustments, including implementing an annualized expense reduction plan for fiscal year 2021, the Company will continue to monitor and make adjustments to the operating practices that it believes to be in the best interests of its employees, customers, suppliers, and shareholders. For further discussion on the potential future impacts of COVID-19, see the Risk Factors presented in Part I, Item 1A in the Company's form 10-K for fiscal year 2020.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("U.S. GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position at March 31, 2021 and June 30, 2020, the results of operations for the quarters and nine months ended March 31, 2021 and 2020, the statements of comprehensive income for the quarters and nine months ended March 31, 2021 and 2020, the statements of shareholders' equity for the quarters and nine months ended March 31, 2021 and 2020 and the statements of cash flows for the nine months ended March 31, 2021 and 2020. The results of operations for the quarters and nine months ended March 31, 2021 and 2020 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, 2020.
The Company has reclassified certain prior year amounts for the results of discontinued operations to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only.
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, 2021 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, 2020. 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, 2020.
See Note 2 - Trade Accounts and Notes Receivable for a discussion of the current expected credit loss policy established upon adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (ASC Topic 326) in fiscal year 2021.
Restructuring Costs
The Company groups exit or disposal cost obligations into two categories: (i) severance and benefit costs and (ii) other. Employee separation costs are recognized upon communication of the restructuring plan to the identified employees. Other associated restructuring costs are expensed as incurred. See Note 14 - Restructuring for further disclosures.
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 $17.0 million and $17.1 million are included in accounts payable on the condensed consolidated balance sheets at March 31, 2021 and June 30, 2020, respectively.
Long-lived Assets
The Company presents depreciation expense and intangible amortization expense on the Condensed Consolidated Income Statements. The Company's depreciation expense related to selling, general and administrative costs totaled $3.1 million and $9.6 million for the quarter and nine months ended March 31, 2021, respectively, and $3.3 million and $9.7 million for the quarter and nine months ended March 31, 2020, respectively. Depreciation expense reported as part of cost of goods sold on the Condensed Consolidated Income Statements totaled $0.3 million and $1.2 million for the quarter and nine months ended March 31, 2021, respectively, and $0.6 million and $1.8 million for the quarter and nine months ended March 31, 2020, respectively. The Company's intangible amortization expense reported on the Condensed Consolidated Income Statements relates to selling, general and administrative costs, not the cost of selling goods. Intangible amortization expense totaled $4.9 million and $14.6 million for the quarter and nine months ended March 31, 2021, respectively, and $5.2 million and $15.0 million for the quarter and nine months ended March 31, 2020, respectively.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (ASC 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 Company adopted this standard effective July 1, 2020 and it did not have a material impact on the Company's consolidated financial statements. See Note 2 - Trade Accounts and Notes Receivable for disclosures related to the adoption of ASU 2016-13.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 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. The Company adopted this standard effective July 1, 2020 and it had no impact on its consolidated financial statements.
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.
(2) Trade Accounts and Notes Receivable, Net
The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due to the Company. The Company has notes receivable with certain customers, which are included in “Accounts receivable, less allowance” in the Condensed Consolidated Balance Sheets.
Management determines the estimate of the allowance for doubtful accounts receivable by considering a number of factors, including: (i) historical experience, (ii) aging of the accounts receivable, (iii) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country-specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables over the contractual life are recorded at inception.
The changes in the allowance for doubtful accounts for the nine months ended March 31, 2021 are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Amounts Charged to Expense
|
|
Write-offs
|
|
Other (1)
|
|
March 31, 2021
|
|
(in thousands)
|
Trade accounts and current notes receivable allowance
|
$
|
21,906
|
|
|
$
|
226
|
|
|
$
|
(1,603)
|
|
|
$
|
651
|
|
|
$
|
21,180
|
|
(1)"Other" amounts include recoveries and the effect of foreign currency fluctuations for the nine months ended March 31, 2021.
(3) Revenue Recognition
The Company provides technology solutions and services from the world's leading suppliers of mobility and barcode, POS, payments, physical security, unified communications and collaboration, and telecom and cloud services. This includes hardware, related accessories and device configuration as well as software licenses, professional services and hardware support programs.
In determining the appropriate amount of revenue to recognize, the Company applies the following five-step model: (i) identify contracts with customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company recognizes revenue as control of products and services are transferred to customers, which is generally at the point of shipment. The Company delivers products to customers in several ways, including: (i) shipment from the Company's warehouse, (ii) drop-shipment directly from the supplier, or (iii) electronic delivery for non-physical products.
Principal versus Agent Considerations
The Company is the principal for sales of all hardware, certain software and 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 connecting independent sales partners with service providers or suppliers who offer telecom and cloud services to end-customers. Intelisys’ sales partners earn commission payments from those service providers or suppliers on end-customer sales. Intelisys provides commission processing services to sales partners, earning a percentage of the commission stream. Because the Company acts as an agent, revenue is recognized on a net basis.
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.
Disaggregation of Revenue
The following tables represent the Company's disaggregation of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2021
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
|
|
|
Revenue by product/service:
|
|
|
|
|
|
|
|
|
|
|
Technology solutions
|
|
$
|
502,227
|
|
|
$
|
211,369
|
|
|
$
|
713,596
|
|
|
|
|
|
Intelisys
|
|
—
|
|
|
16,277
|
|
|
16,277
|
|
|
|
|
|
|
|
$
|
502,227
|
|
|
$
|
227,646
|
|
|
$
|
729,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2021
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
|
|
|
Revenue by product/service:
|
|
|
|
|
|
|
|
|
|
|
Technology solutions
|
|
$
|
1,577,197
|
|
|
$
|
673,134
|
|
|
$
|
2,250,331
|
|
|
|
|
|
Intelisys
|
|
—
|
|
|
47,780
|
|
|
47,780
|
|
|
|
|
|
|
|
$
|
1,577,197
|
|
|
$
|
720,914
|
|
|
$
|
2,298,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2020
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
|
|
|
Revenue by product/service:
|
|
|
|
|
|
|
|
|
|
|
Technology solutions
|
|
$
|
489,218
|
|
|
$
|
240,819
|
|
|
$
|
730,037
|
|
|
|
|
|
Intelisys
|
|
—
|
|
|
14,547
|
|
|
14,547
|
|
|
|
|
|
|
|
$
|
489,218
|
|
|
$
|
255,366
|
|
|
$
|
744,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2020
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
|
|
|
Revenue by product/service:
|
|
|
|
|
|
|
|
|
|
|
Technology solutions
|
|
$
|
1,645,406
|
|
|
$
|
723,557
|
|
|
$
|
2,368,963
|
|
|
|
|
|
Intelisys
|
|
—
|
|
|
42,322
|
|
|
42,322
|
|
|
|
|
|
|
|
$
|
1,645,406
|
|
|
$
|
765,879
|
|
|
$
|
2,411,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Nine months ended
|
|
March 31,
|
|
March 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(in thousands, except per share data)
|
Numerator:
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
13,786
|
|
|
$
|
5,715
|
|
|
$
|
24,732
|
|
|
$
|
29,633
|
|
Net loss from discontinued operations
|
(688)
|
|
|
(4,002)
|
|
|
(37,647)
|
|
|
(5,025)
|
|
Net (loss) income
|
$
|
13,098
|
|
|
$
|
1,713
|
|
|
$
|
(12,915)
|
|
|
$
|
24,608
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares, basic
|
25,455
|
|
|
25,346
|
|
|
25,404
|
|
|
25,386
|
|
Dilutive effect of share-based payments
|
117
|
|
|
17
|
|
|
80
|
|
|
58
|
|
Weighted-average shares, diluted
|
25,572
|
|
|
25,363
|
|
|
25,484
|
|
|
25,444
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations per common share, basic
|
$
|
0.54
|
|
|
$
|
0.23
|
|
|
$
|
0.97
|
|
|
$
|
1.17
|
|
Net loss from discontinued operations per common share, basic
|
(0.03)
|
|
|
(0.16)
|
|
|
(1.48)
|
|
|
(0.20)
|
|
Net (loss) income per common share, basic
|
$
|
0.51
|
|
|
$
|
0.07
|
|
|
$
|
(0.51)
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations per common share, diluted
|
$
|
0.54
|
|
|
$
|
0.23
|
|
|
$
|
0.97
|
|
|
$
|
1.16
|
|
Net loss from discontinued operations per common share, diluted
|
(0.03)
|
|
|
(0.16)
|
|
|
(1.48)
|
|
|
(0.20)
|
|
Net (loss) income per common share, diluted
|
$
|
0.51
|
|
|
$
|
0.07
|
|
|
$
|
(0.51)
|
|
|
$
|
0.97
|
|
For the quarter and nine months ended March 31, 2021, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 1,532,961 and 1,285,153, respectively. For the quarter and nine months ended March 31, 2020, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 1,036,740 and 980,803, respectively.
(5) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
June 30, 2020
|
|
(in thousands)
|
Foreign currency translation adjustment
|
$
|
(108,069)
|
|
|
$
|
(125,974)
|
|
Unrealized loss on hedged transaction, net of tax
|
(4,612)
|
|
|
(6,821)
|
|
Accumulated other comprehensive loss
|
$
|
(112,681)
|
|
|
$
|
(132,795)
|
|
|
|
|
|
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,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(in thousands)
|
Tax expense (benefit)
|
$
|
1,088
|
|
|
$
|
617
|
|
|
$
|
1,348
|
|
|
$
|
921
|
|
(6) Acquisitions
intY
On July 1, 2019, the Company acquired all of the outstanding shares of intY and its CASCADE cloud services distribution platform. The purchase price of this acquisition, net of cash acquired, was approximately $48.9 million. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date. Intangible assets acquired include trade names, customer relationships, and developed technology. Goodwill recognized on this acquisition is not deductible for tax purposes. The impact of this acquisition was not material to the consolidated financial statements. The Company recognized $0.1 million and $0.5 million for the quarter and nine months ended March 31, 2020, respectively, in acquisition-related costs included in selling, general and administrative expenses on the Condensed Consolidated Income Statements in connection with this acquisition. This acquisition is included in the Worldwide Communications & Services segment.
(7) Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended March 31, 2021, by reporting segment, are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
(in thousands)
|
Balance at June 30, 2020
|
$
|
16,370
|
|
|
$
|
197,918
|
|
|
$
|
214,288
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
2,805
|
|
|
2,805
|
|
Balance at March 31, 2021
|
$
|
16,370
|
|
|
$
|
200,723
|
|
|
$
|
217,093
|
|
The following table shows changes in the amount recognized for net identifiable intangible assets for the nine months ended March 31, 2021.
|
|
|
|
|
|
|
Net Identifiable Intangible Assets
|
|
(in thousands)
|
Balance at June 30, 2020
|
$
|
121,547
|
|
|
|
|
|
Amortization expense
|
(14,595)
|
|
Foreign currency translation adjustment
|
2,220
|
|
Balance at March 31, 2021
|
$
|
109,172
|
|
(8) Short-Term Borrowings and Long-Term Debt
The following table presents the Company’s debt for continuing and discontinued operations at March 31, 2021 and June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
June 30, 2020
|
|
(in thousands)
|
Short-term borrowings(a)
|
$
|
—
|
|
|
$
|
3,524
|
|
Current portion of long-term debt
|
7,843
|
|
|
7,839
|
|
Mississippi revenue bond, net of current portion
|
4,081
|
|
|
4,425
|
|
Senior secured term loan facility, net of current portion
|
133,125
|
|
|
138,750
|
|
Borrowings under revolving credit facility(b)
|
53,802
|
|
|
92,418
|
|
Total debt
|
$
|
198,851
|
|
|
$
|
246,956
|
|
(a) Short-term borrowings are classified as held for sale in the Consolidated Balance sheets for the Company's discontinued operations at June 30, 2020.
(b) Borrowings under the revolving credit facility classified as held for sale in the Consolidated Balance Sheets for the Company's discontinued operations totaled $24.7 million at June 30, 2020.
Short-term Borrowings
The Company had a bank overdraft facility with Bank of America used by its products distribution business in the UK and European Union recognized as short-term borrowings. The facility was terminated with the sale of the business in November 2020. The facility allowed the Company to disburse checks in excess of bank balances up to $14.0 million U.S. dollar equivalent for up to seven days. Borrowings under the overdraft facility had an interest rate equal to 1% over the applicable currency's London Interbank Offered Rate ("LIBOR") with a zero percent floor. There were no borrowings outstanding under the overdraft facility at March 31, 2021. At June 30, 2020, there was $3.5 million outstanding under the overdraft facility classified as held for sale in the Consolidated Balance Sheets. The borrowings were denominated in euros, which bore a negative LIBOR rate at June 30, 2020, and as such the interest applicable to the Company was 1.0%.
Credit Facility
The Company has a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (the “Amended Credit Agreement”). On April 30, 2019, the Company amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. The Amended Credit Agreement includes (i) a five-year $350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. Pursuant to an “accordion feature,” the Company may increase its borrowings up to an additional $250 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit, subject to obtaining additional credit commitments from the lenders participating in the increase. The Company incurred debt issuance costs of $1.1 million in connection with the amendments to the Amended Credit Agreement. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.
At the Company's option, loans under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the LIBOR or alternate base rate depending upon the Company's net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash ("Credit Facility Net Debt") to trailing four-quarter adjusted earnings before interest expense, taxes, depreciation and amortization ("Credit Facility EBITDA") (the "Leverage Ratio"). This spread ranges from 1.00% to 1.75% for LIBOR-based loans and 0.00% to 0.75% for alternate base rate loans. Additionally, the Company is charged commitment fees ranging from 0.15% to 0.30%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65% of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement. Under the terms of the revolving credit facility, the payment of cash dividends is restricted.
The spread in effect as of March 31, 2021 was 1.25% for LIBOR-based loans and 0.25% for alternate base rate loans. The commitment fee rate in effect at March 31, 2021 was 0.20%. The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, the Company’s Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. The Company was in compliance with all covenants under the credit facility at March 31, 2021.
Including borrowings for both continuing and discontinued operations, the average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the nine month periods ended March 31, 2021 and 2020 was $62.1 million and $252.4 million, respectively. Taking into consideration outstanding borrowings on the multi-currency revolving credit facility for both continuing and discontinued operations, there was $296.2 million and $257.3 million available for additional borrowings as of March 31, 2021 and June 30, 2020, respectively. At March 31, 2021, based upon the Leverage Ratio calculation, there was $172.6 million available for additional borrowings. There were no letters of credit issued under the multi-currency revolving credit facility at March 31, 2021 and $0.3 million at June 30, 2020.
Mississippi Revenue Bond
On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100% of the principal amount outstanding. At March 31, 2021, the Company was in compliance with all covenants under this bond. The interest rates at March 31, 2021 and June 30, 2020 were 0.96% and 1.03%, respectively.
Debt Issuance Costs
At March 31, 2021, net debt issuance costs associated with the credit facility and bond totaled $1.3 million and are being amortized through the maturity date of each respective debt instrument.
(9) Derivatives and Hedging Activities
The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the consolidated balance sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.
Foreign Currency Derivatives – The Company conducts a portion of its business internationally in a variety of foreign currencies and is exposed to market risk for changes in foreign currency exchange rates. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and once these opportunities have been exhausted the Company uses currency options and forward contracts or other hedging instruments with third parties. These contracts will periodically hedge the exchange of various currencies, including the U.S. dollar, Brazilian real, euro, British pound and Canadian dollar for continuing operations.
The Company had contracts outstanding for purposes of managing cash flows with notional amounts of $25.5 million and $16.6 million for the exchange of foreign currencies at March 31, 2021 and June 30, 2020, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures included in the Condensed Consolidated Income Statements for the quarters and nine months ended March 31, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Nine months ended
|
|
March 31,
|
|
March 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(in thousands)
|
Net foreign exchange derivative contract (gains) losses
|
$
|
(1,061)
|
|
|
$
|
(3,264)
|
|
|
$
|
852
|
|
|
$
|
(3,749)
|
|
Net foreign currency transactional and re-measurement losses (gains)
|
1,020
|
|
|
3,168
|
|
|
(74)
|
|
|
3,835
|
|
Net foreign currency exchange (gains) losses
|
$
|
(41)
|
|
|
$
|
(96)
|
|
|
$
|
778
|
|
|
$
|
86
|
|
Net foreign currency exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses and are included in other income and expense. Foreign currency 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, British pound versus the euro and other currencies versus the U.S. dollar.
Interest Rates - The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. The Company manages its exposure to changes in interest rates by using interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating rate debt. The Company entered into an interest rate swap agreement, which was subsequently settled, and entered into a new amended agreement on April 30, 2019. The swap agreement has a notional amount of $100.0 million, with a $50.0 million tranche scheduled to mature
on April 30, 2024 and a $50.0 million tranche scheduled to mature April 30, 2026. This swap agreement is designated as a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for the quarters and nine months ended March 31, 2021 and 2020.
The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive Income for the quarters and nine months ended March 31, 2021 and 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Nine months ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(in thousands)
|
Net interest expense recognized as a result of interest rate swap
|
|
$
|
557
|
|
|
$
|
180
|
|
|
$
|
1,682
|
|
|
$
|
343
|
|
Unrealized gain (loss) in fair value of interest rate swap
|
|
1,549
|
|
|
(5,518)
|
|
|
1,281
|
|
|
(5,890)
|
|
Net increase (decrease) in accumulated other comprehensive income
|
|
2,106
|
|
|
(5,338)
|
|
|
2,963
|
|
|
(5,547)
|
|
Income tax effect
|
|
524
|
|
|
(1,292)
|
|
|
754
|
|
|
(1,330)
|
|
Net increase (decrease) in accumulated other comprehensive income, net of tax
|
|
$
|
1,582
|
|
|
$
|
(4,046)
|
|
|
$
|
2,209
|
|
|
$
|
(4,217)
|
|
The Company used the following derivative instruments at March 31, 2021 and June 30, 2020, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
June 30, 2020
|
|
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 liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accrued expenses and other current liabilities
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
26
|
|
Foreign currency hedge
|
Accrued expenses and other current liabilities
|
|
$
|
275
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap agreement
|
Other long-term liabilities
|
|
$
|
6,340
|
|
|
$
|
—
|
|
|
$
|
9,433
|
|
|
$
|
—
|
|
(10) Fair Value of Financial Instruments
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company classifies certain assets and liabilities based on the fair value hierarchy, which aggregates fair value measured assets and liabilities based upon the following levels of inputs:
•Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
•Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
The assets and liabilities maintained by the Company that are required to be measured 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 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 at March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
30,145
|
|
|
$
|
30,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
30,145
|
|
|
$
|
30,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
30,145
|
|
|
$
|
30,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
45
|
|
|
—
|
|
|
45
|
|
|
—
|
|
Foreign currency hedge
|
275
|
|
|
—
|
|
|
275
|
|
|
—
|
|
Interest rate swap agreement
|
6,340
|
|
|
—
|
|
|
6,340
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
$
|
36,805
|
|
|
$
|
30,145
|
|
|
$
|
6,660
|
|
|
$
|
—
|
|
The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
27,159
|
|
|
$
|
27,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
27,159
|
|
|
$
|
27,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
27,159
|
|
|
$
|
27,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
26
|
|
|
—
|
|
|
26
|
|
|
—
|
|
Interest rate swap agreement
|
9,433
|
|
|
—
|
|
|
9,433
|
|
|
—
|
|
Liability for contingent consideration
|
46,334
|
|
|
—
|
|
|
—
|
|
|
46,334
|
|
Total liabilities at fair value
|
$
|
82,952
|
|
|
$
|
27,159
|
|
|
$
|
9,459
|
|
|
$
|
46,334
|
|
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 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). 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 non-current assets or accrued expenses and other long-term liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 9 - Derivatives and Hedging Activities.
The Company recorded a contingent consideration liability at the acquisition date of 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 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.
Intelisys is part of the Company's Worldwide Communications & Services segment. The table below provides a summary of the changes in fair value of the Company's contingent considerations for the Intelisys earnout, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter and nine months ended March 31, 2021. The final earnout payment due to the former owners of Intelisys was paid in October 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2021
|
|
|
|
Nine months ended March 31, 2021
|
|
|
|
Worldwide Communications & Services Segment
|
|
|
|
|
(in thousands)
|
Fair value at beginning of period
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
46,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
—
|
|
|
|
|
|
|
(46,850)
|
|
|
Change in fair value of contingent consideration
|
|
|
—
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the Intelisys earnout for the quarter and nine months ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2020
|
|
|
Nine months ended March 31, 2020
|
|
|
|
Worldwide Communications & Services Segment
|
|
|
|
|
(in thousands)
|
Fair value at beginning of period
|
|
|
$
|
45,043
|
|
|
|
|
|
$
|
77,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
—
|
|
|
|
|
|
(38,531)
|
|
|
Change in fair value of contingent consideration
|
|
|
617
|
|
|
|
|
|
6,266
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
|
$
|
45,660
|
|
|
|
|
|
$
|
45,660
|
|
|
The fair values of amounts owed are recorded in current portion of contingent consideration in the Company’s Condensed Consolidated Balance Sheets. In accordance with ASC 805, the Company will revalue the contingent consideration liability 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 liability 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.
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 the Company's contingent consideration liability related to Intelisys at June 30, 2020 were as follows. The measurement period for the Intelisys earnout ended on June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Period
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
|
Weighted Average Rates(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Discounted cash flow
|
|
Weighted average cost of capital
|
|
3.0
|
%
|
|
|
|
|
|
|
|
(a) Weighted average rates identified for this significant unobservable input relate to the valuation of the Intelisys contingent consideration. Since the earnout period for Intelisys closed on June 30, 2020, the weighted average cost of capital represents the cost of debt. There is no EBITDA growth or weighted average cost of capital to report in the current period.
Intelisys
The final contingent consideration payment related to Intelisys was paid during the quarter ended December 31, 2020. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $0.5 million for the nine months ended March 31, 2021. The change in fair value for the current nine month period is due to the recurring amortization of the unrecognized fair value discount.
The fair value of the liability for the contingent consideration related to Intelisys recognized at March 31, 2020 was $45.7 million, all of which was classified as current. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $0.6 million and $6.3 million for the quarter and nine months ended March 31, 2020, respectively. The change in fair value for the prior-year quarter and nine month period is primarily driven by the recurring amortization of the unrecognized fair value discount and better than expected actual results.
(11) Segment Information
The Company is a leading 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. The Company has business operations within this segment in the United States, Canada and Brazil. The Company sees adjacencies among these technologies in helping its customers develop solutions. Data capture and POS solutions 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 and includes the Company's acquisition of intY. The Company has business operations within this segment in the United States, Canada, Brazil and the UK. These offerings include voice, video conferencing, wireless, data networking, cable, unified communications and collaboration, cloud and technology services. As these solutions come together on IP networks, new opportunities are created to move into adjacent solutions for all vertical markets, such as education, healthcare and government.
Selected financial information for each business segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Nine months ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
(in thousands)
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
502,227
|
|
|
$
|
489,218
|
|
|
$
|
1,577,197
|
|
|
$
|
1,645,406
|
|
|
|
Worldwide Communications & Services
|
227,646
|
|
|
255,366
|
|
|
720,914
|
|
|
765,879
|
|
|
|
|
$
|
729,873
|
|
|
$
|
744,584
|
|
|
$
|
2,298,111
|
|
|
$
|
2,411,285
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
3,772
|
|
|
$
|
4,210
|
|
|
$
|
11,852
|
|
|
$
|
12,765
|
|
|
|
Worldwide Communications & Services
|
3,867
|
|
|
3,981
|
|
|
11,257
|
|
|
11,436
|
|
|
|
Corporate
|
719
|
|
|
795
|
|
|
2,308
|
|
|
2,384
|
|
|
|
|
$
|
8,358
|
|
|
$
|
8,986
|
|
|
$
|
25,417
|
|
|
$
|
26,585
|
|
|
|
Change in fair value of contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Communications & Services
|
$
|
—
|
|
|
$
|
618
|
|
|
$
|
516
|
|
|
$
|
6,266
|
|
|
|
|
$
|
—
|
|
|
$
|
618
|
|
|
$
|
516
|
|
|
$
|
6,266
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
8,054
|
|
|
$
|
4,779
|
|
|
$
|
16,088
|
|
|
$
|
29,153
|
|
|
|
Worldwide Communications & Services
|
12,214
|
|
|
6,394
|
|
|
33,555
|
|
|
22,009
|
|
|
|
Corporate(1)
|
(832)
|
|
|
(780)
|
|
|
(11,442)
|
|
|
(2,689)
|
|
|
|
|
$
|
19,436
|
|
|
$
|
10,393
|
|
|
$
|
38,201
|
|
|
$
|
48,473
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
(532)
|
|
|
$
|
(1,855)
|
|
|
$
|
(1,173)
|
|
|
$
|
(3,294)
|
|
|
|
Worldwide Communications & Services
|
(297)
|
|
|
(1,988)
|
|
|
(1,110)
|
|
|
(3,281)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(829)
|
|
|
$
|
(3,843)
|
|
|
$
|
(2,283)
|
|
|
$
|
(6,575)
|
|
|
|
Sales by Geography Category:
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
$
|
666,773
|
|
|
$
|
677,798
|
|
|
$
|
2,081,377
|
|
|
$
|
2,200,644
|
|
|
|
International
|
64,153
|
|
|
74,409
|
|
|
228,784
|
|
|
237,770
|
|
|
|
Less intercompany sales
|
(1,053)
|
|
|
(7,623)
|
|
|
(12,050)
|
|
|
(27,129)
|
|
|
|
|
$
|
729,873
|
|
|
$
|
744,584
|
|
|
$
|
2,298,111
|
|
|
$
|
2,411,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes restructuring costs of $0.6 million and $9.3 million for the quarter and nine months ended March 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
June 30, 2020
|
|
(in thousands)
|
Assets:
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
786,123
|
|
|
$
|
766,746
|
|
Worldwide Communications & Services
|
775,359
|
|
|
685,053
|
|
Corporate
|
21,140
|
|
|
59,064
|
|
Assets held for sale
|
—
|
|
|
181,231
|
|
|
$
|
1,582,622
|
|
|
$
|
1,692,094
|
|
Property and equipment, net by Geography Category:
|
|
|
|
United States and Canada
|
$
|
42,517
|
|
|
$
|
53,083
|
|
International
|
2,799
|
|
|
2,558
|
|
|
$
|
45,316
|
|
|
$
|
55,641
|
|
(12) Leases
In accordance with ASC 842, at contract inception the Company determines if a contract contains a lease by assessing whether the contract contains an identified asset and whether the Company has the ability to control the asset. The Company also determines if the lease meets the classification criteria for an operating lease versus a finance lease under ASC 842. Substantially all of the Company's leases are operating leases for real estate, warehouse and office equipment ranging in duration from 1 year to 10 years. The Company has elected not to record short-term operating leases with an initial term of 12 months or less on the Condensed Consolidated Balance Sheets. Operating leases are recorded as other non-current assets, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company has finance leases for information technology equipment expiring in fiscal year 2022. Finance leases are recorded as property and equipment, net, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The gross amount of the balances recorded related to finance leases is immaterial to the financial statements at March 31, 2021 and June 30, 2020.
Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the net present value of future minimum lease payments over the lease term. The Company generally is not able to determine the rate implicit in its leases and has elected to apply an incremental borrowing rate as the discount rate for the present value determination, which is based on the Company's cost of borrowings for the relevant terms of each lease and geographical economic factors. Certain operating lease agreements contain options to extend or terminate the lease. The lease term used is adjusted for these options when the Company is reasonably certain it will exercise the option. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments not based on a rate or index, such as costs for common area maintenance, are expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable.
The following table presents amounts recorded on the Condensed Consolidated Balance Sheet related to operating leases at March 31, 2021 and June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Balance Sheet location
|
|
March 31, 2021
|
|
June 30, 2020
|
|
|
|
|
(in thousands)
|
Operating lease right-of-use assets
|
|
Other non-current assets
|
|
$
|
20,265
|
|
|
$
|
23,581
|
|
Current operating lease liabilities
|
|
Accrued expenses and other current liabilities
|
|
4,283
|
|
|
4,476
|
|
Long-term operating lease liabilities
|
|
Other long-term liabilities
|
|
17,598
|
|
|
20,760
|
|
The following table presents amounts recorded in operating lease expense as part of selling general and administrative expenses on the Condensed Consolidated Income Statements during the quarters and nine months ended March 31, 2021 and 2020. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31,
|
|
Nine months ended March 31,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(in thousands)
|
|
(in thousands)
|
Operating lease cost
|
|
$
|
1,277
|
|
|
$
|
1,521
|
|
|
$
|
3,964
|
|
|
$
|
4,685
|
|
Variable lease cost
|
|
297
|
|
|
389
|
|
|
880
|
|
|
919
|
|
|
|
$
|
1,574
|
|
|
$
|
1,910
|
|
|
$
|
4,844
|
|
|
$
|
5,604
|
|
Supplemental cash flow information related to the Company's operating leases for the quarter and nine months ended March 31, 2021 and 2020 are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
(in thousands)
|
Cash paid for amounts in the measurement of lease liabilities
|
|
|
|
|
|
$
|
4,116
|
|
|
$
|
4,351
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
|
|
|
—
|
|
|
1,672
|
|
The weighted-average remaining lease term and discount rate at March 31, 2021 are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
Weighted-average remaining lease term
|
|
5.42 years
|
Weighted-average discount rate
|
|
4.1
|
%
|
The following table presents the maturities of the Company's operating lease liabilities at March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
(in thousands)
|
Remainder of 2021
|
|
$
|
1,329
|
|
2022
|
|
4,992
|
|
2023
|
|
4,658
|
|
2024
|
|
4,158
|
|
2025
|
|
3,256
|
|
Thereafter
|
|
5,990
|
|
Total future payments
|
|
24,383
|
|
Less: amounts representing interest
|
|
2,502
|
|
Present value of lease payments
|
|
$
|
21,881
|
|
(13) 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.
In early March 2020, the World Health Organization characterized COVID-19 as a pandemic. The rapid spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on businesses around the world, including the Company’s business, and on global, regional and national economies. The Company is unable at this time to predict the ultimate impact that COVID-19 will have on its business due to the inability to predict the duration or magnitude of the virus' impact.
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 for future pre-acquisition contingency settlements or to be released to the sellers was $3.5 million and $4.8 million, at March 31, 2021 and June 30, 2020, 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 at March 31, 2021 and June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
June 30, 2020
|
|
Network1
|
|
(in thousands)
|
Assets
|
|
|
|
Prepaid expenses and other current assets
|
$
|
14
|
|
|
$
|
14
|
|
Other non-current assets
|
$
|
3,510
|
|
|
$
|
3,652
|
|
Liabilities
|
|
|
|
Accrued expenses and other current liabilities
|
$
|
14
|
|
|
$
|
14
|
|
Other long-term liabilities
|
$
|
3,510
|
|
|
$
|
3,652
|
|
The decrease in pre-acquisition contingencies and corresponding indemnification receivables is due to a slight decrease in the foreign exchange rate of the Brazilian real against the US dollar.
(14) Restructuring
In July 2020, as part of a strategic review of organizational structure and operations, the Company announced a global cost reduction and restructuring program. These actions are designed to better align the cost structure for the wholesale distribution business with lower sales volumes as a result of the COVID-19 pandemic. The Company also initiated the closure of its Canpango business, its salesforce implementation and consulting business. There has been limited adoption by the Company's partner community of the services Canpango offers. These actions include entering into severance and termination agreements with employees, legal fees to execute the reduction in force and costs associated with lease terminations.
The following table presents the restructuring and severance costs incurred for the quarter and nine months ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2021
|
|
Nine months ended March 31, 2021
|
|
|
(in thousands)
|
Severance and benefit costs
|
|
$
|
326
|
|
|
$
|
8,825
|
|
Other
|
|
234
|
|
|
487
|
|
Total restructuring and other charges
|
|
$
|
560
|
|
|
$
|
9,312
|
|
For the quarter and nine months ended March 31, 2021, all restructuring costs are recognized in the Corporate reporting unit and have not been allocated to the Worldwide Communications & Services or Worldwide Barcode, Networking & Security segment. The Company incurred restructuring charges in the prior year that were immaterial to the condensed consolidated financial statements and unrelated to the program described above.
Accrued restructuring and severance costs are included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The following table represents activity for the nine months ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
(in thousands)
|
Balance at July 1, 2020
|
|
$
|
—
|
|
Charged to expense
|
|
9,312
|
|
Cash payments
|
|
(6,803)
|
|
Balance at March 31, 2021
|
|
$
|
2,509
|
|
The remaining balance as of March 31, 2021 of $2.5 million, primarily related to Corporate, is expected to be paid through the first quarter of fiscal year 2022.
(15) Income Taxes
Income taxes for the quarters and nine months ended March 31, 2021 and 2020 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 includes certain items treated as discrete events to arrive at an estimated overall tax provision. During the current period, a discrete net tax benefit of $0.5 million was recorded, which is primarily attributable to exempt foreign income.
The Company’s effective tax rate of 27.1% and 28.3% for the quarter and nine months ended March 31, 2021, respectively, 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 Company's effective tax rate was 32.9% and 28.0% for the quarter and nine months ended March 31, 2020, respectively.
The Company has provided for U.S. income taxes for the current earnings of its Canadian subsidiary and will continue to distribute the earnings of its Canadian subsidiary. Earnings from Brazil will continue to be considered retained indefinitely for reinvestment and all other foreign geographies are immaterial. It has been the practice of the Company to reinvest those earnings in the businesses outside the United States. As a result of the sale of the Latin American and European entities, the Company repatriated the proceeds to the United States with minimal tax consequences.
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, 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 of total gross unrecognized tax benefits at March 31, 2021 and June 30, 2020. Of this total at March 31, 2021, approximately $1 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’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At March 31, 2021 and June 30, 2020, the Company had approximately $1.2 million and $1.1 million, respectively, accrued for interest and penalties.
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, 2015.
(16) Discontinued Operations
On August 20, 2019, the Company announced plans to divest the product distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and the Miami-based export operations ("Divestitures") as these businesses had been performing below management's expectations. The Company will continue to operate its digital business in these countries. Management determined that the Company did not have sufficient scale in these markets to maximize the value-added model for product distribution, leading the Company to focus and invest in its higher-growth, higher-margin businesses. Results from the Divestitures were included within each reportable segment, which includes the Worldwide Barcode, Networking & Security and Worldwide Communications & Services segments.
During the quarter ended June 30, 2020, the Company recorded a pre-tax loss on sale classification of $88.9 million to reduce the carrying value of the Divestitures to its estimate of fair value (the net proceeds received at closing), less estimated costs to sell. As this loss was determined not to be attributable to any individual components in the Divestitures' net assets, it was reflected as a valuation allowance against the total assets of the Divestitures. During the quarter and nine months ended March 31, 2021, the Company recorded an additional pre-tax loss on disposal group of $0.7 million and $34.5 million, respectively. This loss includes the realization of cumulative translation adjustments of $0.0 million and $11.6 million for the quarter and nine months ended March 31, 2021, respectively. Additional losses during the quarter and nine months ended March 31, 2021 are primarily attributable to a reduction in the net proceeds received for the Divestitures.
The Company signed an agreement on July 23, 2020 with Intcomex for its businesses located in Latin America, outside of Brazil. The Company finalized the sale of the Latin America businesses on October 30, 2020. The Company also finalized the sale of the Europe and UK business on November 12, 2020. Total cash received for the sale of divestitures was $34.4 million.
Major components of net loss from discontinued operations for the quarters and nine months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31,
|
|
Nine months ended March 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(in thousands)
|
|
(in thousands)
|
Net sales
|
$
|
—
|
|
|
$
|
127,899
|
|
|
$
|
213,373
|
|
|
$
|
439,527
|
|
Cost of goods sold
|
—
|
|
|
117,669
|
|
|
198,512
|
|
|
400,158
|
|
Gross profit
|
—
|
|
|
10,230
|
|
|
14,861
|
|
|
39,369
|
|
Selling, general and administrative expenses
|
—
|
|
|
13,782
|
|
|
17,291
|
|
|
42,607
|
|
Depreciation expense
|
—
|
|
|
225
|
|
|
—
|
|
|
771
|
|
Intangible amortization expense
|
—
|
|
|
327
|
|
|
—
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
Operating loss
|
—
|
|
|
(4,104)
|
|
|
(2,430)
|
|
|
(5,082)
|
|
Interest expense, net
|
—
|
|
|
323
|
|
|
394
|
|
|
1,236
|
|
Loss on disposal group
|
688
|
|
|
—
|
|
|
34,496
|
|
|
—
|
|
Other (income) expense, net
|
—
|
|
|
433
|
|
|
310
|
|
|
(96)
|
|
Loss from discontinued operations before taxes
|
(688)
|
|
|
(4,860)
|
|
|
(37,630)
|
|
|
(6,222)
|
|
Income tax expense (benefit)
|
—
|
|
|
(858)
|
|
|
17
|
|
|
(1,197)
|
|
Net loss from discontinued operations
|
$
|
(688)
|
|
|
$
|
(4,002)
|
|
|
$
|
(37,647)
|
|
|
$
|
(5,025)
|
|
The major classes of assets and liabilities classified as held-for-sale in the accompanying consolidated balance sheets, were as follows as of March 31, 2021 and June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
June 30, 2020
|
|
(in thousands)
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
4,970
|
|
Accounts receivable, net
|
—
|
|
|
117,200
|
|
Inventories, net
|
—
|
|
|
106,779
|
|
Prepaid expenses and other current assets
|
—
|
|
|
23,808
|
|
|
|
|
|
Total current assets
|
—
|
|
|
252,757
|
|
Property and equipment, net
|
—
|
|
|
1,833
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
—
|
|
|
9,349
|
|
Other non-current assets
|
—
|
|
|
6,215
|
|
Total assets, before valuation allowance
|
—
|
|
|
270,154
|
|
Less: valuation allowance
|
—
|
|
|
(88,923)
|
|
Total assets, net of valuation allowance (1)
|
$
|
—
|
|
|
$
|
181,231
|
|
Liabilities
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
56,098
|
|
Accrued expenses and other current liabilities
|
—
|
|
|
14,815
|
|
Other taxes payable
|
—
|
|
|
20,378
|
|
Short-term borrowings
|
—
|
|
|
3,524
|
|
Income tax payable
|
—
|
|
|
1,085
|
|
Total current liabilities
|
—
|
|
|
95,900
|
|
Borrowings under revolving credit facility
|
—
|
|
|
24,704
|
|
Other long-term liabilities
|
—
|
|
|
7,418
|
|
Total liabilities(1)
|
$
|
—
|
|
|
$
|
128,022
|
|
(1) Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company's consolidated balance sheet as of June 30, 2020. The discontinued operations were disposed of during the quarter ended December 31, 2020.
Significant non-cash operating items and capital expenditures reflected in the cash flows from discontinued operations for the nine months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31,
|
|
2021
|
|
2020
|
|
(in thousands)
|
Loss on disposal group
|
$
|
34,496
|
|
|
$
|
—
|
|
|
|
|
|
Depreciation and amortization
|
—
|
|
|
1,844
|
|
Capital expenditures
|
(58)
|
|
|
(48)
|
|