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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Overview
ScanSource is at the center of the technological solution delivery channel, connecting businesses and providing solutions. We provide technology solutions and services from the world’s leading suppliers of point-of-sale (POS), payments, barcode, physical security, unified communications and collaboration, cloud and telecom services to our customers. We serve approximately
45,000
customers located in the United States, Canada, Latin America and Europe and provide solutions and services from over
500
technology suppliers.
We operate our business under a management structure that enhances our worldwide technology market focus and growth strategy. We segment our business into
two
technology-focused areas that each operate in the U.S., Canada, Latin America and Europe:
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•
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Worldwide Barcode, Networking & Security
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•
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Worldwide Communications & Services
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We sell products to the United States and Canada from our facilities located in Mississippi, California and Kentucky; into Latin America principally from facilities located in Florida, Mexico, Brazil, Colombia and Chile; and into Europe principally from facilities in Belgium, France and the United Kingdom. We also have drop-shipment arrangements with some of our suppliers, which allow us to offer products to customers without taking physical delivery at our facilities.
Our key suppliers include Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, Brocade/Ruckus, CenturyLink/Level 3, Cisco, Comcast Business, Datalogic, Dell, Dialogic, Elo, F5, Fortinet, Epson, Hanwha, Honeywell, HID, Ingenico, Jabra, March Networks, Mitel, NCR, Oracle, Panasonic, Plantronics/Polycom, RingCentral, Samsung, Sony, Spectralink, Toshiba Global Commerce Solutions, Ubiquiti, Unify, Verifone, Verizon, Windstream, XO and Zebra Technologies. We also offer customers significant choices in cloud services through our Intelisys business, including offerings in contact center, infrastructure and unified communications.
Recent Developments
On
August 20, 2018
, the Company acquired Canpango, a global Salesforce implementation and consulting partner with deep knowledge of customer relationship management ("CRM") and integration with telecom systems. Canpango’s professional services are complementary to our cloud services offerings. Canpango joins the Company's Worldwide Communications & Services operating segment.
The Tax Cuts and Jobs Act (the "Tax Act") was enacted in the United States on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and implements a territorial tax system. The Tax Act also requires companies to pay a one-time transition tax on the deemed repatriation of undistributed foreign earnings and remeasure deferred tax assets and liabilities. See Note 12 -
Income Taxes
in the Notes to the Consolidated Financial Statements for further discussion.
Our Strategy
We sell hardware, software, services, and connectivity solutions from technology suppliers to customers that serve end-users. We are a leading channel sales partner for many of our technology suppliers and sell technology solutions that solve end-user's business needs. While we do not manufacture products, we offer the industry leading technology solutions and services from leading technology suppliers. We have the ability to provide a combination of offerings from multiple suppliers or give our customers access to additional services, such as custom configuration, key injection, integration support and other services, to deliver solutions. We also offer the flexibility of on-premise, cloud and hybrid solutions.
As a trusted adviser to our customers, we provide more complete solutions through a better understanding of end-user needs. We drive growth through enhancing our customers' capabilities to provide hardware, software, services and connectivity solutions to meet these needs. Our teams deliver value-added support programs and services, including education and training, network assessments, implementation and marketing to help our customers extend their capabilities, develop new technology practices or reach new end-users.
Our objective is to continue to grow profitable sales in the technologies we offer and expand in higher margin and adjacent markets to help our customers offer more products and services and increase recurring revenue opportunities. We continue to evaluate strategic acquisitions to enhance our technology offerings and service capabilities.
Cost Control/Profitability
Our operating income is driven by gross profits and by a disciplined control of operating expenses. For our fiscal year
2018
, the change in fair value of contingent consideration for amounts owed to former shareholders of businesses we acquired increased significantly. Our operations feature scalable information systems, streamlined management and centralized distribution, enabling us to achieve the economies of scale necessary for cost-effective solution selling. From inception, we have managed our selling, general and administrative expenses by maintaining strong cost controls. However, in order to continue to grow in our markets, we have continued to invest in new technologies and increased marketing efforts to recruit new customers.
Results of Operations
The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales:
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Fiscal Year Ended June 30,
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2018
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|
2017
|
|
2016
|
Statement of income data:
|
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|
|
|
|
Net sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
88.7
|
|
|
89.2
|
|
|
90.0
|
|
Gross profit
|
11.3
|
|
|
10.8
|
|
|
10.0
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|
Selling, general and administrative expenses, net of amortization expense
|
7.7
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|
|
7.4
|
|
|
6.8
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|
Depreciation expense
|
0.3
|
|
|
0.3
|
|
|
0.2
|
|
Intangible amortization expense
|
0.5
|
|
|
0.4
|
|
|
0.3
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|
Change in fair value of contingent consideration
|
1.0
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|
|
0.1
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|
0.0
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|
Operating income
|
1.8
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|
|
2.5
|
|
|
2.7
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|
Interest expense (income), net
|
0.1
|
|
|
(0.1
|
)
|
|
0.0
|
|
Other expense (income), net
|
0.0
|
|
|
(0.3
|
)
|
|
0.1
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|
Income before income taxes and minority interest
|
1.6
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|
|
2.8
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|
|
2.7
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|
Provision for income taxes
|
0.7
|
|
|
0.9
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|
0.9
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|
Net income
|
0.9
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%
|
|
1.9
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%
|
|
1.8
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%
|
Comparison of Fiscal Years Ended
June 30, 2018
,
2017
and
2016
Net Sales
We have
two
reportable segments, which are based on the technologies provided to customers. The following tables summarize our net sales results by business segment and by geographic location for the comparable fiscal years ending
June 30, 2018
,
2017
and
2016
.
Fiscal year
2018
compared to fiscal year
2017
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2018
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2017
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$ Change
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% Change
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|
% Change Constant Currency, Excluding Acquisitions (a)
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(in thousands)
|
|
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|
Sales by Segment:
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|
|
|
|
|
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|
Worldwide Barcode, Networking & Security
|
$
|
2,628,988
|
|
|
$
|
2,389,256
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|
$
|
239,732
|
|
|
10.0
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%
|
|
5.0
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%
|
Worldwide Communications & Services
|
1,217,272
|
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|
1,178,930
|
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|
38,342
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|
|
3.3
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%
|
|
2.2
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%
|
Total net sales
|
$
|
3,846,260
|
|
|
$
|
3,568,186
|
|
|
$
|
278,074
|
|
|
7.8
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%
|
|
4.1
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%
|
|
|
|
|
|
|
|
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Sales by Geography Category:
|
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North American
|
$
|
2,847,197
|
|
|
$
|
2,685,820
|
|
|
$
|
161,377
|
|
|
6.0
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%
|
|
2.5
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%
|
International
|
999,063
|
|
|
882,366
|
|
|
116,697
|
|
|
13.2
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%
|
|
9.0
|
%
|
Total net sales
|
$
|
3,846,260
|
|
|
$
|
3,568,186
|
|
|
$
|
278,074
|
|
|
7.8
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%
|
|
4.1
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%
|
(a)
A reconciliation of non-GAAP net sales in constant currency, excluding acquisitions is presented at the end of
Results of Operations
, under
Non-GAAP Financial Information
.
|
Worldwide Barcode, Networking & Security
The Worldwide Barcode, Networking & Security segment consists of sales to technology customers in North America, Europe and Latin America. During fiscal year
2018
, net sales for this segment increased
$239.7 million
, or
10.0%
, compared to fiscal year
2017
. Excluding the foreign exchange positive impact of
$32.6 million
and sales from the POS Portal acquisition, adjusted net sales for fiscal year
2018
increased
$119.7 million
, or
5.0%
, compared to fiscal year
2017
. The increase in net sales and adjusted net sales is primarily due to sales growth in our Europe and North America businesses.
Worldwide Communications & Services
The Worldwide Communications & Services segment consists of sales to technology customers in North America, Europe and Latin America. During fiscal year
2018
, net sales for this segment increased
$38.3 million
or
3.3%
compared to fiscal year
2017
, primarily due to volume sales growth in our Brazilian business. Excluding the foreign exchange positive impact of
$5.1 million
and sales from the Intelisys acquisition for the first quarter of fiscal years 2018 and 2017, adjusted net sales for fiscal year
2018
increased
$26.4 million
, or
2.2%
, compared to fiscal year
2017
. The increase in net sales and adjusted net sales is primarily due to sales growth in our Brazilian business, partially offset by lower sales volume in our consolidated North America businesses.
Fiscal year
2017
compared to fiscal year
2016
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|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
% Change Constant Currency, Excluding Acquisitions (a)
|
|
(in thousands)
|
|
|
|
|
Sales by Segment:
|
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|
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|
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|
Worldwide Barcode, Networking & Security
|
$
|
2,389,256
|
|
|
$
|
2,361,670
|
|
|
$
|
27,586
|
|
|
1.2
|
%
|
|
(2.0
|
)%
|
Communications & Services
|
1,178,930
|
|
|
1,178,556
|
|
|
374
|
|
|
—
|
%
|
|
(3.2
|
)%
|
Total net sales
|
$
|
3,568,186
|
|
|
$
|
3,540,226
|
|
|
$
|
27,960
|
|
|
0.8
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%
|
|
(2.4
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)%
|
|
|
|
|
|
|
|
|
|
|
Sales by Geography Category:
|
|
|
|
|
|
|
|
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|
North American
|
$
|
2,685,820
|
|
|
$
|
2,620,184
|
|
|
$
|
65,636
|
|
|
2.5
|
%
|
|
(1.1
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)%
|
International
|
882,366
|
|
|
920,042
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|
(37,676
|
)
|
|
(4.1
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)%
|
|
(6.1
|
)%
|
Total net sales
|
$
|
3,568,186
|
|
|
$
|
3,540,226
|
|
|
$
|
27,960
|
|
|
0.8
|
%
|
|
(2.4
|
)%
|
(a)
A reconciliation of non-GAAP net sales in constant currency, excluding acquisitions is presented at the end of
Results of Operations
, under
Non-GAAP Financial Information
.
|
Worldwide Barcode, Networking & Security
During fiscal year
2017
net sales for this segment increased
$27.6 million
, or
1.2%
, compared to fiscal year
2016
, primarily resulting from sales growth in North America. Excluding the foreign exchange positive impact of
$10.2 million
and sales from the KBZ acquisition for the first quarter of fiscal years 2017 and 2016, adjusted net sales fiscal year
2017
decreased
$47.3 million
, or
2.0%
, compared to fiscal
2016
. The decrease in adjusted net sales is primarily due to lower sales volume in our international business and a large transaction with our KBZ business in the December 2015 quarter that did not recur, nor did we expect it to recur.
Worldwide Communications & Services
During fiscal year
2017
, net sales for this segment increased
$0.4 million
compared to fiscal year
2016
, primarily due to the Intelisys acquisition, partially offset by lower net sales in all geographies. Excluding the foreign exchange positive impact of
$8.6 million
and sales from the Intelisys acquisition, adjusted net sales for fiscal year
2017
decreased
$37.6 million
, or
3.2%
, compared to fiscal year
2016
. The decrease in adjusted net sales is due to overall lower sales volume in all geographies.
Gross Profit
The following tables summarize our gross profit for the fiscal years ended
June 30, 2018
,
2017
and
2016
:
Fiscal year
2018
compared to fiscal year
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
238,318
|
|
|
$
|
195,743
|
|
|
$
|
42,575
|
|
|
21.8
|
%
|
|
9.1
|
%
|
|
8.2
|
%
|
Worldwide Communications & Services
|
197,807
|
|
|
187,853
|
|
|
9,954
|
|
|
5.3
|
%
|
|
16.3
|
%
|
|
15.9
|
%
|
Total gross profit
|
$
|
436,125
|
|
|
$
|
383,596
|
|
|
$
|
52,529
|
|
|
13.7
|
%
|
|
11.3
|
%
|
|
10.8
|
%
|
Worldwide Barcode, Networking & Security
Gross profit dollars increased
$42.6 million
and gross profit margin increased to
9.1%
for the Worldwide Barcode, Networking & Security segment for fiscal
2018
as compared to the prior year largely due to the addition of POS Portal results.
Worldwide Communications & Services
Gross profit dollars increased
$10.0 million
and gross profit margin increased to
16.3%
for the Worldwide Communications & Services segment for fiscal year
2018
as compared to the prior year, primarily due to the sales growth contributed by Intelisys.
Fiscal year
2017
compared to fiscal year
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
2017
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
195,743
|
|
|
$
|
196,831
|
|
|
$
|
(1,088
|
)
|
|
(0.6
|
)%
|
|
8.2
|
%
|
|
8.3
|
%
|
Worldwide Communications & Services
|
187,853
|
|
|
158,609
|
|
|
29,244
|
|
|
18.4
|
%
|
|
15.9
|
%
|
|
13.5
|
%
|
Total gross profit
|
$
|
383,596
|
|
|
$
|
355,440
|
|
|
$
|
28,156
|
|
|
7.9
|
%
|
|
10.8
|
%
|
|
10.0
|
%
|
Worldwide Barcode, Networking & Security
Gross profit dollars for the Worldwide Barcode, Networking & Security segment decreased for fiscal year
2017
as compared to fiscal year
2016
. Gross profit margin decreased slightly to 8.2%, compared to 8.3% in fiscal year 2016, primarily due to supplier program changes from the prior year.
Worldwide Communications & Services
Gross profit dollars and gross profit margin for the Worldwide Communications & Services segment increased in fiscal year
2017
as compared to fiscal year
2016
, primarily due to the inclusion of results from the Intelisys acquisition.
Operating expenses
The following tables summarize our operating expenses for the periods ended
June 30, 2018
,
2017
and
2016
:
Fiscal year
2018
compared to fiscal year
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
297,475
|
|
|
$
|
265,178
|
|
|
$
|
32,297
|
|
|
12.2
|
%
|
|
7.7
|
%
|
|
7.4
|
%
|
Depreciation expense
|
13,311
|
|
|
9,444
|
|
|
3,867
|
|
|
40.9
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
Intangible amortization expense
|
20,657
|
|
|
15,524
|
|
|
5,133
|
|
|
33.1
|
%
|
|
0.5
|
%
|
|
0.4
|
%
|
Change in fair value of contingent consideration
|
37,043
|
|
|
5,211
|
|
|
31,832
|
|
|
610.9
|
%
|
|
1.0
|
%
|
|
0.1
|
%
|
Operating expenses
|
368,486
|
|
|
295,357
|
|
|
73,129
|
|
|
24.8
|
%
|
|
9.6
|
%
|
|
8.3
|
%
|
Selling, general and administrative expenses ("SG&A") increased
$32.3 million
for the fiscal year ending
June 30, 2018
. The increase in SG&A expenses is primarily due to increased employee-related expenses, largely due to recent acquisitions. This was partially offset by a favorable Brazilian sales tax settlement recorded in the current fiscal year.
The increase in depreciation expense and intangible amortization expense for the fiscal year ending
June 30, 2018
of
$3.9 million
and
$5.1 million
, respectively, is largely due to additional depreciation and amortization recognized on assets acquired in our POS Portal acquisition.
We have elected to present changes in fair value of the contingent consideration owed to former shareholders of businesses we acquire separately from other SG&A expenses. In fiscal
2018
, we have recorded a
$37.0 million
loss, largely driven by recurring amortization of the unrecognized fair value discount, better-than-expected results from both Network1 and Intelisys and changes in the estimate of the current year payment made to the former owners of Network1 in September 2017.
Fiscal year
2017
compared to fiscal year
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
2017
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
Selling, general and administrative expense
|
$
|
265,178
|
|
|
$
|
240,115
|
|
|
$
|
25,063
|
|
|
10.4
|
%
|
|
7.4
|
%
|
|
6.8
|
%
|
Depreciation expense
|
9,444
|
|
|
7,326
|
|
|
2,118
|
|
|
28.9
|
%
|
|
0.3
|
%
|
|
0.2
|
%
|
Intangible amortization expense
|
15,524
|
|
|
9,828
|
|
|
5,696
|
|
|
58.0
|
%
|
|
0.4
|
%
|
|
0.3
|
%
|
Change in fair value of contingent consideration
|
5,211
|
|
|
1,294
|
|
|
3,917
|
|
|
302.7
|
%
|
|
0.1
|
%
|
|
—
|
%
|
Operating expenses
|
$
|
295,357
|
|
|
$
|
258,563
|
|
|
$
|
36,794
|
|
|
14.2
|
%
|
|
8.3
|
%
|
|
7.3
|
%
|
SG&A increased
$25.1 million
for the fiscal year ending
June 30, 2017
. The increase in SG&A expenses is primarily due to increased employee-related expenses from recent acquisitions and bad debt expense.
The increase of depreciation expense and intangible amortization expense for the fiscal year ending June 30, 2017 of
$2.1 million
and
$5.7 million
, respectively, is largely due to assets acquired through our Intelisys acquisition and additional depreciation on our ERP system.
During fiscal year 2017, with respect to the change in fair value of contingent consideration we recorded a
$5.2 million
expense, largely driven by recurring amortization of the unrecognized fair value discount and improved projections for Intelisys, partially offset by less-than-expected actual results and reduced projected results for Network1.
Operating Income
The following tables summarize our operating income for the periods ended
June 30, 2018
,
2017
and
2016
:
Fiscal year
2018
compared to fiscal year
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
56,911
|
|
|
$
|
49,727
|
|
|
$
|
7,184
|
|
|
14.4
|
%
|
|
2.2
|
%
|
|
2.1
|
%
|
Worldwide Communications & Services
|
10,900
|
|
|
39,768
|
|
|
(28,868
|
)
|
|
(72.6
|
)%
|
|
0.9
|
%
|
|
3.4
|
%
|
Corporate
|
(172
|
)
|
|
(1,256
|
)
|
|
1,084
|
|
|
(86.3
|
)%
|
|
—
|
%
|
|
—
|
%
|
Total operating income
|
$
|
67,639
|
|
|
$
|
88,239
|
|
|
$
|
(20,600
|
)
|
|
(23.3
|
)%
|
|
1.8
|
%
|
|
2.5
|
%
|
Worldwide Barcode, Networking & Security
For the Worldwide Barcode, Networking & Security segment, operating income increased
$7.2 million
for the fiscal year ended
June 30, 2018
as compared to the prior year. Operating income as a percentage of sales increased slightly to
2.2%
, compared to
2.1%
in the prior year. The increase in operating income and operating margin is primarily attributable to results contributed by POS Portal, including higher gross profit margins.
Worldwide Communications & Services
For the Worldwide Communications & Services segment, operating income and operating margin decreased for the fiscal year ended
June 30, 2018
as compared to the prior year primarily due to the expense recognized from the change in fair value of contingent consideration largely due to better-than-expected results and changes in estimate of the current year payment to the former shareholders of Network1.
Corporate
Corporate incurred
$0.2 million
and
$1.3 million
in acquisition costs for the years ended
June 30, 2018
and
2017
, respectively.
Fiscal year
2017
compared to fiscal year
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
2017
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
49,727
|
|
|
$
|
52,227
|
|
|
$
|
(2,500
|
)
|
|
(4.8
|
)%
|
|
2.1
|
%
|
|
2.2
|
%
|
Worldwide Communications & Services
|
39,768
|
|
|
45,513
|
|
|
(5,745
|
)
|
|
(12.6
|
)%
|
|
3.4
|
%
|
|
3.9
|
%
|
Corporate
|
(1,256
|
)
|
|
(863
|
)
|
|
(393
|
)
|
|
45.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Total operating income
|
$
|
88,239
|
|
|
$
|
96,877
|
|
|
$
|
(8,638
|
)
|
|
(8.9
|
)%
|
|
2.5
|
%
|
|
2.7
|
%
|
Worldwide Barcode, Networking & Security
For the Worldwide Barcode, Networking & Security segment, operating income decreased
$2.5 million
for the fiscal year ended
June 30, 2017
as compared to the prior year. Operating income as a percentage of sales remained fairly consistent year-to-year. The decrease in operating income is largely due to lower gross profit margins and increased employee-related costs, partially offset in improvements in bad debt expense recognized.
Worldwide Communications & Services
For the Worldwide Communications & Services segment, operating income decreased
$5.7 million
for the fiscal year ended
June 30, 2017
as compared to the prior year. Operating income as a percentage of sales decreased to
3.4%
from
3.9%
. The decrease in operating income and margin is largely due to increased amortization expense on intangible assets acquired through our Intelisys acquisition, a higher loss for change in fair value of contingent consideration and higher bad debt expense.
Corporate
Corporate incurred
$1.3 million
and
$0.9 million
in acquisition costs for the year ended
June 30, 2017
and
2016
, respectively.
Total Other (Income) Expense
The following tables summarize our total other (income) expense for the fiscal years ended
June 30, 2018
,
2017
and
2016
:
Fiscal year
2018
compared to fiscal year
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
Interest expense
|
$
|
9,149
|
|
|
$
|
3,215
|
|
|
$
|
5,934
|
|
|
184.6
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
Interest income
|
(3,713
|
)
|
|
(5,329
|
)
|
|
1,616
|
|
|
(30.3
|
)%
|
|
(0.1
|
)%
|
|
(0.1
|
)%
|
Net foreign exchange losses (gains)
|
2,096
|
|
|
1,919
|
|
|
177
|
|
|
9.2
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
Other, net
|
(818
|
)
|
|
(13,061
|
)
|
|
12,243
|
|
|
(93.7
|
)%
|
|
—
|
%
|
|
(0.4
|
)%
|
Total other (income) expense
|
$
|
6,714
|
|
|
$
|
(13,256
|
)
|
|
$
|
19,970
|
|
|
(150.6
|
)%
|
|
0.2
|
%
|
|
(0.4
|
)%
|
Interest expense reflects interest incurred on borrowings, non-utilization fees from our revolving credit facility and amortization of debt issuance costs. Interest expense increased in fiscal
2018
as compared to
2017
principally from additional borrowings on our multi-currency revolving credit facility.
Interest income for the year ended
June 30, 2018
was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents, principally in Brazil. In fiscal
2018
and
2017
we recognized accrued interest income related to two separate legal tax settlements in Brazil of $0.7 million and $1.4 million, respectively.
Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, the British pound versus the euro, the Canadian dollar versus the U.S. dollar and other currencies versus the U.S. dollar. 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. We partially offset foreign currency exposure with the use of foreign exchange forward contracts to hedge against these exposures. The costs associated with foreign exchange forward contracts are included in the net foreign exchange loss.
Other income for the fiscal year ended
2017
included $12.7 million from the recognition of a legal settlement in the US, net of attorney fees that did not recur in fiscal
2018
.
Fiscal year
2017
compared to fiscal year
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Sales
June 30,
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
2017
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
Interest expense
|
$
|
3,215
|
|
|
$
|
2,124
|
|
|
$
|
1,091
|
|
|
51.4
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
Interest income
|
(5,329
|
)
|
|
(3,448
|
)
|
|
(1,881
|
)
|
|
54.6
|
%
|
|
(0.1
|
)%
|
|
(0.1
|
)%
|
Net foreign exchange (gains) losses
|
1,919
|
|
|
2,571
|
|
|
(652
|
)
|
|
(25.4
|
)%
|
|
0.1
|
%
|
|
0.1
|
%
|
Other, net
|
(13,061
|
)
|
|
(380
|
)
|
|
(12,681
|
)
|
|
3,337.1
|
%
|
|
(0.4
|
)%
|
|
—
|
%
|
Total other (income) expense
|
$
|
(13,256
|
)
|
|
$
|
867
|
|
|
$
|
(14,123
|
)
|
|
(1,629.0
|
)%
|
|
(0.4
|
)%
|
|
—
|
%
|
Interest expense increased in fiscal
2017
over
2016
principally from additional borrowings on our multi-currency revolving credit facility.
Interest income for the year ended
June 30, 2017
was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents, principally in Brazil. The increase in interest income is primarily due to approximately $1.4 million of interest accrued on a tax settlement in Brazil.
We experienced foreign exchange losses as foreign currency exchange rates weakened against the U.S. dollar during fiscal 2017. Losses were partially offset by the use of foreign exchange forward contracts to hedge against currency exposures.
Other income for the fiscal year ended
2017
increased
$12.7 million
primarily due to the recognition of a legal settlement in the US, net of attorney fees compared to the prior year.
Provision for Income Taxes
Income tax expense was
$27.8 million
,
$32.2 million
and
$32.4 million
for the fiscal years ended
June 30, 2018
,
2017
and
2016
respectively, reflecting an effective tax rate of
45.6%
,
31.8%
, and
33.7%
, respectively. The increase in the effective tax rate for fiscal year 2018 as compared to fiscal year 2017 is primarily due to discrete tax items recognized associated with U.S. tax reform, including a one-time transition tax expense of $9.6 million and a tax benefit of $1.6 million to remeasure deferred taxes. The decrease in the effective tax rate for fiscal year 2017 as compared to fiscal year 2016 is primarily due a favorable tax recovery recognized by the Brazilian Supreme Court during the quarter ending
June 30, 2017
.
We expect the fiscal year 2019 effective tax rate to be approximately 26% to 27%. See Note 12 -
Income Taxes
in the Notes to Consolidated Financial Statements for further discussion including an effective tax rate reconciliation.
Quarterly Results
The following tables set forth certain unaudited quarterly financial data. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Fiscal 2018
|
|
Fiscal 2017
|
|
Jun. 30
2018
|
|
Mar. 31
2018
|
|
Dec. 31
2017
|
|
Sept. 30
2017
|
|
Jun. 30
2017
|
|
Mar. 31
2017
|
|
Dec. 31
2016
|
|
Sept. 30
2016
|
|
(in thousands, except per share data)
|
Net sales
|
$
|
993,852
|
|
|
$
|
895,637
|
|
|
$
|
1,032,212
|
|
|
$
|
924,559
|
|
|
$
|
917,291
|
|
|
$
|
813,538
|
|
|
$
|
904,792
|
|
|
$
|
932,566
|
|
Cost of goods sold
|
880,503
|
|
|
791,749
|
|
|
919,241
|
|
|
818,642
|
|
|
816,435
|
|
|
720,867
|
|
|
806,258
|
|
|
841,032
|
|
Gross profit
|
$
|
113,349
|
|
|
$
|
103,888
|
|
|
$
|
112,971
|
|
|
$
|
105,917
|
|
|
$
|
100,856
|
|
|
$
|
92,671
|
|
|
$
|
98,534
|
|
|
$
|
91,534
|
|
Change in Fair Value of Contingent Consideration
|
$
|
8,448
|
|
|
$
|
4,801
|
|
|
$
|
6,913
|
|
|
$
|
16,881
|
|
|
$
|
1,290
|
|
|
$
|
1,960
|
|
|
$
|
1,791
|
|
|
$
|
169
|
|
Net income
|
$
|
10,388
|
|
|
$
|
10,649
|
|
|
$
|
7,969
|
|
|
$
|
4,147
|
|
|
$
|
18,970
|
|
|
$
|
12,424
|
|
|
$
|
23,036
|
|
|
$
|
14,816
|
|
Net income per common share, basic
|
$
|
0.41
|
|
|
$
|
0.42
|
|
|
$
|
0.31
|
|
|
$
|
0.16
|
|
|
$
|
0.75
|
|
|
$
|
0.49
|
|
|
$
|
0.92
|
|
|
$
|
0.58
|
|
Weighted-average shares outstanding, basic
|
25,577
|
|
|
25,572
|
|
|
25,506
|
|
|
25,434
|
|
|
25,341
|
|
|
25,262
|
|
|
25,146
|
|
|
25,523
|
|
Net income per common share, diluted
|
$
|
0.40
|
|
|
$
|
0.42
|
|
|
$
|
0.31
|
|
|
$
|
0.16
|
|
|
$
|
0.74
|
|
|
$
|
0.49
|
|
|
$
|
0.91
|
|
|
$
|
0.58
|
|
Weighted-average shares outstanding, diluted
|
25,675
|
|
|
25,606
|
|
|
25,648
|
|
|
25,579
|
|
|
25,512
|
|
|
25,400
|
|
|
25,285
|
|
|
25,762
|
|
Non-GAAP Financial Information
Evaluating Financial Condition and Operating Performance
In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating
income, non-GAAP pre-tax income, non-GAAP net income, non-GAAP EPS, return on invested capital ("ROIC") and "constant currency." Constant currency is a measure that excludes the translation exchange impact from changes in foreign currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.
These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP.
Net Sales in Constant Currency, Excluding Acquisitions
We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the average foreign exchange rates between reporting periods. Constant currency is calculated by translating current period results from currencies other than the U.S. dollar into U.S. dollars using the comparable average foreign exchange rates from the prior year period. We also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date in order to show net sales results on an organic basis. This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and the impact of acquisitions. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Segment:
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Worldwide Barcode, Networking & Security:
|
(in thousands)
|
|
|
Net sales, as reported
|
$
|
2,628,988
|
|
|
$
|
2,389,256
|
|
|
$
|
239,732
|
|
|
10.0
|
%
|
Foreign exchange impact
(a)
|
(32,561
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
2,596,427
|
|
|
2,389,256
|
|
|
207,171
|
|
|
8.7
|
%
|
Less: Acquisitions
|
(87,461
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
2,508,966
|
|
|
$
|
2,389,256
|
|
|
$
|
119,710
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Worldwide Communications & Services:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
1,217,272
|
|
|
$
|
1,178,930
|
|
|
$
|
38,342
|
|
|
3.3
|
%
|
Foreign exchange impact
(a)
|
(5,055
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
1,212,217
|
|
|
1,178,930
|
|
|
33,287
|
|
|
2.8
|
%
|
Less: Acquisitions
|
(9,750
|
)
|
|
(2,863
|
)
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
1,202,467
|
|
|
$
|
1,176,067
|
|
|
$
|
26,400
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
3,846,260
|
|
|
$
|
3,568,186
|
|
|
$
|
278,074
|
|
|
7.8
|
%
|
Foreign exchange impact
(a)
|
(37,616
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
3,808,644
|
|
|
3,568,186
|
|
|
240,458
|
|
|
6.7
|
%
|
Less: Acquisitions
|
(97,211
|
)
|
|
(2,863
|
)
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
3,711,433
|
|
|
$
|
3,565,323
|
|
|
$
|
146,110
|
|
|
4.1
|
%
|
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2018 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
|
Worldwide Barcode, Networking & Security:
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
(in thousands)
|
|
|
Net sales, as reported
|
$
|
2,389,256
|
|
|
$
|
2,361,670
|
|
|
$
|
27,586
|
|
|
1.2
|
%
|
Foreign exchange impact
(b)
|
(10,229
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
2,379,027
|
|
|
2,361,670
|
|
|
17,357
|
|
|
0.7
|
%
|
Less: Acquisitions
|
(99,332
|
)
|
|
(34,628
|
)
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
2,279,695
|
|
|
$
|
2,327,042
|
|
|
$
|
(47,347
|
)
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
Worldwide Communications & Services:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
1,178,930
|
|
|
$
|
1,178,556
|
|
|
$
|
374
|
|
|
—
|
%
|
Foreign exchange impact
(b)
|
(8,599
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
1,170,331
|
|
|
1,178,556
|
|
|
(8,225
|
)
|
|
(0.7
|
)%
|
Less: Acquisitions
|
(29,421
|
)
|
|
—
|
|
|
(29,421
|
)
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
1,140,910
|
|
|
$
|
1,178,556
|
|
|
$
|
(37,646
|
)
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
3,568,186
|
|
|
$
|
3,540,226
|
|
|
$
|
27,960
|
|
|
0.8
|
%
|
Foreign exchange impact
(b)
|
(18,828
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
3,549,358
|
|
|
3,540,226
|
|
|
9,132
|
|
|
0.3
|
%
|
Less: Acquisitions
|
(128,753
|
)
|
|
(34,628
|
)
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
3,420,605
|
|
|
$
|
3,505,598
|
|
|
$
|
(84,993
|
)
|
|
(2.4
|
)%
|
(b) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2017 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Geography:
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
United States and Canada:
|
(in thousands)
|
|
|
Net sales, as reported
|
$
|
2,847,197
|
|
|
$
|
2,685,820
|
|
|
$
|
161,377
|
|
|
6.0
|
%
|
Less: Acquisitions
|
(97,211
|
)
|
|
(2,863
|
)
|
|
|
|
|
Net sales, excluding acquisitions
|
$
|
2,749,986
|
|
|
$
|
2,682,957
|
|
|
$
|
67,029
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
999,063
|
|
|
$
|
882,366
|
|
|
$
|
116,697
|
|
|
13.2
|
%
|
Foreign exchange impact
(a)
|
(37,616
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
961,447
|
|
|
882,366
|
|
|
79,081
|
|
|
9.0
|
%
|
Less: Acquisitions
|
—
|
|
|
—
|
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
961,447
|
|
|
$
|
882,366
|
|
|
$
|
79,081
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
3,846,260
|
|
|
$
|
3,568,186
|
|
|
$
|
278,074
|
|
|
7.8
|
%
|
Foreign exchange impact
(a)
|
(37,616
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
3,808,644
|
|
|
3,568,186
|
|
|
240,458
|
|
|
6.7
|
%
|
Less: Acquisitions
|
(97,211
|
)
|
|
(2,863
|
)
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
3,711,433
|
|
|
$
|
3,565,323
|
|
|
$
|
146,110
|
|
|
4.1
|
%
|
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2018 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
United States:
|
(in thousands)
|
|
|
Net sales, as reported
|
$
|
2,685,820
|
|
|
$
|
2,620,184
|
|
|
$
|
65,636
|
|
|
2.5
|
%
|
Less: Acquisitions
|
(128,753
|
)
|
|
(34,628
|
)
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
2,557,067
|
|
|
$
|
2,585,556
|
|
|
$
|
(28,489
|
)
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
882,366
|
|
|
$
|
920,042
|
|
|
$
|
(37,676
|
)
|
|
(4.1
|
)%
|
Foreign exchange impact
(a)
|
(18,828
|
)
|
|
|
|
|
|
|
Net sales, constant currency
|
863,538
|
|
|
920,042
|
|
|
(56,504
|
)
|
|
(6.1
|
)%
|
Less: Acquisitions
|
—
|
|
|
—
|
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
863,538
|
|
|
$
|
920,042
|
|
|
$
|
(56,504
|
)
|
|
(6.1
|
)%
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
Net sales, as reported
|
$
|
3,568,186
|
|
|
$
|
3,540,226
|
|
|
$
|
27,960
|
|
|
0.8
|
%
|
Foreign exchange impact
(a)
|
(18,828
|
)
|
|
—
|
|
|
|
|
|
Net sales, constant currency
|
3,549,358
|
|
|
3,540,226
|
|
|
9,132
|
|
|
0.3
|
%
|
Less: Acquisitions
|
(128,753
|
)
|
|
(34,628
|
)
|
|
|
|
|
Net sales, constant currency excluding acquisitions
|
$
|
3,420,605
|
|
|
$
|
3,505,598
|
|
|
$
|
(84,993
|
)
|
|
(2.4
|
)%
|
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the year ended June 30, 2017 into U.S. dollars using the average foreign exchange rates for the year ended June 30, 2016.
|
Non-GAAP Operating Income, Non-GAAP Pre-Tax Income, Non-GAAP Net Income and Non-GAAP EPS
To evaluate current period performance on a more consistent basis with prior periods, we disclose 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, acquisition costs and other non-GAAP adjustments. Non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted EPS are useful in assessing and understanding our operating performance, especially when comparing results with previous periods or forecasting performance for future periods. Below we provide a non-GAAP reconciliation of operating income, pre-tax income, net income and earnings per share adjusted for the costs and charges mentioned above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2018
|
|
Year ended June 30, 2017
|
|
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
|
$
|
67,639
|
|
|
$
|
60,925
|
|
|
$
|
33,153
|
|
|
$
|
1.29
|
|
|
$
|
88,239
|
|
|
$
|
101,495
|
|
|
$
|
69,246
|
|
|
$
|
2.71
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
20,657
|
|
|
20,657
|
|
|
14,021
|
|
|
0.55
|
|
|
15,524
|
|
|
15,524
|
|
|
10,247
|
|
|
0.40
|
|
Change in fair value of contingent consideration
|
37,043
|
|
|
37,043
|
|
|
24,697
|
|
|
0.96
|
|
|
5,211
|
|
|
5,211
|
|
|
2,921
|
|
|
0.11
|
|
Acquisition costs
|
172
|
|
|
172
|
|
|
172
|
|
|
0.01
|
|
|
1,256
|
|
|
1,256
|
|
|
1,256
|
|
|
0.06
|
|
Legal settlement, net of attorney fees
|
952
|
|
|
952
|
|
|
771
|
|
|
0.03
|
|
|
—
|
|
|
(12,777
|
)
|
|
(8,047
|
)
|
|
(0.32
|
)
|
Tax recovery and related interest income
|
(2,466
|
)
|
|
(3,119
|
)
|
|
(2,058
|
)
|
|
(0.08
|
)
|
|
—
|
|
|
(1,382
|
)
|
|
(5,370
|
)
|
|
(0.21
|
)
|
Tax reform changes
|
—
|
|
|
—
|
|
|
9,034
|
|
|
0.35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-GAAP measures
|
$
|
123,997
|
|
|
$
|
116,630
|
|
|
$
|
79,790
|
|
|
$
|
3.11
|
|
|
$
|
110,230
|
|
|
$
|
109,327
|
|
|
$
|
70,253
|
|
|
$
|
2.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income by Segment:
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
|
% of Net Sales
June 30,
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
2018
|
|
2017
|
Worldwide Barcode, Networking & Security:
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
$
|
56,911
|
|
|
$
|
49,727
|
|
|
$
|
7,184
|
|
|
14.4
|
%
|
|
2.2
|
%
|
|
2.1
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
8,703
|
|
|
4,033
|
|
|
4,670
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
69
|
|
|
—
|
|
|
69
|
|
|
|
|
|
|
|
Tax recovery
|
(1,512
|
)
|
|
—
|
|
|
(1,512
|
)
|
|
|
|
|
|
|
Non-GAAP operating income
|
$
|
64,171
|
|
|
$
|
53,760
|
|
|
$
|
10,411
|
|
|
19.4
|
%
|
|
2.4
|
%
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Communications & Services:
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
$
|
10,900
|
|
|
$
|
39,768
|
|
|
$
|
(28,868
|
)
|
|
(72.6
|
)%
|
|
0.9
|
%
|
|
3.4
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
11,954
|
|
|
11,491
|
|
|
463
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
36,974
|
|
|
5,211
|
|
|
31,763
|
|
|
|
|
|
|
|
Legal settlement
|
952
|
|
|
—
|
|
|
952
|
|
|
|
|
|
|
|
Tax recovery
|
(954
|
)
|
|
—
|
|
|
(954
|
)
|
|
|
|
|
|
|
Non-GAAP operating income
|
$
|
59,826
|
|
|
$
|
56,470
|
|
|
$
|
3,356
|
|
|
5.9
|
%
|
|
4.9
|
%
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
$
|
(172
|
)
|
|
$
|
(1,256
|
)
|
|
$
|
1,084
|
|
|
nm*
|
|
|
nm*
|
|
|
nm*
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
172
|
|
|
1,256
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
Non-GAAP operating income
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
nm*
|
|
|
nm*
|
|
|
nm*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
$
|
67,639
|
|
|
$
|
88,239
|
|
|
$
|
(20,600
|
)
|
|
(23.3
|
)%
|
|
2.5
|
%
|
|
2.7
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
20,657
|
|
|
15,524
|
|
|
5,133
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
37,043
|
|
|
5,211
|
|
|
31,832
|
|
|
|
|
|
|
|
Acquisition costs
|
172
|
|
|
1,256
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
Legal settlement
|
952
|
|
|
—
|
|
|
952
|
|
|
|
|
|
|
|
Tax recovery
|
(2,466
|
)
|
|
—
|
|
|
(2,466
|
)
|
|
|
|
|
|
|
Non-GAAP operating income
|
$
|
123,997
|
|
|
$
|
110,230
|
|
|
$
|
13,767
|
|
|
12.5
|
%
|
|
3.1
|
%
|
|
2.7
|
%
|
Return on Invested Capital
Management uses ROIC as a performance measurement to assess efficiency at allocating capital under our control to generate returns. Management believes this metric balances our operating results with asset and liability management, is not impacted by capitalization decisions and correlates with shareholder value creation. In addition, it is easily computed, communicated and
understood. ROIC also provides management a measure of our profitability on a basis more comparable to historical or future periods.
ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.
We calculate ROIC as earnings before interest expense, income taxes, depreciation and amortization, plus change in fair value of contingent consideration and other non-GAAP adjustments ("adjusted EBITDA"), divided by invested capital. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. The following table summarizes annualized ROIC for the fiscal years ended
June 30, 2018
,
2017
and
2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Return on invested capital ratio
|
12.5
|
%
|
|
13.1
|
%
|
|
13.3
|
%
|
The components of our ROIC calculation and reconciliation to our financial statements are shown, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of EBITDA to Net Income
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Net income (GAAP)
|
$
|
33,153
|
|
|
$
|
69,246
|
|
|
$
|
63,619
|
|
Plus: income taxes
|
27,772
|
|
|
32,249
|
|
|
32,391
|
|
Plus: interest expense
|
9,149
|
|
|
3,215
|
|
|
2,124
|
|
Plus: depreciation & amortization
|
37,495
|
|
|
24,968
|
|
|
17,154
|
|
EBITDA
|
107,569
|
|
|
129,678
|
|
|
115,288
|
|
Change in fair value of contingent consideration
|
37,043
|
|
|
5,211
|
|
|
1,294
|
|
Acquisition costs
(a)
|
172
|
|
|
1,256
|
|
|
863
|
|
Legal settlement (recovery), net of attorney fees
|
952
|
|
|
(12,777
|
)
|
|
—
|
|
Tax recovery and related interest income
|
(3,119
|
)
|
|
(1,382
|
)
|
|
—
|
|
Adjusted EBITDA (numerator for ROIC) (non-GAAP)
|
$
|
142,617
|
|
|
$
|
121,986
|
|
|
$
|
117,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested capital calculations
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Equity – beginning of the year
|
$
|
837,145
|
|
|
$
|
774,496
|
|
|
$
|
808,985
|
|
Equity – end of the year
|
866,376
|
|
|
837,145
|
|
|
774,496
|
|
Change in fair value of contingent consideration, net of tax
|
24,697
|
|
|
2,921
|
|
|
977
|
|
Acquisition costs
(a)
|
172
|
|
|
1,256
|
|
|
863
|
|
Legal settlement (recovery), net of attorney fees, net of tax
|
771
|
|
|
(8,047
|
)
|
|
—
|
|
Tax recovery and related interest income, net of tax
|
(2,058
|
)
|
|
(5,370
|
)
|
|
—
|
|
Tax reform changes
|
9,034
|
|
|
—
|
|
|
—
|
|
Average equity, adjusted
|
868,069
|
|
|
801,201
|
|
|
792,661
|
|
Average funded debt
(b)
|
276,233
|
|
|
131,445
|
|
|
93,500
|
|
Invested capital (denominator)
|
$
|
1,144,302
|
|
|
$
|
932,646
|
|
|
$
|
886,161
|
|
|
|
|
|
|
|
(a)
Includes acquisition costs for the years ended
June 30, 2018
,
2017
and
2016
. Acquisition costs are non-deductible for tax purposes.
(b)
Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with US GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable, inventory reserves to reduce inventories to the lower of cost or net realizable value and supplier incentives. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. For further discussion of our significant accounting policies, refer to Note 1 -
Business and Summary of Significant Accounting Policies
.
Allowances for Trade and Notes Receivable
We maintain an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable, (3) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers and (4) the current economic and country specific environment. If the financial condition of our customers were to deteriorate and reduce the ability of our customers to make payments on their accounts,we may be required to increase our allowance by recording additional bad debt expense. Likewise, should the financial condition of our customers improve and result in payments or settlements of previously reserved amounts, we may be required to record a reduction in bad debt expense to reverse the recorded allowance.
Inventory Reserves
Management determines the inventory reserves required to reduce inventories to the lower of cost or net realizable value based principally on the effects of technological changes, quantities of goods and length of time on hand and other factors. An estimate is made of the net realizable value, less cost to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. The estimates used to calculate these reserves are applied consistently. The adjustments are recorded in the period in which the loss of utility of the inventory occurs, which establishes a new cost basis for the inventory. This new cost basis is maintained until such time that the reserved inventory is disposed of, returned to the supplier or sold. To the extent that specifically reserved inventory is sold, cost of goods sold is expensed for the new cost basis of the inventory sold.
Supplier Programs
We receive incentives from suppliers related to volume rebates, cooperative advertising allowances and other incentive agreements. These incentives are generally under quarterly, semi-annual or annual agreements with the suppliers. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the supplier. Suppliers generally require that we use their cooperative advertising allowances exclusively for advertising or other marketing programs. Incentives received from suppliers for specifically identified incremental cooperative advertising programs are recorded as adjustments to SG&A expenses. FASB's ASC 605 –
Revenue Recognition
, addresses accounting by a customer for certain consideration received from a supplier. This guidance requires that the portion of these supplier funds in excess of our costs be reflected as a reduction of inventory. Such funds are recognized as a reduction of the cost of products sold when the related inventory is sold.
We record unrestricted volume rebates received as a reduction of inventory and as a reduction of the cost of goods sold when the related inventory is sold. Amounts received or receivables from suppliers that are not yet earned are deferred in the Consolidated Balance Sheets. Supplier receivables are generally collected through reductions to accounts payable authorized by the supplier. In addition, we may receive early payment discounts from certain suppliers. We record early payment discounts received as a reduction of inventory and recognize the discount as a reduction of cost of goods sold when the related inventory is sold. ASC 605 requires management to make certain estimates of the amounts of supplier incentives that will be received. Actual recognition of the supplier consideration may vary from management estimates based on actual results.
Goodwill
We account for recorded goodwill in accordance with ASC 350,
Goodwill and Other Intangible Assets
, which requires that goodwill be reviewed annually for impairment or more frequently if impairment indicators exist. Goodwill testing utilizes an impairment
analysis, whereby we compare the carrying value of each identified reporting unit to its fair value. The carrying value of goodwill is reviewed at a reporting unit level at least annually for impairment, or more frequently if impairment indicators exist. Our goodwill reporting units align directly with our operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services. The fair values of the reporting units are estimated using the net present value of discounted cash flows generated by each reporting unit. Considerable judgment is necessary in estimating future cash flows, discount rates and other factors affecting the estimated fair value of the reporting units, including the operating and macroeconomic factors. Historical financial information, internal plans and projections and industry information are used in making such estimates.
Under Accounting Standards Update ("ASU") 2017-04 if fair value of goodwill fair value is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting units' fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, we would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We also assess the recoverability of goodwill if facts and circumstances indicate goodwill may be impaired. In our most recent annual test, we estimated the fair value of our reporting units primarily based on the income approach utilizing the discounted cash flow method. We also utilized fair value estimates derived from the market approach utilizing the public company market multiple method to validate the results of the discounted cash flow method, which required us to make assumptions about the applicability of those multiples to our reporting units. The discounted cash flow method requires us to estimate future cash flows and discount those amounts to present value. The key assumptions utilized in determining fair value included:
|
|
•
|
Industry weighted-average cost of capital ("WACC"): We utilized a WACC relative to each reporting unit's respective geography and industry as the discount rate for estimated future cash flows. The WACC is intended to represent a rate of return that would be expected by a market place participant in each respective geography.
|
|
|
•
|
Operating income: We utilized historical and expected revenue growth rates, gross margins and operating expense percentages, which varied based on the projections of each reporting unit being evaluated.
|
|
|
•
|
Cash flows from working capital changes: We utilized a projected cash flow impact pertaining to expected changes in working capital as each of our goodwill reporting units grow.
|
While we believe our assumptions are appropriate, they are subject to uncertainty and by nature include judgments and estimates regarding future events, including projected growth rates, margin percentages and operating efficiencies. Key assumptions used in determining fair value include projected growth and operating margin, working capital requirements and discount rates. During fiscal years
2018
and
2017
, we completed our annual impairment test as of each April 30th and determined that our goodwill is not at risk of impairment.
See Note 6 -
Goodwill and Other Identifiable Intangible Assets
in the Notes to Consolidated Financial Statements for further discussion on our goodwill impairment testing and results.
Liability for Contingent Consideration
In addition to the initial cash consideration paid to former shareholders of Network1 and Intelisys, we are obligated to make additional earnout payments based on future results through a specified date based on a multiple of the subsidiary’s pro forma earnings as defined in the respective share purchase agreements. Future payments are to be paid in the functional currency of the acquired entity, which is the Brazilian real for Network1 and U.S. dollars for Intelisys. We made a single earnout payment to the former shareholders of POS Portal in fiscal year 2018. We paid the final earnout payment to the former shareholders of Imago in fiscal year 2017 and to CDC in fiscal year 2016. We will pay the final earnout payment to the former shareholders of Network1 during fiscal year 2019. Intelisys has three remaining earnout payments to be paid in annual installments during fiscal years 2019 through 2021. In accordance with ASC Topic 805, we determine the fair value of this liability for contingent consideration at each reporting date throughout the term of the earnout using a form of a probability weighted discounted cash flow model. Each period, we will reflect the contingent consideration liability at fair value with changes recorded in the change in fair value of contingent consideration line item on the Consolidated Income Statement. Current and noncurrent portions of the liability are presented in the current portion of contingent consideration and long-term portion of contingent consideration line items on the Consolidated Balance Sheets.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future affect or change on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the company is a party, under which the company has (i) any obligation arising under a
guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Accounting Standards Recently Issued
See Note 1 in the Notes to Consolidated Financial Statements for the discussion on recent accounting pronouncements.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under the $400 million revolving credit facility. Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to suppliers. In general, as our sales volumes increase, our net investment in working capital typically increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.
Cash and cash equivalents totaled
$25.5 million
at
June 30, 2018
, compared to
$56.1 million
at
June 30, 2017
and
$61.4 million
at
June 30, 2016
, of which
$20.3 million
,
$47.9 million
and
$52.7 million
was held outside of the United States as of
June 30, 2018
,
2017
and
2016
, respectively. Checks released but not yet cleared from these accounts in the amounts of
$5.7 million
,
$8.3 million
and
$78.3 million
are classified as accounts payable as of
June 30, 2018
,
2017
and
2016
, respectively.
We conduct business in many locations throughout the world where we generate and use cash. We provide for United States income taxes for the earnings of our Canadian subsidiary. Earnings from all other geographies will continue to be considered retained indefinitely for reinvestment. Due to recent tax legislation in the United States, we are required to estimate a one-time transition tax on repatriation of foreign earnings during the fiscal year ended
June 30, 2018
. See Note 12 -
Income Taxes
in the Notes to the Consolidated Financial Statements for further discussion.
Our net investment in working capital increased
$27.1 million
to $
651.9
million at
June 30, 2018
from $
624.7
million at
June 30, 2017
, principally from higher accounts receivable and inventory, partially offset by higher accounts payable. Our net investment in working capital totaled
$643.8 million
at
June 30, 2016
. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels, payments to suppliers, as well as cash generated or used by other financing and investing activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
Cash provided by (used in):
|
June 30, 2018
|
|
June 30, 2017
|
|
June 30, 2016
|
|
(in thousands)
|
Operating activities
|
$
|
27,871
|
|
|
$
|
94,876
|
|
|
$
|
52,211
|
|
Investing activities
|
(151,927
|
)
|
|
(96,236
|
)
|
|
(73,556
|
)
|
Financing activities
|
97,508
|
|
|
(3,506
|
)
|
|
(36,305
|
)
|
Effect of exchange rate change on cash and cash equivalents
|
(4,016
|
)
|
|
(440
|
)
|
|
(2,596
|
)
|
Increase (decrease) in cash and cash equivalents
|
$
|
(30,564
|
)
|
|
$
|
(5,306
|
)
|
|
$
|
(60,246
|
)
|
Net cash provided by operating activities was
$27.9 million
for year ended
June 30, 2018
, compared to
$94.9 million
and
$52.2 million
for the years ended
June 30, 2017
and
2016
, respectively. Operating cash flows for the year ended
June 30, 2018
is primarily attributable to net income, increases in non-cash adjustments, partially offset by overall increases in cash used for working capital needs, excluding the impact of initial accounts balances assumed from the POS Portal acquisition. Operating cash flows for the year ended
June 30, 2017
is primarily attributable to net income, increases in non-cash adjustments and decreases in inventory levels, partially offset by increases in accounts receivable, excluding the impact of initial accounts balances assumed from Intelisys. Operating cash flows for the year ended
June 30, 2016
is primarily attributable to net income, increases in accounts receivable and non-cash adjustments, partially offset by increases in accounts payable, excluding the impact of initial accounts balances assumed from the KBZ acquisition.
Excluding Intelisys, the number of days sales outstanding ("DSO") was
59
at
June 30, 2018
, compared to
61
at
June 30, 2017
and
57
at
June 30, 2016
. Throughout the current fiscal year DSO ranged from 59 to 64. Inventory turnover was
6.0
times during the fourth quarter of the current fiscal year, compared to
6.2
and 5.6 times in the fourth quarter of fiscal year 2017 and 2016, respectively. Throughout fiscal year 2018 inventory turnover ranged from 5.5 to 6.2 times.
Cash used in investing activities was
$151.9 million
,
$96.2 million
and
$73.6 million
for the years ended
June 30, 2018
,
2017
and
2016
, respectively. Investing cash flows for the years ended
June 30, 2018
,
2017
and
2016
is primarily driven by cash used to acquire POS Portal, Intelisys and KBZ, respectively.
Cash provided by financing activities for the year ended
June 30, 2018
totaled to
$97.5 million
, compared to cash used in financing of
$3.5 million
and
$36.3 million
for the years ended
June 30, 2017
and
2016
, respectively. Cash provided in fiscal years
2018
is primarily attributable to net borrowings on the revolving credit facility, partially offset by contingent consideration payments to the former shareholders of Network1, Intelisys and POS Portal. Cash used in fiscal
2017
and
2016
is primarily attributable to repurchases of common stock and contingent consideration payments, partially offset by net borrowings on the revolving credit facility.
In August 2016, the Board of Directors authorized a three year $120 million share repurchase program. During the year ended
June 30, 2017
, we repurchased 0.6 million shares under this program totaling approximately
$20.3 million
. There were no share repurchases under this program during the fiscal year ended
June 30, 2018
.
We have a multi-currency senior secured revolving credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (the “Amended Credit Agreement”). On
April 3, 2017
, we amended this credit facilty to extend its maturity to
April 3, 2022
. On
August 8, 2017
, we amended this credit facility to increase the amount from
$300 million
to
$400 million
. The Amended Credit Agreement allows for the issuance of up to
$50 million
for letters of credit and has a
$200 million
accordion feature that allows us to increase the availability to
$600 million
, subject to obtaining additional credit commitments from the lenders participating in the increase.
At our option, loans denominated in U.S. dollars under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon our 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"). This spread ranges from
1.00%
to
2.125%
for LIBOR-based loans and
0.00%
to
1.125%
for alternate base rate loans. Additionally, we are assessed commitment fees ranging from
0.175%
to
0.35%
, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of our domestic assets 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. We were in compliance with all covenants under the credit facility as of
June 30, 2018
. There was
$244.0 million
and
$91.9 million
outstanding on the revolving credit facility at
June 30, 2018
and
2017
, respectively.
On a gross basis, we borrowed
$2,301 million
and repaid
$2,150 million
on the revolving credit facility in fiscal
2018
. In fiscal
2017
, we borrowed
$1,813 million
and repaid
$1,793 million
, and in fiscal
2016
, we borrowed
$1,377 million
and repaid
$1,305 million
. The average daily balance on the revolving credit facility was
$269.5 million
,
$126.5 million
and $86.6 million for the years ended
June 30, 2018
,
2017
and
2016
, respectively. There were no letters of credit issued under the multi-currency revolving credit facility as of
June 30, 2018
and
June 30, 2017
compared to
€0.4 million
as of June 30,
2016
. There was
$156.0 million
,
$208.1 million
and
$228.2 million
available for additional borrowings as of
June 30, 2018
,
2017
and
2016
, respectively.
As of
June 30, 2018
, we are obligated to pay certain earnout payments to the former shareholders of Network1 and Intelisys related to their acquisitions on January 13, 2015 and August 29, 2016, respectively. See Note 9 -
Fair Value of Financial Instruments
for a discussion on the liabilities recorded. We made a single earnout payment to the former shareholders of POS Portal in fiscal year 2018. We paid the final earnout payment to the former shareholders of Imago in fiscal year 2017 and to CDC in fiscal year 2016. Future earnout payments for Intelisys are expected to be funded by cash from operations and our existing revolving credit facility. We will pay the final earnout payment to the former shareholders of Network1 during fiscal year 2019, and it is expected to be funded by existing cash balances in Brazil and cash from operations.
We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet our present and future working capital and cash requirements for at least the next twelve months.
Commitments
At
June 30, 2018
, we had contractual obligations in the form of non-cancelable operating leases, a capital lease (including interest payments), debt (including interest payments) and the contingent consideration for the earnouts pertaining to the Network1 and Intelisys acquisitions. See Notes 7, 9 and 13 of the Notes to the Consolidated Financial Statements. The following table summarizes our future contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Total
|
|
Year 1
|
|
Years 2-3
|
|
Years 4-5
|
|
Greater than
5 Years
|
|
(in thousands)
|
Contractual Obligations
|
|
Non-cancelable operating leases
(1)
|
$
|
38,078
|
|
|
$
|
8,196
|
|
|
$
|
11,476
|
|
|
$
|
7,589
|
|
|
$
|
10,817
|
|
Capital lease
|
1,350
|
|
|
675
|
|
|
675
|
|
|
—
|
|
|
—
|
|
Principal debt payments
|
5,429
|
|
|
551
|
|
|
680
|
|
|
698
|
|
|
3,500
|
|
Revolving credit facility
|
244,000
|
|
|
—
|
|
|
—
|
|
|
244,000
|
|
|
—
|
|
Contingent consideration
(2)
|
108,233
|
|
|
42,975
|
|
|
65,258
|
|
|
—
|
|
|
—
|
|
Other
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total obligations
|
$
|
397,090
|
|
|
$
|
52,397
|
|
|
$
|
78,089
|
|
|
$
|
252,287
|
|
|
$
|
14,317
|
|
|
|
(1)
|
Amounts to be paid in future periods for real estate taxes, insurance and other operating expenses applicable to the properties pursuant to the respective operating leases have been excluded from the table above as the amounts payable in future periods are generally not specified in the lease agreements and are dependent upon amounts which are not known at this time. Such amounts were not material in the current fiscal year.
|
|
|
(2)
|
Amounts disclosed regarding future Intelisys and Network1 earnout payments are presented at their discounted fair value. Estimated future, undiscounted earnout payments for Intelisys could range as high as
$115.3 million
as of
June 30, 2018
.
|
|
|
(3)
|
Amounts totaling
$23.4 million
of deferred compensation, which are included in accrued expenses and other current liabilities and other long-term liabilities in our Consolidated Balance Sheets as of
June 30, 2018
, have been excluded from the table above due to the uncertainty of the timing of the payment of these obligations, which are generally at the discretion of the individual employees or upon death of the former employee, respectively.
|
|
|
ITEM 8.
|
Financial Statements and Supplementary Data.
|
Index to Financial Statements
|
|
|
|
Page
|
Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All schedules and exhibits not included are not applicable, not required or would contain information which is shown in the financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
ScanSource, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ScanSource, Inc. (a South Carolina corporation) and subsidiaries (the “Company”) as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2018, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 28, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
Columbia, South Carolina
August 28, 2018
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
ScanSource, Inc.:
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of ScanSource, Inc. (a South Carolina corporation) and subsidiaries (the “Company”) as of June 30, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2018, and our report dated August 28, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of POS Portal, Inc. (POS Portal), a wholly-owned subsidiary, whose financial statements reflect total assets and revenues each constituting 2% of the related consolidated financial statement amounts as of and for the year ended June 30, 2018. As indicated in Management’s Report, POS Portal was acquired during the year ended June 30, 2018. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of POS Portal.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Columbia, South Carolina
August 28, 2018
ScanSource, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
June 30,
2017
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
25,530
|
|
|
$
|
56,094
|
|
Accounts receivable, less allowance of $45,561 at June 30, 2018
and $44,434 at June 30, 2017
|
678,940
|
|
|
637,293
|
|
Inventories
|
595,948
|
|
|
531,314
|
|
Prepaid expenses and other current assets
|
61,744
|
|
|
56,322
|
|
Total current assets
|
1,362,162
|
|
|
1,281,023
|
|
Property and equipment, net
|
73,042
|
|
|
56,566
|
|
Goodwill
|
298,174
|
|
|
200,881
|
|
Identifiable intangible assets, net
|
136,806
|
|
|
101,513
|
|
Deferred income taxes
|
22,199
|
|
|
29,491
|
|
Other non-current assets
|
52,912
|
|
|
48,829
|
|
Total assets
|
$
|
1,945,295
|
|
|
$
|
1,718,303
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
562,564
|
|
|
$
|
513,155
|
|
Accrued expenses and other current liabilities
|
90,873
|
|
|
104,715
|
|
Current portion of contingent consideration
|
42,975
|
|
|
30,675
|
|
Income taxes payable
|
13,348
|
|
|
7,730
|
|
Current portion of long-term debt
|
551
|
|
|
—
|
|
Total current liabilities
|
710,311
|
|
|
656,275
|
|
Deferred income taxes
|
1,769
|
|
|
2,008
|
|
Long-term debt, net of current portion
|
4,878
|
|
|
5,429
|
|
Borrowings under revolving credit facility
|
244,000
|
|
|
91,871
|
|
Long-term portion of contingent consideration
|
65,258
|
|
|
83,361
|
|
Other long-term liabilities
|
52,703
|
|
|
42,214
|
|
Total liabilities
|
1,078,919
|
|
|
881,158
|
|
Commitments and contingencies
|
|
|
|
Shareholders’ equity:
|
|
|
|
Preferred stock, no par value; 3,000,000 shares authorized, none issued
|
—
|
|
|
—
|
|
Common stock, no par value; 45,000,000 shares authorized, 25,593,122 and 25,431,845 shares issued and outstanding at June 30, 2018 and June 30, 2017, respectively
|
68,220
|
|
|
61,169
|
|
Retained earnings
|
882,333
|
|
|
849,180
|
|
Accumulated other comprehensive loss
|
(84,177
|
)
|
|
(73,204
|
)
|
Total shareholders’ equity
|
866,376
|
|
|
837,145
|
|
Total liabilities and shareholders’ equity
|
$
|
1,945,295
|
|
|
$
|
1,718,303
|
|
See accompanying notes to consolidated financial statements.
ScanSource, Inc. and Subsidiaries
Consolidated Income Statements
Years Ended
June 30, 2018
,
2017
and
2016
(in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Net sales
|
$
|
3,846,260
|
|
|
$
|
3,568,186
|
|
|
$
|
3,540,226
|
|
Cost of goods sold
|
3,410,135
|
|
|
3,184,590
|
|
|
3,184,786
|
|
Gross profit
|
436,125
|
|
|
383,596
|
|
|
355,440
|
|
Selling, general and administrative expenses
|
297,475
|
|
|
265,178
|
|
|
240,115
|
|
Depreciation expense
|
13,311
|
|
|
9,444
|
|
|
7,326
|
|
Intangible amortization expense
|
20,657
|
|
|
15,524
|
|
|
9,828
|
|
Change in fair value of contingent consideration
|
37,043
|
|
|
5,211
|
|
|
1,294
|
|
Operating income
|
67,639
|
|
|
88,239
|
|
|
96,877
|
|
Interest expense
|
9,149
|
|
|
3,215
|
|
|
2,124
|
|
Interest income
|
(3,713
|
)
|
|
(5,329
|
)
|
|
(3,448
|
)
|
Other (income) expense, net
|
1,278
|
|
|
(11,142
|
)
|
|
2,191
|
|
Income before income taxes
|
60,925
|
|
|
101,495
|
|
|
96,010
|
|
Provision for income taxes
|
27,772
|
|
|
32,249
|
|
|
32,391
|
|
Net income
|
$
|
33,153
|
|
|
$
|
69,246
|
|
|
$
|
63,619
|
|
Per share data:
|
|
|
|
|
|
Net income per common share, basic
|
$
|
1.30
|
|
|
$
|
2.74
|
|
|
$
|
2.40
|
|
Weighted-average shares outstanding, basic
|
25,522
|
|
|
25,318
|
|
|
26,472
|
|
Net income per common share, diluted
|
$
|
1.29
|
|
|
$
|
2.71
|
|
|
$
|
2.38
|
|
Weighted-average shares outstanding, diluted
|
25,624
|
|
|
25,515
|
|
|
26,687
|
|
See accompanying notes to consolidated financial statements.
ScanSource, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended
June 30, 2018
,
2017
and
2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Net income
|
$
|
33,153
|
|
|
$
|
69,246
|
|
|
$
|
63,619
|
|
Unrealized gain on hedged transaction, net of tax
|
1,089
|
|
|
13
|
|
|
—
|
|
Foreign currency translation adjustment
|
(12,062
|
)
|
|
(530
|
)
|
|
(8,185
|
)
|
Comprehensive income
|
$
|
22,180
|
|
|
$
|
68,729
|
|
|
$
|
55,434
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
|
|
|
|
|
|
|
|
|
ScanSource, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended
June 30, 2018
,
2017
and
2016
(in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
(Shares)
|
|
Common
Stock
(Amount)
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
|
Balance at June 30, 2015
|
28,214,153
|
|
|
$
|
157,172
|
|
|
$
|
716,315
|
|
|
$
|
(64,502
|
)
|
|
$
|
808,985
|
|
Net income
|
—
|
|
|
—
|
|
|
63,619
|
|
|
—
|
|
|
63,619
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,185
|
)
|
|
(8,185
|
)
|
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
|
284,730
|
|
|
3,994
|
|
|
—
|
|
|
—
|
|
|
3,994
|
|
Common stock repurchased
|
(2,884,210
|
)
|
|
(100,751
|
)
|
|
|
|
|
|
(100,751
|
)
|
Share based compensation
|
—
|
|
|
7,093
|
|
|
—
|
|
|
—
|
|
|
7,093
|
|
Tax shortfall from exercise or vesting of share-based payment arrangements
|
—
|
|
|
(259
|
)
|
|
—
|
|
|
—
|
|
|
(259
|
)
|
Balance at June 30, 2016
|
25,614,673
|
|
|
67,249
|
|
|
779,934
|
|
|
(72,687
|
)
|
|
774,496
|
|
Net income
|
—
|
|
|
—
|
|
|
69,246
|
|
|
—
|
|
|
69,246
|
|
Unrealized gain on hedged transaction, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
13
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(530
|
)
|
|
(530
|
)
|
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
|
394,815
|
|
|
8,208
|
|
|
—
|
|
|
—
|
|
|
8,208
|
|
Common stock repurchased
|
(577,643
|
)
|
|
(20,335
|
)
|
|
|
|
|
|
(20,335
|
)
|
Share based compensation
|
—
|
|
|
6,578
|
|
|
—
|
|
|
—
|
|
|
6,578
|
|
Tax shortfall from exercise or vesting of share-based payment arrangements
|
—
|
|
|
(531
|
)
|
|
—
|
|
|
—
|
|
|
(531
|
)
|
Balance at June 30, 2017
|
25,431,845
|
|
|
61,169
|
|
|
849,180
|
|
|
(73,204
|
)
|
|
837,145
|
|
Net income
|
—
|
|
|
—
|
|
|
33,153
|
|
|
—
|
|
|
33,153
|
|
Unrealized gain on hedged transaction, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
1,089
|
|
|
1,089
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,062
|
)
|
|
(12,062
|
)
|
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
|
161,277
|
|
|
636
|
|
|
—
|
|
|
—
|
|
|
636
|
|
Share based compensation
|
—
|
|
|
6,415
|
|
|
—
|
|
|
—
|
|
|
6,415
|
|
Balance at June 30, 2018
|
25,593,122
|
|
|
$
|
68,220
|
|
|
$
|
882,333
|
|
|
$
|
(84,177
|
)
|
|
$
|
866,376
|
|
See accompanying notes to consolidated financial statements.
ScanSource, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended
June 30, 2018
,
2017
and
2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
33,153
|
|
|
$
|
69,246
|
|
|
$
|
63,619
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
37,495
|
|
|
24,968
|
|
|
17,154
|
|
Amortization of debt issue costs
|
326
|
|
|
290
|
|
|
297
|
|
Provision for doubtful accounts
|
7,075
|
|
|
8,901
|
|
|
7,571
|
|
Share-based compensation
|
6,459
|
|
|
6,602
|
|
|
7,093
|
|
Deferred income taxes
|
(22,286
|
)
|
|
(1,861
|
)
|
|
1,846
|
|
Excess tax benefits from share-based payment arrangements
|
—
|
|
|
(89
|
)
|
|
(101
|
)
|
Change in fair value of contingent consideration
|
37,043
|
|
|
5,211
|
|
|
1,294
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
(46,766
|
)
|
|
(66,129
|
)
|
|
14,167
|
|
Inventories
|
(59,498
|
)
|
|
28,449
|
|
|
2,999
|
|
Prepaid expenses and other assets
|
(6,366
|
)
|
|
(4,300
|
)
|
|
4,612
|
|
Other noncurrent assets
|
(6,361
|
)
|
|
(9,540
|
)
|
|
(2,186
|
)
|
Accounts payable
|
44,464
|
|
|
19,861
|
|
|
(71,706
|
)
|
Accrued expenses and other liabilities
|
(11,540
|
)
|
|
8,491
|
|
|
6,401
|
|
Income taxes payable
|
14,673
|
|
|
4,776
|
|
|
(849
|
)
|
Net cash provided by operating activities
|
27,871
|
|
|
94,876
|
|
|
52,211
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(8,159
|
)
|
|
(8,849
|
)
|
|
(12,081
|
)
|
Cash paid for business acquisitions, net of cash acquired
|
(143,768
|
)
|
|
(83,804
|
)
|
|
(61,475
|
)
|
Payments for acquisition of intangible assets
|
—
|
|
|
(3,583
|
)
|
|
—
|
|
Net cash used in investing activities
|
(151,927
|
)
|
|
(96,236
|
)
|
|
(73,556
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Borrowings on revolving credit, net of expenses
|
2,301,443
|
|
|
1,813,062
|
|
|
1,376,620
|
|
Repayments on revolving credit, net of expenses
|
(2,149,659
|
)
|
|
(1,792,620
|
)
|
|
(1,305,193
|
)
|
Repayments on long-term debt
|
—
|
|
|
—
|
|
|
(2,792
|
)
|
Repayments of capital lease obligations
|
(591
|
)
|
|
(246
|
)
|
|
(223
|
)
|
Debt issuance costs
|
(296
|
)
|
|
(876
|
)
|
|
—
|
|
Contingent consideration payments
|
(54,025
|
)
|
|
(10,241
|
)
|
|
(8,606
|
)
|
Exercise of stock options
|
2,273
|
|
|
9,969
|
|
|
5,542
|
|
Taxes paid on settlement of equity awards
|
(1,637
|
)
|
|
(1,761
|
)
|
|
(1,548
|
)
|
Repurchase of common stock
|
—
|
|
|
(20,882
|
)
|
|
(100,206
|
)
|
Excess tax benefits from share-based payment arrangements
|
—
|
|
|
89
|
|
|
101
|
|
Net cash provided by (used in) financing activities
|
97,508
|
|
|
(3,506
|
)
|
|
(36,305
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(4,016
|
)
|
|
(440
|
)
|
|
(2,596
|
)
|
Decrease in cash and cash equivalents
|
(30,564
|
)
|
|
(5,306
|
)
|
|
(60,246
|
)
|
Cash and cash equivalents at beginning of period
|
56,094
|
|
|
61,400
|
|
|
121,646
|
|
Cash and cash equivalents at end of period
|
$
|
25,530
|
|
|
$
|
56,094
|
|
|
$
|
61,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(continued)
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Interest paid during the year
|
$
|
8,544
|
|
|
$
|
2,831
|
|
|
$
|
1,706
|
|
Income taxes paid during the year
|
$
|
38,330
|
|
|
$
|
31,126
|
|
|
$
|
33,859
|
|
See accompanying notes to consolidated financial statements.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2018
|
|
(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 point-of-sale (POS), payments, barcode, physical security, unified communications and collaboration and cloud and telecom services to market. The Company operates in the Unites States, Canada, Latin America and Europe. The Company's
two
operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services, are based on product, customer and service type.
Consolidation Policy
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Related Party Transactions
A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. There were
no
material related party transactions for the fiscal years ended
June 30, 2018
,
2017
and
2016
.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable, contingent consideration and inventory reserves. Management bases its estimates on assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.
The following significant accounting policies relate to the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements:
(a) Allowances for Trade and Notes Receivable
The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company.
Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable, (3) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers and (4) the current economic and country specific environment. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
(b) Inventory Reserves
Management determines the inventory reserves required to reduce inventories to the lower of cost or net realizable value based principally on the effects of technological changes, quantities of goods, length of time on hand and other factors. An estimate is made of the net realizable value, less cost to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. The estimates used to calculate these reserves are applied consistently. The adjustments are recorded in the period in which the loss of utility of the inventory occurs, which establishes a new cost basis for the inventory. This new cost basis is maintained until such time that the reserved inventory is disposed of, returned to the supplier or sold. To the extent that specifically reserved inventory is sold, cost of goods sold is expensed for the new cost basis of the inventory sold.
(c) Purchase Price Allocations
For each acquisition, the Company allocates the purchase price to assets acquired, liabilities assumed and goodwill and intangibles in accordance with the FASB's Accounting Standards Codification ("ASC") 805. The Company recognizes assets and liabilities acquired at their estimated fair values. Management uses judgment to (1) identify the acquired assets and liabilities assumed, (2) estimate the fair value of these assets, (3) estimate the useful life of the assets and (4) assess the appropriate method for recognizing depreciation or amortization expense over the asset’s useful life.
(d) Goodwill Fair Value
The Company estimates the fair value of its goodwill reporting units primarily based on the income approach utilizing the discounted cash flow method. The Company also utilizes fair value estimates derived from the market approach utilizing the public company market multiple method to validate the results of the discounted cash flow method, which requires it to make assumptions about the applicability of those multiples to its reporting units. The discounted cash flow method requires the Company to estimate future cash flows, using key assumptions such as the weighted average cost of capital, revenue growth rates, projected gross margin and operating margin percentage growth, expected working capital changes and a related cash flow impact from working capital changes, and then discount those amounts to present value.
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 some zero-balance disbursement accounts at various financial institutions in which the Company does not maintain significant depository relationships. Due to the terms of the agreements governing these accounts, 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. As a result, checks released but not yet cleared from these accounts in the amounts of
$5.7 million
and
$8.3 million
are classified as accounts payable as of
June 30, 2018
and
2017
, respectively.
The Company maintains its cash with various financial institutions globally that are monitored regularly for credit quality and holds amounts in excess of Federal Deposit Insurance Corporation ("FDIC") limits or other insured limits. Cash and cash equivalents held outside of the United States totaled
$20.3 million
and
$47.9 million
as of
June 30, 2018
and
2017
, respectively.
Concentration of Credit Risk
The Company sells to a large base of customers throughout the United States, Canada, Latin America and Europe. The Company performs ongoing credit evaluations of its customers’ financial condition. In certain cases, the Company will accept tangible assets as collateral to increase the trade credit of its customers. In addition, the Company carries credit insurance on certain subsections of the customer portfolio. No single customer accounted for more than
6%
of the Company’s net sales for fiscal years
2018
. No single customer accounted for more than
5%
of the Company's net sales for fiscal
2017
or
2016
.
In the event that the Company does not collect payment on accounts receivable within the established trade terms for certain customers, the Company may establish arrangements for longer-term financing. The Company accounts for these arrangements by recording them at their historical cost less specific allowances at balance sheet dates. Interest income is recognized in the period earned and is recorded as interest income in the Consolidated Income Statement.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
Derivative Financial Instruments
The Company uses derivative instruments to manage certain exposures related to fluctuations in foreign currency exchange rates and changes in interest rates in connection with borrowing activities. The Company records all derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company’s foreign currency exposure results from purchasing and selling internationally in several foreign currencies and from intercompany loans with foreign subsidiaries. The Company's foreign currencies are denominated primarily in Brazilian reais, euros, British pounds, Canadian dollars, Mexican pesos, Colombian pesos, Chilean pesos and Peruvian nuevos sols.
The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The market risk related to the foreign exchange agreements is offset by changes in the valuation of the underlying items. These contracts are generally for a duration of
90
days or less. The Company has elected not to designate its foreign currency contracts as hedging instruments. They are, therefore, marked-to-market with changes in their fair value recorded in the Consolidated Income Statement each period. Derivative financial instruments related to foreign currency exposure are accounted for on an accrual basis with gains or losses on these contracts recorded in income in the period in which their value changes, with the offsetting entry for unsettled positions reflected in either other assets or other liabilities.
The Company's earnings are affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure, the Company has entered into an interest rate swap agreement and designated this instrument as a hedge of the cash flows on certain variable rate debt. To the extent the derivative instrument was effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative instrument were not included in current earnings, but were reported as other comprehensive income (loss). There was
no
ineffective portion to be recorded as an adjustment to earnings for the year ended
June 30, 2018
.
Investments
The Company has investments that are held in a grantor trust formed by the Company related to the ScanSource, Inc. Nonqualified Deferred Compensation Plan and Founder’s Supplemental Executive Retirement Plan ("SERP"). The Company has classified these investments as trading securities, and they are recorded at fair value with unrealized gains and losses included in the accompanying Consolidated Income Statements. The Company’s obligations under this deferred compensation plan change in concert with the performance of the investments along with contributions to and withdrawals from the plan. The fair value of these investments and the corresponding deferred compensation obligation was
$23.4 million
and
$21.4 million
as of
June 30, 2018
and
June 30, 2017
, respectively. These investments are classified as either prepaid expenses and current assets or other non-current assets in the Consolidated Balance Sheets depending on the timing of planned disbursements. The deferred compensation obligation is classified either within accrued expenses and other current liabilities or other long-term liabilities as well. The amounts of these investments classified as current assets with corresponding current liabilities were
$1.6 million
and
$2.7 million
at
June 30, 2018
and
June 30, 2017
, respectively.
Inventories
Inventories (consisting entirely of finished goods) are stated at the lower of cost (first-in, first-out method) or net realizable value.
Supplier Programs
The Company receives incentives from suppliers related to cooperative advertising allowances, volume rebates and other incentive agreements. These incentives are generally under quarterly, semi-annual or annual agreements with the suppliers. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the supplier. Suppliers generally require that the Company use the suppliers' cooperative advertising allowances for advertising or other marketing programs. Incentives received from suppliers for specifically identified incremental cooperative advertising programs are recorded as adjustments to selling, general and administrative expenses. ASC 605 –
Revenue Recognition
addresses accounting by a customer for certain consideration received from a supplier. This guidance requires that the portion of these supplier funds in excess of our costs be reflected as a reduction of inventory. Such funds are recognized as a reduction of the cost of goods sold when the related inventory is sold.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
The Company records unrestricted volume rebates received as a reduction of inventory and reduces the cost of goods sold when the related inventory is sold. Amounts received or receivables from suppliers that are not yet earned are deferred in the Consolidated Balance Sheets. Supplier receivables are generally collected through reductions to accounts payable authorized by the supplier. In addition, the Company may receive early payment discounts from certain suppliers. The Company records early payment discounts received as a reduction of inventory, thereby resulting in a reduction of cost of goods sold when the related inventory is sold. ASC 605 requires management to make certain estimates of the amounts of supplier incentives that will be received. Actual recognition of the supplier consideration may vary from management estimates.
Supplier Concentration
The Company sells products from many suppliers, however, sales of products supplied by Avaya, Cisco and Zebra each constituted more than
10%
of the Company’s net sales for the years ended
June 30, 2018
,
2017
and
2016
.
Product Warranty
The Company’s suppliers generally provide a warranty on the products provided by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. In
three
of its product lines, the Company offers a self-branded warranty program, in which management has determined that the Company is the primary obligor. The Company purchases contracts from unrelated third parties, generally the original equipment manufacturers, to fulfill any obligation to service or replace defective product claimed on these warranty programs. As a result, the Company has not recorded a provision for estimated service warranty costs. To maintain customer relations, the Company facilitates returns of defective products from the Company's customers by accepting for exchange, with the Company's prior approval, most defective products within
30
days of invoicing.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of
3
to
10
years for furniture, equipment and computer software,
25
to
40
years for buildings and
15
years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized.
To the extent that the Company has longstanding, "in-process" projects that have not been implemented for their intended operational use, the Company capitalizes the portion of interest expense incurred during the asset's acquisition period that theoretically could have been avoided in accordance with ASC 835. The amount capitalized is determined by applying the appropriate capitalization rate to the average amount of accumulated expenditures for the asset during the reporting period. The capitalization rate used is based on the rates applicable to borrowings outstanding during the reporting period. The Company has not recorded any capitalized interest for the years ended
June 30, 2018
and
2017
.
Capitalized Software
The Company accounts for capitalized software in accordance with ASC 350-40, which provides guidance for computer software developed or obtained for internal use. The Company is required to continually evaluate the stage of the implementation process to determine whether or not costs are expensed or capitalized. Costs incurred during the preliminary project phase or planning and research phase are expensed as incurred. Costs incurred during the development phase, such as material and direct services costs, compensation costs of employees associated with the development and interest cost, are capitalized as incurred. Costs incurred during the post-implementation or operation phase, such as training and maintenance costs, are expensed as incurred. In addition, costs incurred to modify existing software that result in additional functionality are capitalized as incurred.
Goodwill
The Company accounts for recorded goodwill in accordance with ASC 350,
Goodwill and Other Intangible Assets
, which requires that goodwill be reviewed annually for impairment or more frequently if impairment indicators exist. Goodwill testing utilizes an impairment analysis, whereby the Company compares the carrying value of each identified reporting unit to its fair value. The
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
Company's goodwill reporting units align directly with its operating segments, Worldwide Barcode, Networking & Worldwide Security and Communications & Services. The fair values of the reporting units are estimated using the net present value of discounted cash flows generated by each reporting unit. Considerable judgment is necessary in estimating future cash flows, discount rates and other factors affecting the estimated fair value of the reporting units, including the operating and macroeconomic factors. Historical financial information, internal plans and projections and industry information are used in making such estimates.
Under ASU 2017-04 if fair value of goodwill is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting units' fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, the Company would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company also assesses the recoverability of goodwill if facts and circumstances indicate goodwill may be impaired. In its most recent annual test, the Company estimated the fair value of its reporting units primarily based on the income approach utilizing the discounted cash flow method. The Company also corroborated the fair value estimates derived from the income approach by considering the implied market multiples of comparable transactions and companies. The discounted cash flow method required the Company to estimate future cash flows and discount those amounts to present value. The key assumptions utilized in determining fair value included:
|
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Industry weighted-average cost of capital ("WACC"): The Company utilized a WACC relative to each reporting unit's respective geography and industry as the discount rate for estimated future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant in each respective geography.
|
|
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•
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Operating income: The Company utilized historical and expected revenue growth rates, gross margins and operating expense percentages, which varied based on the projections of each reporting unit being evaluated.
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•
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Other cash flow adjustments: The Company utilized a projected cash flow impact pertaining to depreciation, capital expenditures and expected changes in working capital as each of its goodwill reporting units grow.
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See Note 6 -
Goodwill and Other Identifiable Intangible Assets
for more information regarding goodwill and the results of our testing.
Intangible Assets
Intangible assets consist of customer relationships, trade names, distributor agreements, supplier partner programs, intellectual property, non-compete agreements and an encryption key library. Customer relationships, distributor agreements, supplier partner programs and the encryption key library are amortized using the straight-line method over their estimated useful lives, which range from
5
to
15
years. Trade names are amortized over a period ranging from
1
to
5
years. Non-compete agreements are amortized over their contract life.
These assets are shown in detail in Note 6 -
Goodwill and Other Identifiable Intangible Assets.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Tests for recoverability of a long-lived asset to be held and used are measured by comparing the carrying amount of the long-lived asset to the sum of the estimated future undiscounted cash flows expected to be generated by the asset. In estimating the future undiscounted cash flows, the Company uses projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. If it is determined that a long-lived asset is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value.
Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable, accrued liabilities, borrowings under the revolving credit facility and subsidiary lines of credit approximate fair value based upon either short maturities or variable interest rates of these instruments. For additional information related to the fair value of derivatives, please see Note 9 -
Fair Value of Financial Instruments
.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
Liability for Contingent Consideration
In addition to the initial cash consideration paid to former shareholders of Network1 and Intelisys, the Company is obligated to make additional earnout payments based on future results through a specified date based on a multiple of the subsidiary’s pro forma earnings as defined in the respective purchase agreements. Future payments are to be paid in the functional currency of the acquired entity, which is the Brazilian real for Network1 and U.S. dollars for Intelisys. The Company paid the final earnout payment to the former shareholders of CDC during fiscal year 2016 and the final earnout payment to Imago during fiscal year 2017. The Company also made a single earnout payment to the former shareholders of POS Portal during fiscal year 2018 in accordance with the share purchase agreement.
Network1 has
one
remaining earnout payment to be paid during fiscal year 2019. Intelisys has
three
remaining earnout payments to be paid in annual installments during fiscal years 2019 through 2021. In accordance with ASC Topic 805, the Company determines the fair value of this liability for contingent consideration at each reporting date throughout the term of the earnout using a form of a probability weighted discounted cash flow model. Each period the Company will reflect the contingent consideration liability at fair value with changes recorded in the change in fair value of contingent consideration line item on the Consolidated Income Statement. Current and noncurrent portions of the liability are presented in the current portion of contingent consideration and long-term portion of contingent consideration line items on the Consolidated Balance Sheets.
Contingencies
The Company accrues for contingent obligations, including estimated legal costs, when it is probable that a liability is incurred and the amount is reasonably estimable. As facts concerning contingencies become known, management reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal and other regulatory matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process.
Revenue Recognition
Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed and determinable; and (4) collectability must be reasonably assured. The Company allows its customers to return product for exchange or credit, subject to certain limitations. Taxes collected from customers and remitted to governmental authorities, such as sales taxes and value added taxes, are excluded from net sales.
The Company provides third-party service contracts, typically for product maintenance and support. 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. Since the Company acts as an agent on behalf of most of these service contracts sold, revenue is recognized net of cost at the time of sale. However, the Company provides some self-branded warranty programs and 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 and presented in net sales and cost of goods sold, respectively.
Service revenue associated with third-party service contracts and warranty programs, as mentioned above, along with configuration and marketing services, is recognized when the work is complete and the four criteria discussed above have been met. Service revenue associated with service contracts, warranty programs, configuration, marketing and other services approximates
3%
of consolidated net sales for fiscal years
2018
,
2017
and
2016
.
The Company provides hardware and value added services for point of sale and payment equipment. This includes terminals, related accessories, financing, device configuration as well as software licenses, professional services and hardware support programs. The Company is the primary obligor for all hardware, software and services sold and recognizes such revenue and cost of goods sold on a gross basis. The revenue associated with rental offerings to customers is recognized in net sales and the cost associated with such offering is recognized as depreciation on the capitalized equipment in cost of goods sold in the Consolidated Income Statements.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
Through the Intelisys acquisition, the Company has a recurring revenue model in which the Company acts as a master agent partnering suppliers with sales agents to provide telecommunications and cloud services to end-users. As the Company acts as an agent on behalf of the suppliers' services, commission revenue received from the supplier is recognized net of cost associated with the commissions the Company pays to sales agents, at the time of sale. Revenue associated with the recurring revenue model approximates
1%
of consolidated net sales for fiscal year
2018
.
During the fiscal years ended
June 30, 2018
,
2017
and
2016
, the Company did not engage in sales transactions involving multiple element arrangements.
Shipping Revenue and Costs
Shipping revenue is included in net sales, and related costs are included in cost of goods sold. Shipping revenue was
$19.9 million
,
$12.8 million
and
$13.0 million
for the years ended
June 30, 2018
,
2017
and
2016
.
Advertising Costs
The Company defers advertising-related costs until the advertising is first run in trade or other publications or, in the case of brochures, until the brochures are printed and available for distribution or posted online. Advertising costs, net of supplier reimbursement are included in selling, general and administrative expenses, were not significant in any of the three fiscal years ended
June 30, 2018
,
2017
and
2016
. Deferred advertising costs for any of these three fiscal years were also not significant.
Foreign Currency
The currency effects of translating the financial statements of the Company’s foreign entities that operate in their local currency are included in the cumulative currency translation adjustment component of accumulated other comprehensive income or loss. The Company's functional currencies include U.S. dollars, Brazilian reais, euros, British pounds, Colombian pesos and Canadian dollars. The assets and liabilities of these foreign entities are translated into U.S. dollars using the exchange rate at the end of the respective period. Sales, costs and expenses are translated at average exchange rates effective during the respective period. Foreign currency transactional and re-measurement gains and losses are included in other expense (income) in the Consolidated Income Statements. Such amounts are not significant to any of the periods presented.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. In accordance with ASC 740,
Accounting for Income Taxes
valuation allowances are provided against deferred tax assets when it is more likely than not that an asset will not be realized
.
Additionally, the Company maintains reserves for uncertain tax provisions.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Company has accounted for changes in the tax provision in accordance with the new law. In response to the Tax Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that provides guidance on accounting for the impact of the Tax Act. SAB 118 allows companies to record provisional amounts to the extent reasonably estimable and adjust them over time as more information becomes available, not to extend beyond the measurement period of one year from the enactment of the Tax Act. Accordingly, the Company has recorded provisional amounts for the one-time transition tax on the deemed repatriation of undistributed foreign earnings and the remeasurment of deferred tax assets and liabilities. The final impact from the enactment of the Tax Act may differ from the estimates provided for a number of reasons including, but not limited to, the issuance of final regulations, interpretation of the law and refinement of the Company's ongoing analysis of the new tax positions. Any changes in the provisional amount recognized will be reflected in the income tax expense in the period they are identified. See Note 12 -
Income Taxes
for further discussion.
Share-Based Payments
The Company accounts for share-based compensation using the provisions of ASC 718,
Accounting for Stock Compensation
, which requires the recognition of the fair value of share-based compensation. Furthermore, the Company adopted ASU 2016-09 which simplified several aspects of the accounting share-based compensation, including income tax effects, forfeitures, statutory
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
withholding requirements and cash flow statement classifications. Share-based compensation is estimated at the grant date based on the fair value of the awards. Since this compensation cost is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASU 2016-09 allows companies to elect an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. The Company has elected to maintain its current accounting policy, estimate the total number of awards expected to be forfeited at the time of grant and revise such estimates, if necessary, in subsequent periods if actual forfeitures differ. The Company has elected to expense grants of awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting portion of the award.
Common stock repurchases
Repurchases of common stock are accounted for at cost, which includes brokerage fees, and are included as a component of shareholder's equity on the Consolidated Balance Sheets. In August 2014, our Board of Directors authorized a
three
-year
$120 million
share repurchase program. Through
June 30, 2016
, the Company completed the program, repurchasing
3.4 million
shares totaling approximately
$119.5 million
. In August 2016, the Board of Directors authorized a new
three
-year
$120 million
share repurchase program. During the year ended
June 30, 2017
, the Company repurchased
0.6 million
shares totaling approximately
$20.3 million
. There were
no
share repurchases during the year ended
June 30, 2018
.
Comprehensive Income
ASC 220,
Comprehensive Income
, defines comprehensive income as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive income for the Company include net income, unrealized gains or losses on hedged transactions, net of tax and foreign currency translation adjustments arising from the consolidation of the Company’s foreign subsidiaries. The loss from foreign currency translation adjustment increased for the year ended June 30, 2018 as compared to the prior year largely due to the significant fluctuations in the Brazilian real year-over-year.
Business Combinations
The Company accounts for business combinations in accordance with ASC 805,
Business Combinations
. ASC 805 establishes principles and requirements for recognizing the total consideration transferred to and the assets acquired, liabilities assumed and any non-controlling interest in the acquired target in a business combination. ASC 805 also provides guidance for recognizing and measuring goodwill acquired in a business combination and requires the acquirer to disclose information that users may need to evaluate and understand the financial impact of the business combination. See Note 5 -
Acquisitions
for further discussion.
Reclassifications
Certain reclassifications have been made on the Consolidated Statements of Cash Flows to show taxes paid on settlement of equity awards separately from exercise of stock options under cash flows from financing activities. Prior year balances have been reclassified to conform with current year presentation. These reclassifications had no effect on consolidated financial results.
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. The standard permits the use of either the retrospective or cumulative effect transition method. The Company adopted this guidance for the fiscal year beginning July 1, 2018 using the full retrospective transition method. The Company engaged a third-party consultant to assist with developing a multi-phase plan to assess the impact of
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
adoption. The Company does not expect the adoption of ASC 606 to have a material impact to the financial statements and is currently in the process of finalizing policy and procedure documentation around the adoption of the standard. Additionally, the Company is in the process of evaluating the impact of the expanded disclosure requirements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
requiring lessees to reflect most leases on their balance sheets and recognize expenses on their income statements in a manner similar to current guidance. Under the new guidance, lessees will be required to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The asset will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs. For leases with a lease term of 12 months or less, as long as the lease does not include options to purchase the underlying assets, lessees can elect not to recognize a lease liability and right-of-use asset. Under the new guidance, lessor accounting is largely unchanged, and the accounting for sale and leaseback transactions is simplified. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This guidance will be applicable to the Company for the fiscal year beginning July 1, 2019. The guidance can be adopted using a modified retrospective approach or a cumulative-effect adjustment to the opening balance sheet of retained earnings in the period of adoption for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company 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, with the treatment of contingent consideration payments made after a business combination being the most directly applicable to the Company. The update requires that cash payments made approximately three months or less after an acquisition's consummation date should be classified as cash outflows for investing activities. Payment made thereafter up to the amount of the original contingent consideration liability should be classified as cash outflows from financing activities. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows from operating activities. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The standard will be applicable to the Company for the fiscal year beginning July 1, 2018. The guidance requires adoption using a retrospective transition method. Upon adoption, the Company expects to retroactively reclassify cash outflows between financing activities and operating activities related to contingent consideration payments in excess of the originally valued contingent consideration liability at the date of acquisition.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815)
that amends and simplifies guidance related to hedge accounting to more accurately portray the economics of an entity’s risk management activities in its financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. This guidance will be applicable to the Company for the fiscal year beginning July 1, 2019. The guidance requires adoption using a modified retrospective approach. The presentation and disclosure requirements apply prospectively. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this new guidance.
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)
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.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands, except per share data)
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
33,153
|
|
|
$
|
69,246
|
|
|
$
|
63,619
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares, basic
|
25,522
|
|
25,318
|
|
|
26,472
|
|
Dilutive effect of share-based payments
|
102
|
|
|
197
|
|
|
215
|
|
Weighted-average shares, diluted
|
25,624
|
|
25,515
|
|
|
26,687
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic
|
$
|
1.30
|
|
|
$
|
2.74
|
|
|
$
|
2.40
|
|
Net income per common share, diluted
|
$
|
1.29
|
|
|
$
|
2.71
|
|
|
$
|
2.38
|
|
For the years ended
June 30, 2018
,
2017
and
2016
, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would have been antidilutive were
551,320
,
418,325
and
461,090
, respectively.
(3)
Property and Equipment
Property and equipment is comprised of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Land
|
$
|
3,331
|
|
|
$
|
3,331
|
|
Buildings and leasehold improvements
|
21,384
|
|
|
21,101
|
|
Computer software and equipment
|
74,220
|
|
|
53,583
|
|
Furniture, fixtures and equipment
|
27,077
|
|
|
26,059
|
|
Construction in progress
|
1,584
|
|
|
4,556
|
|
Rental equipment
|
13,817
|
|
|
—
|
|
|
141,413
|
|
|
108,630
|
|
Less accumulated depreciation
|
(68,371
|
)
|
|
(52,064
|
)
|
|
$
|
73,042
|
|
|
$
|
56,566
|
|
During the fiscal year ended
June 30, 2018
, the increase in net fixed assets from the prior year is largely due to net assets acquired during the POS Portal acquisition.
Depreciation expense recorded as selling, general and administrative costs in the accompanying Consolidated Income Statements was
$13.3 million
,
$9.4 million
and
$7.3 million
for the fiscal years ended
2018
,
2017
and
2016
, respectively. Depreciation expense recorded as cost of goods sold in the accompanying Consolidated Income Statements was
$3.5 million
for the fiscal year ended
June 30, 2018
. There was no depreciation expense recorded as cost of goods sold prior to the acquisition of POS Portal on July 31, 2017.
(4) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised of the following:
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Deferred warranty revenue
|
$
|
21,065
|
|
|
$
|
24,813
|
|
Accrued compensation
|
22,378
|
|
|
21,713
|
|
Other taxes payable
|
18,560
|
|
|
18,440
|
|
Accrued marketing expense
|
4,457
|
|
|
5,914
|
|
Brazilian pre-acquisition contingencies
|
1,385
|
|
|
3,506
|
|
Accrued freight
|
3,849
|
|
|
3,392
|
|
Other accrued liabilities
|
19,179
|
|
|
26,937
|
|
|
$
|
90,873
|
|
|
$
|
104,715
|
|
(5) Acquisitions
POS Portal
On July 31, 2017, the Company acquired all of the outstanding shares of POS Portal a leading provider of payment devices and services primarily to the small and midsized ("SMB") market segment in the United States. POS Portal joined the Worldwide Barcode, Networking & Security segment.
Under the share purchase agreement, the all-cash transaction included an initial purchase price of approximately
$144.9 million
paid in cash at closing. The Company paid an additional
$3.4 million
for customary closing adjustments during the six months ended December 31, 2017. The Company acquired
$4.6 million
in cash, net of debt payoff and other customary closing adjustments, resulting in
$143.8 million
net cash paid for POS Portal. The agreement also included a cash earn-out payment up to
$13.2 million
based on POS Portal's earnings before interest expense, taxes, depreciation and amortization (EBITDA) for the trailing twelve months (TTM) ended September 30, 2017, which was paid in full during the quarter ended December 31, 2017. A portion of the purchase price was placed into escrow to indemnify the Company for certain pre-acquisition damages. A portion of the escrow was released during the quarter ended December 31, 2017. As of
June 30, 2018
, the balance available in escrow was
$13.1 million
. In connection with the POS Portal acquisition during fiscal 2018, the Company recognized
$0.2 million
in acquisition-related cost included in selling, general and administrative expenses on the Consolidated Income Statements.
The purchase price of this acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date. Purchase accounting for this acquisition was finalized during the quarter ended December 31, 2017. The goodwill balance is primarily attributed to expanding the Company's high-value capabilities and market reach across all payment channels. Goodwill, identifiable intangible assets and the related deferred tax liability are not deductible for tax purposes. Pro forma results of operations have not been presented for the acquisition of POS Portal because such results are not material to our consolidated results.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
POS Portal
|
|
(in thousands)
|
Receivables
|
$
|
8,914
|
|
Inventory
|
8,352
|
|
Other current assets
|
917
|
|
Property and equipment, net
|
24,963
|
|
Goodwill
|
101,198
|
|
Identifiable intangible assets
|
57,000
|
|
Other non-current assets
|
100
|
|
|
$
|
201,444
|
|
|
|
Accounts payable
|
$
|
10,897
|
|
Accrued expenses and other current liabilities
|
5,130
|
|
Contingent consideration
|
13,098
|
|
Other long-term liabilities
|
102
|
|
Long-term deferred taxes payable
|
28,449
|
|
Consideration transferred, net of cash acquired
|
143,768
|
|
|
$
|
201,444
|
|
Intangible assets acquired include trade names, customer relationships, non-compete agreements and an encryption key library. The weighted-average amortization period for these identified assets after purchase accounting adjustments, other than goodwill, was
10
years.
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 & Services operating segment. With this acquisition, the Company broadened its capabilities in the telecom and cloud services market and expands its opportunities for high-growth recurring revenue.
Under the asset purchase agreement, the Company made an initial cash payment of approximately
$84.6 million
, which consisted of an initial purchase price of
$83.6 million
and
$1.0 million
for additional net assets acquired at closing, and agreed to make
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 as part of the acquisition, resulting in
$83.8 million
net cash paid for Intelisys initially. A portion of the purchase price was placed into escrow to indemnify the Company for certain pre-acquisition damages. As of
June 30, 2018
, the balance available in escrow was
$8.5 million
. During fiscal years 2017 and 2016, the Company recognized
$0.5 million
and
$0.3 million
, respectively, in acquisition-related cost included in selling, general and administrative expenses on the Consolidated Income Statements.
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. The goodwill balance is primarily attributed to entering the recurring revenue telecom and cloud services market and expanded market opportunities to grow recurring revenue streams. Goodwill and identifiable intangible assets are expected to be fully deductible for tax purposes.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
Intelisys
|
|
(in thousands)
|
Receivables, net
|
$
|
21,655
|
|
Other current assets
|
1,547
|
|
Property and equipment, net
|
5,298
|
|
Goodwill
|
109,005
|
|
Identifiable intangible assets
|
63,110
|
|
Other non-current assets
|
1,839
|
|
|
$
|
202,454
|
|
Accounts payable
|
$
|
21,063
|
|
Accrued expenses and other current liabilities
|
2,587
|
|
Contingent consideration
|
95,000
|
|
Consideration transferred, net of cash acquired
|
83,804
|
|
|
$
|
202,454
|
|
Intangible assets acquired include customer relationships, trade names, intellectual property and non-compete agreements. The weighted-average amortization period for these identified intangible assets after purchase accounting adjustments, other than goodwill, was
10
years.
|
|
(6)
|
Goodwill and Other Identifiable Intangible Assets
|
In accordance with ASC 350,
Intangibles - Goodwill and Other Intangible Assets
, the Company performs its annual goodwill impairment test during the fourth quarter of each fiscal year, or whenever indicators of impairment are present. The reporting units utilized for goodwill impairment tests align directly with our operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services. The testing includes the determination of each reporting unit's fair value using a discounted cash flows model compared to each reporting unit's carrying value. Key assumptions used in determining fair value include projected growth and operating margin, working capital requirements and discount rates. During fiscal years ended
June 30, 2018
,
2017
and
2016
, no impairment charges related to goodwill were recorded.
Changes in the carrying amount of goodwill for the years ended
June 30, 2018
and
2017
, by reportable segment, are set forth in the table below. Additions to goodwill for fiscal years
2018
and
2017
are due to the acquisitions of POS Portal and Intelisys, respectively.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
(in thousands)
|
Balance at June 30, 2016
|
$
|
36,434
|
|
|
$
|
56,281
|
|
|
$
|
92,715
|
|
Additions
|
—
|
|
|
109,005
|
|
|
109,005
|
|
Unrealized loss on foreign currency translation
|
(174
|
)
|
|
(665
|
)
|
|
(839
|
)
|
Balance at June 30, 2017
|
$
|
36,260
|
|
|
$
|
164,621
|
|
|
$
|
200,881
|
|
Additions
|
101,198
|
|
|
—
|
|
|
101,198
|
|
Unrealized loss on foreign currency translation
|
(244
|
)
|
|
(3,661
|
)
|
|
(3,905
|
)
|
Balance at June 30, 2018
|
$
|
137,214
|
|
|
$
|
160,960
|
|
|
$
|
298,174
|
|
The following table shows the Company’s identifiable intangible assets as of
June 30, 2018
and
2017
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Book
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Book
Value
|
|
(in thousands)
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
139,479
|
|
|
$
|
40,337
|
|
|
$
|
99,142
|
|
|
$
|
110,691
|
|
|
$
|
27,977
|
|
|
$
|
82,714
|
|
Trade names
|
27,123
|
|
|
12,224
|
|
|
14,899
|
|
|
23,256
|
|
|
8,691
|
|
|
14,565
|
|
Non-compete agreements
|
3,064
|
|
|
1,221
|
|
|
1,843
|
|
|
1,160
|
|
|
608
|
|
|
552
|
|
Distributor agreements
|
363
|
|
|
188
|
|
|
175
|
|
|
355
|
|
|
158
|
|
|
197
|
|
Supplier partner program
|
3,583
|
|
|
456
|
|
|
3,127
|
|
|
3,583
|
|
|
98
|
|
|
3,485
|
|
Encryption key library
|
19,900
|
|
|
2,280
|
|
|
17,620
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total intangibles
|
$
|
193,512
|
|
|
$
|
56,706
|
|
|
$
|
136,806
|
|
|
$
|
139,045
|
|
|
$
|
37,532
|
|
|
$
|
101,513
|
|
During fiscal year 2018, the Company acquired customer relationships, trade names, intellectual property, non-compete agreements and an encryption key library related to the acquisition of POS Portal.
The weighted-average amortization period for all intangible assets was approximately
10
years for years ended
June 30, 2018
,
2017
and
2016
, respectively. Amortization expense for the years ended
June 30, 2018
,
2017
and
2016
was
$20.7 million
,
$15.5 million
and
$9.8 million
, respectively, all of which relates to selling, general and administrative costs, not the cost of selling goods, and has been presented as such in the accompanying Consolidated Income Statements.
Estimated future amortization expense is as follows:
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
Amortization
Expense
|
|
(in thousands)
|
Year Ended June 30,
|
|
2019
|
$
|
18,920
|
|
2020
|
18,308
|
|
2021
|
18,200
|
|
2022
|
16,564
|
|
2023
|
15,591
|
|
Thereafter
|
49,223
|
|
Total
|
$
|
136,806
|
|
|
|
(7)
|
Short-Term Borrowings and Long-Term Debt
|
The following table shows the Company’s long term debt as of
June 30, 2018
and
2017
, respectively.
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
Current portion of long-term debt
|
$
|
551
|
|
|
$
|
—
|
|
Long term debt, net of current portion
|
4,878
|
|
|
5,429
|
|
Borrowings under revolving credit facility
|
244,000
|
|
|
91,871
|
|
Total debt
|
$
|
249,429
|
|
|
$
|
97,300
|
|
Revolving Credit Facility
The Company has a multi-currency senior secured revolving credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (the “Amended Credit Agreement”). On
April 3, 2017
, the Company amended this credit facility to extend its maturity to
April 3, 2022
. On
August 8, 2017
, the Company amended this credit facility to increase the committed amount from
$300 million
to
$400 million
. The Amended Credit Agreement allows for the issuance of up to
$50 million
for letters of credit and has a
$200 million
accordion feature that allows the Company to increase the availability to
$600 million
, subject to obtaining additional credit commitments from the lenders participating in the increase. The Company incurred debt issuance costs of
$0.9 million
and
$0.3 million
in connection with the amendments to the Amended Credit Agreement on
April 3, 2017
and
August 8, 2017
, respectively. These costs were capitalized to other assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.
At the Company's option, loans denominated in U.S. dollars under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon the Company's ratio of total debt (excluding accounts payable and accrued liabilities), measured as of the end of the most recent quarter, to adjusted earnings before interest expense, taxes, depreciation and amortization ("EBITDA") for the most recently completed
four
quarters (the "Leverage Ratio"). This spread ranges from
1.00%
to
2.125%
for LIBOR-based loans and
0.00%
to
1.125%
for alternate base rate loans. Additionally, the Company is assessed commitment fees ranging from
0.175%
to
0.35%
, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to
65%
of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement.
The spread in effect as of
June 30, 2018
was
1.625%
for LIBOR-based loans and
0.625%
for alternate base rate loans. The commitment fee rate in effect as of
June 30, 2018
was
0.25%
. The Company was in compliance with all covenants under the credit facility as of
June 30, 2018
.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
The average daily balance on the revolving credit facility during the fiscal years ended
June 30, 2018
and
2017
was
$269.5 million
and
$126.5 million
, respectively. There was
$156.0 million
and
$208.1 million
available for additional borrowings as of
June 30, 2018
and
2017
, respectively. There were
no
letters of credit issued under the multi-currency revolving credit facility as of
June 30, 2018
and
June 30, 2017
.
Long-Term Debt
On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi facility through the issuance of an industrial development revenue bond. The bond matures on
September 1, 2032
and accrues interest at a rate equal to 30-day LIBOR 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
5
th anniversary of the agreement, requiring the Company to pay back the bonds at
100%
of the principal amount outstanding. As of
June 30, 2018
, the Company was in compliance with all covenants under this bond. The interest rate at
June 30, 2018
and
2017
was
2.855%
and
1.926%
, respectively.
Scheduled maturities of the Company’s revolving credit facility and long-term debt at
June 30, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
Long-Term Debt
|
|
(in thousands)
|
Fiscal year:
|
|
|
|
2019
|
$
|
—
|
|
|
$
|
551
|
|
2020
|
—
|
|
|
338
|
|
2021
|
—
|
|
|
342
|
|
2022
|
244,000
|
|
|
347
|
|
2023
|
—
|
|
|
351
|
|
Thereafter
|
—
|
|
|
3,500
|
|
Total principal payments
|
$
|
244,000
|
|
|
$
|
5,429
|
|
Debt Issuance Costs
As of
June 30, 2018
, net debt issuance costs associated with the credit facility and bonds totaled
$1.3 million
and are being amortized on a straight-line basis through the maturity date of each respective debt instrument.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
(8) Derivatives and Hedging Activities
The Company’s results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the 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. 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 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, Canadian dollar, Mexican peso, Colombian peso, Chilean 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 with notional amounts of
$74.6 million
and
$67.1 million
for the exchange of foreign currencies as of
June 30, 2018
and
2017
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Net foreign exchange derivative contract loss (gain)
|
$
|
386
|
|
|
$
|
146
|
|
|
$
|
(1,951
|
)
|
Net foreign currency transactional and re-measurement loss
|
1,710
|
|
|
1,773
|
|
|
4,522
|
|
Net foreign currency loss
|
$
|
2,096
|
|
|
$
|
1,919
|
|
|
$
|
2,571
|
|
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 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. To manage the exposure to interest rates, the Company entered into an interest rate swap agreement with a notional amount of
$50 million
scheduled to mature on
April 3, 2022
. This swap agreement is designated as a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). There was
no
ineffective portion to be recorded as an adjustment to earnings for fiscal years ended
June 30, 2018
and
2017
.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
The components of the cash flow hedge included in accumulated other comprehensive income (loss), net of income taxes, in the Consolidated Statements of Shareholders’ Equity, are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
June 30, 2018
|
June 30, 2017
|
|
(in thousands)
|
Net interest expense recognized as a result of interest rate swap
|
$
|
161
|
|
$
|
7
|
|
Unrealized gain in fair value of interest swap rates
|
1,422
|
|
14
|
|
Net increase in accumulated other comprehensive income (loss)
|
$
|
1,583
|
|
$
|
21
|
|
Income tax effect
|
494
|
|
8
|
|
Net increase in accumulated other comprehensive income (loss), net of tax
|
$
|
1,089
|
|
$
|
13
|
|
The Company has the following derivative instruments located on the Consolidated Balance Sheets and Income Statements as of
June 30, 2018
, utilized for the risk management purposes detailed above:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Balance Sheet Location
|
|
Fair Value of Derivatives
Designated as Hedge
Instruments
|
|
Fair Value of Derivatives
Not Designated as Hedge
Instruments
|
|
|
|
(in thousands)
|
Derivative assets:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
157
|
|
Interest rate swap agreement
|
Other current assets
|
|
$
|
1,604
|
|
|
$
|
—
|
|
Derivative liabilities:
|
|
|
|
|
|
Foreign exchange contracts
|
Accrued expenses and other current liabilities
|
|
$
|
—
|
|
|
$
|
156
|
|
The Company has the following derivative instruments located on the Consolidated Balance Sheets and Income Statements as of
June 30, 2017
, utilized for the risk management purposes detailed above:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Balance Sheet Location
|
|
Fair Value of Derivatives
Designated as Hedge
Instruments
|
|
Fair Value of Derivatives
Not Designated as Hedge
Instruments
|
|
|
|
(in thousands)
|
Derivative assets:
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
35
|
|
Interest rate swap agreement
|
Other current assets
|
|
$
|
21
|
|
|
$
|
—
|
|
Derivative liabilities:
|
|
|
|
|
|
Foreign exchange contracts
|
Accrued expenses and other current liabilities
|
|
$
|
—
|
|
|
$
|
131
|
|
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
(9) Fair Value of Financial Instruments
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify 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;
|
|
|
•
|
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
|
The assets and liabilities maintained by the Company that are required to be measured at fair value on a recurring basis include deferred compensation plan investments, forward foreign currency exchange contracts, interest rate swap agreements and contingent consideration owed to the previous owners of Network1 and Intelisys. The carrying value of debt listed in Note 7 -
Short-Term Borrowings and Long Term 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
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
23,352
|
|
|
$
|
23,352
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
157
|
|
|
—
|
|
|
157
|
|
|
—
|
|
Interest rate swap agreement
|
1,604
|
|
|
—
|
|
|
1,604
|
|
|
—
|
|
Total assets at fair value
|
$
|
25,113
|
|
|
$
|
23,352
|
|
|
$
|
1,761
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
23,352
|
|
|
$
|
23,352
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
156
|
|
|
—
|
|
|
156
|
|
|
—
|
|
Liability for contingent consideration, current and non-current
|
108,233
|
|
|
—
|
|
|
—
|
|
|
108,233
|
|
Total liabilities at fair value
|
$
|
131,741
|
|
|
$
|
23,352
|
|
|
$
|
156
|
|
|
$
|
108,233
|
|
The following table presents assets and liabilities measured at fair value on a recurring basis as of
June 30, 2017
:
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
21,439
|
|
|
$
|
21,439
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
35
|
|
|
—
|
|
|
35
|
|
|
—
|
|
Interest rate swap agreement
|
21
|
|
|
—
|
|
|
21
|
|
|
—
|
|
Total assets at fair value
|
$
|
21,495
|
|
|
$
|
21,439
|
|
|
$
|
56
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan investments, current and non-current portion
|
$
|
21,074
|
|
|
$
|
21,074
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency exchange contracts
|
131
|
|
|
—
|
|
|
131
|
|
|
—
|
|
Liability for contingent consideration, current and non-current
|
114,036
|
|
|
—
|
|
|
—
|
|
|
114,036
|
|
Total liabilities at fair value
|
$
|
135,241
|
|
|
$
|
21,074
|
|
|
$
|
131
|
|
|
$
|
114,036
|
|
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 or active employees. These investments are recorded to prepaid and other current assets or other non-current assets depending on their corresponding, anticipated distributions 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). 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 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. See Note 8 -
Derivatives and Hedging Activities
.
The Company recorded contingent consideration liabilities at the acquisition date of Network1, Intelisys and POS Portal representing the amounts payable to former shareholders, as outlined under the terms of the applicable 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 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 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 15 -
Accumulated Other Comprehensive (Loss) Income
.
POS Portal is part of the Company's Worldwide Barcode, Networking & Security Segment. Network1 and Intelisys are part of the Company's Worldwide Communications & Services segment.
The table below provides a summary of the changes in fair value of the Company’s contingent considerations for the Network1, Intelisys and POS Portal earnouts, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the fiscal year ended
June 30, 2018
. The contingent consideration due to the former shareholders of POS Portal was paid in full during the quarter ended December 31, 2017.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration for the Fiscal Year Ended
|
|
June 30, 2018
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
(in thousands)
|
Fair value at beginning of period
|
$
|
—
|
|
|
$
|
114,036
|
|
|
$
|
114,036
|
|
Issuance of contingent consideration
|
13,098
|
|
|
—
|
|
|
13,098
|
|
Payments
|
(13,167
|
)
|
|
(40,858
|
)
|
|
(54,025
|
)
|
Adjustments to contingent consideration
(1)
|
—
|
|
|
(779
|
)
|
|
(779
|
)
|
Change in fair value
|
69
|
|
|
36,974
|
|
|
37,043
|
|
Fluctuation due to foreign currency exchange
|
—
|
|
|
(1,140
|
)
|
|
(1,140
|
)
|
Fair value at end of period
|
$
|
—
|
|
|
$
|
108,233
|
|
|
$
|
108,233
|
|
(1)
The contingent consideration payable to the former shareholders of Network1 has been reduced by payments the Company made to settle pre-acquisition contingencies during the quarter ended
June 30, 2018
.
The table below provides a summary of the changes in fair value of the Company’s contingent considerations for the Imago, Network1 and Intelisys earnouts, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the fiscal year ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration for the Fiscal Year Ended
|
|
June 30, 2017
|
|
Worldwide Barcode, Networking & Security Segment
|
|
Worldwide Communications & Services Segment
|
|
Total
|
|
(in thousands)
|
Fair value at beginning of period
|
$
|
—
|
|
|
$
|
24,652
|
|
|
$
|
24,652
|
|
Issuance of contingent consideration
|
—
|
|
|
95,000
|
|
|
95,000
|
|
Payments
|
—
|
|
|
(10,241
|
)
|
|
(10,241
|
)
|
Change in fair value
|
—
|
|
|
5,211
|
|
|
5,211
|
|
Fluctuation due to foreign currency exchange
|
—
|
|
|
(586
|
)
|
|
(586
|
)
|
Fair value at end of period
|
$
|
—
|
|
|
$
|
114,036
|
|
|
$
|
114,036
|
|
The fair values of amounts owed are recorded in the current portion of contingent consideration and the long-term portion of contingent consideration in the Company's Consolidated Balance Sheets. The U.S. dollar amounts of actual disbursements made in conjunction 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. 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 Consolidated Income Statement 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 and Brazilian markets.
|
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Valuation techniques and significant observable inputs used in recurring Level 3 fair value measurements for our contingent consideration liabilities as of
June 30, 2018
and
2017
were as follows.
|
|
|
|
|
|
|
|
|
Reporting Period
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
|
Weighted Average Rates
|
June 30, 2018
|
|
Discounted cash flow
|
|
Weighted average cost of capital
|
|
8.6
|
%
|
|
|
|
|
Adjusted EBITDA growth rate
|
|
18.2
|
%
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Discounted cash flow
|
|
Weighted average cost of capital
|
|
14.2
|
%
|
|
|
|
|
Adjusted EBITDA growth rate
|
|
17.0
|
%
|
The weighted average cost of capital ("WACC") decreased year-over-year largely due to the reduction in the WACC used for the Network1 contingent consideration liability as the earnout period is complete as of June 30, 2018.
Worldwide Barcode, Networking & Security Segment
POS Portal
The contingent consideration due to the former shareholders of POS Portal was paid in full during the quarter ended December 31, 2017. As such, no liability is recorded as of this reporting date. The change in the fair value of the contingent consideration recognized in the Consolidated Income Statements for the fiscal year ended
June 30, 2018
was a loss less than
$0.1 million
.
CDC
The final payment of the contingent consideration related to CDC was paid during the fiscal year ended June 30, 2016. The change in fair value of the contingent consideration recognized in the Consolidated Income Statements was a loss of
$0.2 million
for the fiscal year ended June 30, 2016. The loss was due to the recurring amortization of unrecognized fair value discount.
Worldwide Communications & Services Segment
Network1
The fair value of the liability for the contingent consideration related to Network1 recognized at
June 30, 2018
was
$10.7 million
of which the entire balance is classified as current. The change in fair value of the contingent consideration recognized in the Consolidated Income Statements contributed a loss of
$21.0 million
for the fiscal year ended
June 30, 2018
, which is primarily due to a change in estimate of the current year payment to the former shareholders of Network1, additional agreed upon adjustments to the projected final settlement and improved actual results for the fiscal year. 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.
As of
June 30, 2017
, the fair value of the contingent consideration was
$6.9 million
, of which
$5.4 million
was classified as current. The change in fair value of the contingent consideration recognized in the Consolidated Income Statements was a gain of
$5.8 million
for the fiscal year ended
June 30, 2017
, which was largely driven by a reduction in future projected results and less-than-expected actual results, partially offset by the recurring amortization of the unrecognized fair value discount.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
Intelisys
The fair value of the liability for the contingent consideration related to Intelisys recognized at
June 30, 2018
was
$97.5 million
of which
$32.2 million
is classified as current. The change in fair value of the contingent consideration recognized in the Consolidated Income Statements contributed a loss of
$16.0 million
for the fiscal year ended
June 30, 2018
, which was primarily due to the recurring amortization of the unrecognized fair value discount and an adjustment to the probability weights in the discounted cash flow model. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to
$115.3 million
, based on the Company’s best estimate of the earnout calculated on a multiple of adjusted earnings.
The fair value of the liability for the contingent consideration related to Intelisys recognized at
June 30, 2017
was
$107.1 million
of which
$25.3 million
is classified as current. The change in fair value of the contingent consideration recognized in the Consolidated Income Statements contributed a loss of
$12.1 million
for the fiscal year ended
June 30, 2017
, which was largely driven by the recurring amortization of the unrecognized fair value discount and improvements in projected results.
Imago
The final payment of the contingent consideration related to Imago was paid during the quarter ended December 31, 2016. The change in fair value of contingent consideration recognized in the Consolidated Income Statements contributed a gain of
$1.1 million
for the fiscal year ended
June 30, 2017
, which was largely driven by actual results that were less-than-expected, including special adjustments as determined by the purchase agreement and recurring amortization of the unrecognized fair value discount. In addition, volatility in the foreign exchange rate between the British pound and the U.S. dollar drove changes in the translation of this British pound-denominated liability.
Scheduled maturities of the Company’s contingent considerations at
June 30, 2018
are as follows:
|
|
|
|
|
|
Contingent Consideration
|
|
(in thousands)
|
Fiscal year:
|
|
2019
|
$
|
42,975
|
|
2020
|
32,239
|
|
2021
|
33,019
|
|
Total contingent consideration payments
|
$
|
108,233
|
|
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
(10) Share-Based Compensation
Share-Based Compensation Plans
The Company has awards outstanding from
two
share-based compensation plans (the 2002 Long-Term Incentive Plan and the 2013 Long-Term Incentive Plan). Awards are currently only being granted under the 2013 Long-Term Incentive Plan. As of
June 30, 2018
, there were
3,786,727
shares available for future grant under the 2013 Long-Term Incentive Plan. All of the Company’s share-based compensation plans are shareholder approved, and it is the Company’s belief that such awards align the interests of its employees and directors with those of its shareholders. Under the plans, the Company is authorized to award officers, employees, consultants and non-employee members of the Board of Directors various share-based payment awards, including options to purchase common stock and restricted stock. Restricted stock can be in the form of a restricted stock award ("RSA"), restricted stock unit ("RSU") or a performance unit ("PU"). An RSA is common stock that is subject to risk of forfeiture or other restrictions that lapse upon satisfaction of specified conditions. An RSU represents the right to receive shares of common stock in the future with the right to future delivery of the shares subject to risk of forfeiture or other restrictions that lapse upon satisfaction of specified conditions.
The Company accounts for its share-based compensation awards in accordance with ASC 718 –
Stock Compensation,
which requires all share-based compensation to be recognized in the income statement based on fair value and applies to all awards granted, modified, canceled or repurchased after the effective date. Total share-based compensation included as a component of selling, general and administrative expenses in our Consolidated Income Statements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Share-based compensation related to:
|
|
|
|
|
|
Equity classified stock options
|
$
|
1,184
|
|
|
$
|
1,356
|
|
|
$
|
1,479
|
|
Equity classified restricted stock
|
5,275
|
|
|
5,246
|
|
|
5,614
|
|
Total share-based compensation
|
$
|
6,459
|
|
|
$
|
6,602
|
|
|
$
|
7,093
|
|
Stock Options
During the fiscal year ended
June 30, 2018
, the Company granted stock options for
119,132
shares. These options vest annually over
3
years and have a
10
-year contractual life. These options were granted with an exercise price that is no less than
100%
of the fair market value of the underlying shares on the date of the grant.
The fair value of each option (for purposes of calculation of share-based compensation) was estimated on the date of grant using the Black-Scholes-Merton option pricing formula that uses assumptions determined at the date of grant. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them ("expected term"), the estimated volatility of the Company's common stock price over the expected term ("expected volatility") and the number of options that will ultimately not complete their vesting requirements ("forfeitures"). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the Consolidated Income Statements.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
The Company used the following weighted-average assumptions for the options granted during the following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
Expected term
|
5 years
|
|
|
5 years
|
|
|
4.02 years
|
|
Expected volatility
|
30.70
|
%
|
|
30.88
|
%
|
|
28.70
|
%
|
Risk-free interest rate
|
2.17
|
%
|
|
1.84
|
%
|
|
1.47
|
%
|
Dividend yield
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Weighted-average fair value per option
|
$
|
10.60
|
|
|
$
|
11.26
|
|
|
$
|
9.53
|
|
The weighted-average expected term of the options represents the period of time the options are expected to be outstanding based on historical trends and behaviors of certain groups and individuals receiving these awards. The expected volatility is predominantly based on the historical volatility of our common stock for a period approximating the expected term. The risk-free interest rate reflects the interest rate at grant date on zero-coupon United States governmental bonds that have a remaining life similar to the expected option term. The dividend yield assumption was based on the Company's dividend payment history and management's expectations of future dividend payments.
A summary of activity under our stock option plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2018
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding, beginning of year
|
872,989
|
|
|
$
|
37.63
|
|
|
|
|
|
Granted during the period
|
119,132
|
|
|
34.27
|
|
|
|
|
|
Exercised during the period
|
(62,701
|
)
|
|
35.72
|
|
|
|
|
|
Canceled, forfeited, or expired during the period
|
(32,300
|
)
|
|
37.17
|
|
|
|
|
|
Outstanding, end of year
|
897,120
|
|
|
37.33
|
|
|
5.95
|
|
$
|
3,089,365
|
|
Vested and expected to vest at June 30, 2018
|
895,187
|
|
|
37.34
|
|
|
5.94
|
|
$
|
3,078,179
|
|
Exercisable, end of year
|
685,554
|
|
|
$
|
37.84
|
|
|
5.07
|
|
$
|
2,113,769
|
|
The aggregate intrinsic value was calculated using the market price of the Company's stock on
June 30, 2018
, and the exercise price for only those options that have an exercise price that is less than the market price of our stock. This amount will change as the market price per share changes. The aggregate intrinsic value of options exercised during the fiscal years ended
June 30, 2018
,
2017
and
2016
was
$0.5 million
,
$1.6 million
and
$1.3 million
, respectively.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
A summary of the status of the Company’s shares subject to unvested options is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2018
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Grant
Date Fair-
Value
|
Unvested, beginning of year
|
215,970
|
|
|
$
|
38.48
|
|
|
$
|
10.39
|
|
Granted
|
119,132
|
|
|
34.27
|
|
|
10.60
|
|
Vested
|
(123,536
|
)
|
|
39.20
|
|
|
10.33
|
|
Unvested, end of year
|
211,566
|
|
|
$
|
35.69
|
|
|
$
|
10.54
|
|
As of
June 30, 2018
, there was approximately
$1.6 million
of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans in the form of stock options. This cost is expected to be recognized over a weighted-average period of
1.12
years. The total fair value of options vested during the fiscal years ended
June 30, 2018
,
2017
and
2016
is
$1.3 million
,
$1.5 million
and
$1.5 million
, respectively. The following table summarizes information about stock options outstanding and exercisable as of
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Shares
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
$18.13 - $22.27
|
|
2,800
|
|
|
0.43
|
|
$
|
18.14
|
|
|
2,800
|
|
|
$
|
18.14
|
|
$22.27 - $26.38
|
|
25,000
|
|
|
1.43
|
|
24.57
|
|
|
25,000
|
|
|
24.57
|
|
$26.38 - $30.49
|
|
20,731
|
|
|
4.44
|
|
29.80
|
|
|
20,731
|
|
|
29.80
|
|
$30.49 - $34.60
|
|
197,971
|
|
|
7.17
|
|
34.21
|
|
|
82,839
|
|
|
34.27
|
|
$34.60 - $38.71
|
|
371,169
|
|
|
5.67
|
|
37.04
|
|
|
274,735
|
|
|
36.87
|
|
$38.71 - $42.82
|
|
279,449
|
|
|
6.02
|
|
41.83
|
|
|
279,449
|
|
|
41.83
|
|
|
|
897,120
|
|
|
5.95
|
|
$
|
37.33
|
|
|
685,554
|
|
|
$
|
37.84
|
|
The Company issues shares to satisfy the exercise of options.
Restricted Stock
Grants of Restricted Shares
During the fiscal year ended
June 30, 2018
, the Company granted
138,665
shares of restricted stock to employees and non-employee directors,
all
of which were issued in the form of RSUs or PUs:
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2018
|
|
Shares
granted
|
|
Date granted
|
|
Grant date
fair value
|
|
Vesting period
|
Employees
|
|
|
|
|
|
|
|
Certain employees based on performance
|
92,469
|
|
|
December 8, 2017
|
|
$
|
34.35
|
|
|
Annually over 3 years
|
Certain employees based on performance
(1)
|
31,296
|
|
|
February 1, 2018
|
|
$
|
34.95
|
|
|
January 1, 2018 through December 31, 2020
|
Non-Employee Directors
(2)
|
|
|
|
|
|
|
|
Certain Directors
|
500
|
|
|
September 11, 2017
|
|
$
|
37.75
|
|
|
6 months
|
Certain Directors
|
14,400
|
|
|
December 8, 2017
|
|
$
|
34.35
|
|
|
6 months
|
(1) The RSU's granted on February 1, 2018 contains both service and performance-based vesting conditions for the period January 1, 2018 through December 31, 2020 (the "performance cycle") as determined by the Compensation Committee of the Company's Board of Directors. The total number for target shares granted could differ from the actual shares vested at the conclusion of the performance cycle. See the Company's 2018 Proxy Statement for more information about these grants.
(2) Under the 2013 Long-Term Incentive Plan, non-employee directors receive annual awards of restricted stock, as opposed to stock options. The number of shares of restricted stock to be granted is established from time to time by the Board of Directors. Currently, the number of shares of restricted stock awarded annually to each non-employee director generally is determined by dividing
$100,000
by the equity award value of the common stock on the date of grant, as defined in the 2013 Long-Term Incentive Plan. The equity award value means the value per share based on a
45
-day averaging of the fair market value of the common stock over a specified period of time, or the fair market value of the common stock on a specified date. These awards will generally vest in full on the day that is six months after the date of grant or upon the earlier occurrence of (i) the director’s termination of service as a director by reason of death, disability or retirement or (ii) a change in control by the Company. The compensation expense associated with these awards will be recognized on a pro-rata basis over this period.
A summary of the status of the Company’s outstanding restricted stock is presented below:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2018
|
|
Shares
|
|
Weighted-Average
Grant Date Fair
Value
|
Outstanding, beginning of year
|
267,386
|
|
|
$
|
37.86
|
|
Granted during the period
|
138,665
|
|
|
34.50
|
|
Target shares adjustment during the period
(1)
|
(216
|
)
|
|
36.33
|
|
Vested during the period
|
(146,046
|
)
|
|
38.16
|
|
Cancelled, forfeited, or expired during the period
|
(6,270
|
)
|
|
34.77
|
|
Outstanding, end of year
|
253,519
|
|
|
$
|
35.93
|
|
(1) These target shares granted as RSUs during fiscal year 2015 have service based and performance based vesting conditions. The actual number of shares granted for each of the
three
tranches, for the period June 1, 2014 through June 30, 2017, is determined after the date of the Company's financial statements. Therefore, the adjustment recognized during fiscal year 2018 represents the variance between the shares assumed to be granted versus at June 30, 2017 the actual shares granted for the third tranche.
As of
June 30, 2018
, there was approximately
$6.6 million
of unrecognized compensation cost related to unvested restricted stock awards and restricted stock units granted, which is expected to be recognized over a weighted-average period of
1.23
years. The Company withheld
47,470
shares for income taxes during the fiscal year ended
June 30, 2018
.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
(11) Employee Benefit Plans
The Company has defined contribution plans under Section 401(k) of the Internal Revenue Code of 1986. One plan governs all employees located in the United States, excluding POS Portal employees, that meet certain eligibility requirements and provides a matching contribution equal to one-half of each participant’s contribution, up to a maximum matching contribution per participant of
$800
. Employer contributions are vested based upon tenure over a
five
-year period. The Company also assumed POS Portal's defined contribution plan upon acquisition, which provides a matching contribution equal to
100%
of each participant's contribution, up to a maximum of
4%
. The Company's employer contributions under the POS Portal plan vest immediately.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Matching contributions
|
$
|
1,163
|
|
|
$
|
875
|
|
|
$
|
735
|
|
Discretionary contributions
|
4,700
|
|
|
3,413
|
|
|
3,617
|
|
Total contributions
|
$
|
5,863
|
|
|
$
|
4,288
|
|
|
$
|
4,352
|
|
Internationally, the Company contributes to either plans required by local governments or to various employee annuity plans. Additionally, the Company maintains a non-qualified, unfunded deferred compensation plan that allows eligible executives to defer a portion of their compensation in addition to receiving discretionary matching contributions from the Company. Employer contributions are vested over a
five
-year period.
(12) Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduces the corporate federal tax rate from
35%
to
21%
effective January 1, 2018 and implements a modified territorial tax system. Since the Company has a June 30th fiscal year-end, the lower tax rate resulted in a blended U.S. statutory federal rate of approximately
28%
for the fiscal year ended June 30, 2018. The U.S. statutory federal rate will be
21%
for subsequent fiscal years. As part of of the Tax Act, U.S. companies are required to pay a one-time transition tax on the deemed repatriation of undistributed foreign earnings and to remeasure deferred tax assets and liabilities.
In response to the Tax Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that provides guidance on accounting for the impact of the Tax Act. SAB 118 allows companies to record provisional amounts to the extent reasonably estimable and adjust them over time as more information becomes available, not to extend beyond the measurement period of one year from the enactment of the Tax Act. Accordingly, the Company has recorded provisional amounts for the one-time transition tax on the deemed repatriation of undistributed foreign earnings and the remeasurement of deferred tax assets and liabilities. The final impact from the enactment of the Tax Act may differ from the estimates provided for a number of reasons including, but not limited to, the issuance of final regulations, interpretation of the law and refinement of the Company's ongoing analysis of the new tax positions. Any changes in the provisional amount recognized will be reflected in the income tax expense in the period they are identified.
The Tax Act includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax as part of the transition. For the fiscal year ended
June 30, 2018
, the Company recognized provisional income tax expense of
$9.6 million
for a one-time transition tax liability on total post-1986 foreign subsidiaries’ earnings and profits (“E&P”) that were previously deferred from U.S. income taxes. No additional income tax expense has been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent for these entities as such amounts continue to be indefinitely reinvested in foreign operations.
As part of accounting for the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which such deferred taxes are expected to reverse in the future, which is generally
21%
. For the fiscal year ended
June 30, 2018
the Company recognized provisional income tax benefit of
$1.6 million
for the remeasurement of the Company’s deferred tax asset and liability balances.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
Income tax expense (benefit) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
Federal
|
$
|
38,263
|
|
|
$
|
31,149
|
|
|
$
|
21,855
|
|
State
|
3,503
|
|
|
2,615
|
|
|
1,652
|
|
Foreign
|
9,203
|
|
|
269
|
|
|
6,100
|
|
Total current
|
50,969
|
|
|
34,033
|
|
|
29,607
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(9,987
|
)
|
|
(3,832
|
)
|
|
3,990
|
|
State
|
(1,962
|
)
|
|
(397
|
)
|
|
365
|
|
Foreign
|
(11,248
|
)
|
|
2,445
|
|
|
(1,571
|
)
|
Total deferred
|
(23,197
|
)
|
|
(1,784
|
)
|
|
2,784
|
|
Provision for income taxes
|
$
|
27,772
|
|
|
$
|
32,249
|
|
|
$
|
32,391
|
|
A reconciliation of the U.S. Federal income tax expense at a blended statutory rate of
28%
for the fiscal year ended
June 30, 2018
and a statutory rate of
35%
for the
June 30, 2017
and
2016
fiscal years to actual income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
U.S. statutory rate
|
28.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
U.S. Federal income tax at statutory rate
|
$
|
17,094
|
|
|
$
|
35,524
|
|
|
$
|
33,603
|
|
Increase (decrease) in income taxes due to:
|
|
|
|
|
|
State and local income taxes, net of Federal benefit
|
1,883
|
|
|
1,729
|
|
|
1,578
|
|
Tax credits
|
(1,825
|
)
|
|
(1,430
|
)
|
|
(2,517
|
)
|
Valuation allowance
|
1,530
|
|
|
444
|
|
|
541
|
|
Effect of foreign operations, net
|
(1,396
|
)
|
|
(1,477
|
)
|
|
(1,150
|
)
|
Stock compensation
|
1,049
|
|
|
(61
|
)
|
|
(62
|
)
|
Capitalized acquisition costs
|
48
|
|
|
231
|
|
|
70
|
|
Nontaxable income
|
(9
|
)
|
|
(4,437
|
)
|
|
—
|
|
Disallowed interest
|
1,888
|
|
|
2,011
|
|
|
571
|
|
Other
|
(1,438
|
)
|
|
(285
|
)
|
|
(243
|
)
|
U.S. Tax Reform transition tax
|
9,609
|
|
|
—
|
|
|
—
|
|
U.S. Tax Reform impact of rate change on deferred taxes
|
(1,615
|
)
|
|
—
|
|
|
—
|
|
Belgium Tax Reform impact of rate change on deferred taxes
|
1,040
|
|
|
—
|
|
|
—
|
|
Other jurisdictions impact of rate change on deferred taxes
|
(86
|
)
|
|
—
|
|
|
—
|
|
Provision for income taxes
|
$
|
27,772
|
|
|
$
|
32,249
|
|
|
$
|
32,391
|
|
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Deferred tax assets derived from:
|
|
|
|
Allowance for accounts receivable
|
$
|
12,874
|
|
|
$
|
11,687
|
|
Inventories
|
4,060
|
|
|
5,235
|
|
Nondeductible accrued expenses
|
7,426
|
|
|
3,968
|
|
Net operating loss carryforwards
|
5,350
|
|
|
3,141
|
|
Tax credits
|
5,795
|
|
|
4,094
|
|
Timing of amortization deduction from goodwill
|
5,756
|
|
|
1,285
|
|
Deferred compensation
|
5,696
|
|
|
7,934
|
|
Stock compensation
|
2,809
|
|
|
5,424
|
|
Timing of amortization deduction from intangible assets
|
2,510
|
|
|
3,032
|
|
Total deferred tax assets
|
52,276
|
|
|
45,800
|
|
Valuation allowance
|
(5,098
|
)
|
|
(3,473
|
)
|
Total deferred tax assets, net of allowance
|
47,178
|
|
|
42,327
|
|
Deferred tax liabilities derived from:
|
|
|
|
Timing of depreciation and other deductions from building and equipment
|
(7,468
|
)
|
|
(7,778
|
)
|
Timing of amortization deduction from goodwill
|
(1,782
|
)
|
|
(5,013
|
)
|
Timing of amortization deduction from intangible assets
|
(17,498
|
)
|
|
(2,053
|
)
|
Total deferred tax liabilities
|
(26,748
|
)
|
|
(14,844
|
)
|
Net deferred tax assets
|
$
|
20,430
|
|
|
$
|
27,483
|
|
The components of pretax earnings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Domestic
|
$
|
66,416
|
|
|
$
|
79,871
|
|
|
$
|
76,062
|
|
Foreign
|
(5,491
|
)
|
|
21,624
|
|
|
19,948
|
|
Worldwide pretax earnings
|
$
|
60,925
|
|
|
$
|
101,495
|
|
|
$
|
96,010
|
|
As of
June 30, 2018
, there were (i) gross net operating loss carryforwards of approximately
$2.4 million
for U.S. federal income tax purposes; (ii) gross state net operating loss carryforwards of approximately
$4.1 million
; (iii) foreign gross net operating loss carryforwards of approximately
$17.8 million
; (iv) state income tax credit carryforwards of approximately
$2.2 million
that will began to expire in the 2018 tax year; and (v) withholding tax credits of approximately
$3.5 million
; and (vi) foreign tax credits of
$0.6 million
. The Company maintains a valuation allowance of
$0.6 million
for foreign net operating losses, a less than
$0.1 million
valuation allowance for state net operating losses, a
$3.5 million
valuation allowance for withholding tax credits, a
$0.6 million
valuation allowance for foreign tax credits, and
$0.3 million
valuation allowance for state income tax credits, and a less than
$0.1 million
valuation allowance for the notional interest deduction, where it was determined that, in accordance with ASC 740, it is more likely than not that they cannot be utilized.
The Company adopted ASU 2016-09 during fiscal year 2018 which required the Company to recognize excess tax benefits and tax deficiencies as income tax expense or benefit for stock award settlements that were previously recognized as additional paid-in-capital. As a result of these changes, the Company recognized net tax expense of
$1.0 million
for the fiscal year ended June 30, 2018.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
The one-time transition tax is based on the total post-1986 foreign subsidiaries’ earnings and profits (“E&P”) were previously deferred from U.S. income taxes. Prior to the passage of the Tax Act, the Company did not provide for U.S. income taxes for undistributed earnings of foreign subsidiaries that were considered to be retained indefinitely for reinvestment. The Company will continue to distribute the earnings of its Canadian subsidiary, but earnings from all other geographies will continue to be considered retained indefinitely for reinvestment. It has been the practice of the Company to reinvest those earnings in the business outside the United States. Apart from the one-time transition tax, any incremental deferred income taxes on the unremitted foreign earnings are not expected to be material.
As of
June 30, 2018
, the Company had gross unrecognized tax benefits of
$2.1 million
,
$1.4 million
of which, if recognized, would affect the effective tax rate. This reflects a decrease of
$0.1 million
on a gross basis over the prior fiscal year. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Income Statement. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet. The total amount of interest and penalties accrued, but excluded from the table below were
$1.2 million
for the fiscal year ending
June 30, 2018
and
$1.1 million
for the fiscal year ended
June 30, 2017
and
$1.2 million
for the fiscal year ended
June 30, 2016
, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Beginning Balance
|
$
|
2,176
|
|
|
$
|
2,148
|
|
|
$
|
1,301
|
|
Additions based on tax positions related to the current year
|
157
|
|
|
174
|
|
|
326
|
|
Additions for tax positions of prior years
|
—
|
|
|
—
|
|
|
658
|
|
Reduction for tax positions of prior years
|
(280
|
)
|
|
(146
|
)
|
|
(137
|
)
|
Ending Balance
|
$
|
2,053
|
|
|
$
|
2,176
|
|
|
$
|
2,148
|
|
Financial results for the Belgium business produced pre-tax loss of approximately
$5.3 million
for the year ended
June 30, 2018
. To the extent the Belgium business does not return to profitability as expected, this could affect the valuation of certain deferred tax assets. However, the Belgium business reported cumulative taxable income for two of the four prior years. In the judgment of management, the conditions that gave rise to the fiscal current year and prior year pre-tax losses are temporary and that it is more likely than not that the deferred tax asset will be realized. A corporate tax reform law was enacted in Belgium on December 25, 2017, which reduces the corporate tax rate from
33%
to
25%
over a three-year period. The company remeasured certain deferred tax assets and liabilities based on the rates at which such deferred taxes are expected to reverse in the future. As a result, the Company recognized income tax expense of
$1.0 million
during the year ended
June 30, 2018
.
During the quarter ended June 30, 2017, a lawsuit filed by ScanSource Brazil with the Brazilian Supreme Court in 2014 regarding the tax treatment of certain Brazilian state-provided tax benefits was settled in Scansource Brazil’s favor. As a result, Scansource Brazil was awarded and recovered a tax settlement. The Company recorded, discrete to the June 30, 2017 quarter, the income tax benefit associated with that recovery equal to approximately
$4.5 million
.
The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the United States federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With certain exceptions, the Company is no longer subject to state and local, or non-United States income tax examinations by tax authorities for tax years before June 30,
2013
.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
(13) Commitments and Contingencies
Leases
The Company leases office and warehouse space under non-cancelable operating leases that expire through 2023. The Company also leases certain equipment under a capital lease that expires in 2020. Lease expense and future minimum lease payments under operating leases and capital leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Lease expense
|
$
|
9,824
|
|
|
$
|
8,703
|
|
|
$
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Payments
|
|
Capital Lease Payments
|
|
Total Payments
|
|
(in thousands)
|
Fiscal Year Ended June 30,
|
|
|
|
|
|
2019
|
$
|
8,196
|
|
|
$
|
675
|
|
|
$
|
8,871
|
|
2020
|
6,160
|
|
|
675
|
|
|
6,835
|
|
2021
|
5,316
|
|
|
—
|
|
|
5,316
|
|
2022
|
4,185
|
|
|
—
|
|
|
4,185
|
|
2023
|
3,404
|
|
|
—
|
|
|
3,404
|
|
Thereafter
|
10,817
|
|
|
—
|
|
|
10,817
|
|
Total future minimum lease payments
|
38,078
|
|
|
1,350
|
|
|
39,428
|
|
Less: amounts representing interest on capital lease
|
—
|
|
|
30
|
|
|
30
|
|
Total future minimum principal lease payments
|
$
|
38,078
|
|
|
$
|
1,320
|
|
|
$
|
39,398
|
|
On July 6, 2016, the Company entered into an amended agreement to continue to lease approximately
741,000
square feet for distribution, warehousing and storage purposes in a building located in Southaven, Mississippi. The term of the lease is
135
months with
2
consecutive
5
-year extension options.
On December 7, 2017 the Company entered into a new lease agreement and amended an existing lease agreement for certain information technology infrastructure located in the Greenville, South Carolina facility expiring in 2020. The Company determined each lease qualified as a capital lease and recorded a capital lease obligation equal to the present value of the minimum lease payments of
$1.9 million
in accordance.
The components of the Company's capital lease as of
June 30, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations
|
|
Property & Equipment
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
Short-Term
|
|
Long-Term
|
|
Total
|
|
(in thousands)
|
IT Infrastructure
|
$
|
1,583
|
|
|
$
|
(259
|
)
|
|
$
|
1,324
|
|
|
$
|
653
|
|
|
$
|
667
|
|
|
$
|
1,320
|
|
Commitments and Contingencies
A majority of the Company’s net revenues in fiscal years
2018
,
2017
and
2016
were received from the sale of products purchased from the Company’s
ten
largest suppliers. The Company has entered into written agreements with substantially all of its major
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
suppliers. While the Company’s agreements with most of its suppliers contain standard provisions for periodic renewals, these agreements generally permit termination by either party without cause upon
30
to
120
days' notice.
The Company or 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 or results of operations.
During fiscal year ended
June 30, 2018
, the Company recognized
$2.9 million
in proceeds from a legal tax settlement, net of attorney fees, in Brazil. Of the total settlement,
$2.5 million
is included in selling, general and administrative expenses and
$0.4 million
is included in interest income on the Consolidated Income Statements. During the fiscal year ended
June 30, 2017
, the Company recognized
$12.8 million
in proceeds from a legal settlement, net of attorney fees, included in other income (expense), net on the Consolidated Income Statements.
Capital Projects
The Company expects total capital expenditures to range from
$10.0 million
to
$15.0 million
during fiscal year 2019 primarily for rental equipment investments and facility improvements.
Pre-Acquisition Contingencies
During the Company's due diligence for the CDC acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. In connection with these contingencies, 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 Company settled the single remaining pre-acquisition contingency of approximately
$2.3 million
for CDC during the quarter ended March 31, 2018 and paid the remaining escrow balance to the former shareholders of CDC.
The table below summarizes the balances and line item presentation of CDC's pre-acquisition contingencies and corresponding indemnification receivables in the Company's consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(in thousands)
|
Assets
|
|
|
|
Prepaid expenses and other assets (current)
|
$
|
—
|
|
|
$
|
2,212
|
|
Other assets (noncurrent)
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
Other current liabilities
|
$
|
—
|
|
|
$
|
2,212
|
|
Other long-term liabilities
|
$
|
—
|
|
|
$
|
—
|
|
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 sellers deposited
$12.3 million
and
$8.7 million
into the escrow account for the years ended
June 30, 2018
and
2017
. The amount available after the impact of foreign currency translation, as of
June 30, 2018
and
2017
, for future pre-acquisition contingency settlements or to be released to the sellers was
$24.1 million
and
$13.0 million
, respectively.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
The table below summarizes the balances and line item presentation of Network1's pre-acquisition contingencies and corresponding indemnification receivables in the Company's consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(in thousands)
|
Assets
|
|
|
|
Prepaid expenses and other assets (current)
|
$
|
1,385
|
|
|
$
|
1,294
|
|
Other assets (noncurrent)
|
$
|
5,700
|
|
|
$
|
8,235
|
|
Liabilities
|
|
|
|
Other current liabilities
|
$
|
1,385
|
|
|
$
|
1,294
|
|
Other long-term liabilities
|
$
|
5,700
|
|
|
$
|
8,235
|
|
The net decline in the value of pre-acquisition contingencies for Network1 is primarily due to the expiration of the statute of limitations for identified pre-acquisition contingencies. The amount of reasonably possible undiscounted pre-acquisition contingencies as of
June 30, 2018
is estimated to range from
$6.7 million
to
$23.0 million
at this time, of which all exposures are indemnifiable under the share purchase agreement.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
(14) Segment Information
The Company is a leading provider of technology products and solutions to customers in specialty technology markets. The Company has
two
reportable segments, based on product, customer and service type.
Worldwide Barcode, Networking & Security Segment
The Worldwide Barcode, Networking & Security segment includes a portfolio of solutions primarily for enterprise mobile computing, data capture, barcode printing, POS, payments, networking, electronic physical security, cyber security and other technologies. We have business units within this segment in North America, Latin America and Europe. We see adjacencies among these technologies in helping our customers develop solutions. Data capture and POS 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. We have business units within this segment in North America, Latin America and Europe. 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.
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
Selected financial information for each business segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Sales:
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
2,628,988
|
|
|
$
|
2,389,256
|
|
|
$
|
2,361,670
|
|
Worldwide Communications & Services
|
1,217,272
|
|
|
1,178,930
|
|
|
1,178,556
|
|
|
$
|
3,846,260
|
|
|
$
|
3,568,186
|
|
|
$
|
3,540,226
|
|
Depreciation and amortization:
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
18,233
|
|
|
$
|
6,496
|
|
|
$
|
5,651
|
|
Worldwide Communications & Services
|
15,769
|
|
|
15,099
|
|
|
8,543
|
|
Corporate
|
3,493
|
|
|
3,373
|
|
|
2,960
|
|
|
$
|
37,495
|
|
|
$
|
24,968
|
|
|
$
|
17,154
|
|
Operating income:
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
56,911
|
|
|
$
|
49,727
|
|
|
$
|
52,227
|
|
Worldwide Communications & Services
|
10,900
|
|
|
39,768
|
|
|
45,513
|
|
Corporate
(1)
|
(172
|
)
|
|
(1,256
|
)
|
|
(863
|
)
|
|
$
|
67,639
|
|
|
$
|
88,239
|
|
|
$
|
96,877
|
|
Capital expenditures:
|
|
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
4,841
|
|
|
$
|
3,796
|
|
|
$
|
5,298
|
|
Worldwide Communications & Services
|
1,964
|
|
|
3,163
|
|
|
3,923
|
|
Corporate
|
1,354
|
|
|
1,890
|
|
|
2,860
|
|
|
$
|
8,159
|
|
|
$
|
8,849
|
|
|
$
|
12,081
|
|
Sales by Geography Category:
|
|
|
|
|
|
United States
|
$
|
2,877,225
|
|
|
$
|
2,719,413
|
|
|
$
|
2,655,760
|
|
International
(2)
|
999,245
|
|
|
882,446
|
|
|
920,098
|
|
Less intercompany sales
|
(30,210
|
)
|
|
(33,673
|
)
|
|
(35,632
|
)
|
|
$
|
3,846,260
|
|
|
$
|
3,568,186
|
|
|
$
|
3,540,226
|
|
|
|
|
|
|
|
(1)
For the years ended June 30, 2018, 2017 and 2016, the amounts shown above include acquisition costs.
(2)
For the years ended June 30, 2018, 2017 and 2016, there were no sales in excess of 10% of consolidated net sales to any single international country.
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(in thousands)
|
Assets:
|
|
|
|
Worldwide Barcode, Networking & Security
|
$
|
1,062,143
|
|
|
$
|
885,786
|
|
Worldwide Communications & Services
|
841,490
|
|
|
769,342
|
|
Corporate
|
41,662
|
|
|
63,175
|
|
|
$
|
1,945,295
|
|
|
$
|
1,718,303
|
|
Property and equipment, net by Geography Category:
|
|
|
|
United States
|
$
|
69,032
|
|
|
$
|
51,853
|
|
International
|
4,010
|
|
|
4,713
|
|
|
$
|
73,042
|
|
|
$
|
56,566
|
|
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
June 30, 2018
|
|
(15)
|
Accumulated Other Comprehensive (Loss) Income
|
The components of accumulated other comprehensive (loss) income, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Currency translation adjustment
|
$
|
(85,279
|
)
|
|
$
|
(73,217
|
)
|
|
$
|
(72,687
|
)
|
Unrealized gain on fair value of interest rate swap, net of tax
|
1,102
|
|
|
13
|
|
|
—
|
|
Accumulated other comprehensive loss
|
$
|
(84,177
|
)
|
|
$
|
(73,204
|
)
|
|
$
|
(72,687
|
)
|
The tax effect of amounts in comprehensive income (loss) reflect a tax expense or benefit as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended June 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Tax expense (benefit)
|
$
|
1,993
|
|
|
$
|
(396
|
)
|
|
$
|
327
|
|
|
|
|
|
|
|
On
August 20, 2018
, the Company acquired Canpango, a global Salesforce implementation and consulting partner with deep knowledge of CRM and integration with telecom systems. Canpango’s professional services are complementary to our cloud services offerings. Canpango joins the Company's Worldwide Communications & Services operating segment.