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

Quarterly period ended December 31, 2019

OR

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

Commission File Number: 000-26926
 
 
 
SCANSOURCELOGO4A291A04.JPG
ScanSource, Inc.

South Carolina
(State of Incorporation)

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

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

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

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

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

 
Emerging growth company

 
Non-accelerated filer

 
 
 
 

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




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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at January 31, 2020
Common Stock, no par value per share
 
25,345,798 shares



SCANSOURCE, INC.
INDEX TO FORM 10-Q
December 31, 2019
 
 
 
Page #
 
 
 
 
Item 1.
5
 
5
 
6
 
7
 
8
 
10
 
11
Item 2.
28
Item 3.
45
Item 4.
46
 
 
 
 
 
 
Item 1
47
Item 1A.
47
Item 2
47
Item 6.
48
 
 
49
 
 
 


3


FORWARD-LOOKING STATEMENTS

Forward-looking statements are included in the "Risk Factors," "Legal Proceedings," "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures About Market Risk" sections and elsewhere herein. Words such as "expects," "anticipates," "believes," "intends," "plans," "hopes," "forecasts," "seeks," "estimates," "goals," "projects," "strategy," "future," "likely," "may," "should," and variations of such words and similar expressions generally identify such forward-looking statements. Any forward-looking statement made by us in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q, except as required by law. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, changes in interest and exchange rates and regulatory regimes impacting our overseas operations, the failure of acquisitions to meet our expectations, the failure to manage and implement our organic growth strategy, credit risks involving our larger customers and suppliers, termination of our relationship with key suppliers or a significant modification of the terms under which we operate with a key supplier, the decline in demand for the products and services that we provide, reduced prices for the products and services that we provide due both to competitor and customer actions and the other factors set forth in "Risk Factors" contained in our Annual Report on Form 10-K for the year ended June 30, 2019.


4


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share information)
 
December 31, 2019
 
June 30, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,005

 
$
23,818

Accounts receivable, less allowance of $37,672 at December 31, 2019 and $38,849 at June 30, 2019
645,270

 
654,983

Inventories
742,979

 
697,343

Prepaid expenses and other current assets
109,075

 
101,171

Total current assets
1,539,329

 
1,477,315

Property and equipment, net
61,625

 
63,363

Goodwill
369,537

 
319,538

Identifiable intangible assets, net
117,981

 
127,939

Deferred income taxes
24,498

 
24,724

Other non-current assets
97,160

 
54,382

Total assets
$
2,210,130

 
$
2,067,261

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
672,906

 
$
558,101

Accrued expenses and other current liabilities
105,649

 
91,407

Current portion of contingent consideration
45,043

 
38,393

Income taxes payable
627

 
4,310

Short-term borrowings
2,098

 
4,590

Current portion of long-term debt
5,964

 
4,085

Total current liabilities
832,287

 
700,886

Deferred income taxes
1,248

 
1,395

Long-term debt, net of current portion
146,925

 
151,014

Borrowings under revolving credit facility
202,758

 
200,817

Long-term portion of contingent consideration

 
39,532

Other long-term liabilities
99,332

 
59,488

Total liabilities
1,282,550

 
1,153,132

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, 25,345,798 and 25,408,397 shares issued and outstanding at December 31, 2019 and June 30, 2019, respectively
61,095

 
64,287

Retained earnings
962,825

 
939,930

Accumulated other comprehensive loss
(96,340
)
 
(90,088
)
Total shareholders’ equity
927,580

 
914,129

Total liabilities and shareholders’ equity
$
2,210,130

 
$
2,067,261

 
 
 
 
June 30, 2019 amounts are derived from audited consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.


5


SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(In thousands, except per share data)
 
 
Quarter ended
 
Six months ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
989,503

 
$
1,046,021

 
$
1,996,430

 
$
2,018,921

Cost of goods sold
875,619

 
925,543

 
1,770,447

 
1,786,229

Gross profit
113,884

 
120,478

 
225,983

 
232,692

Selling, general and administrative expenses
83,121

 
80,950

 
165,632

 
158,880

Depreciation expense
3,459

 
3,272

 
7,008

 
6,538

Intangible amortization expense
5,631

 
4,700

 
10,593

 
9,703

Change in fair value of contingent consideration
3,176

 
1,850

 
5,649

 
6,434

Operating income
18,497

 
29,706

 
37,101

 
51,137

Interest expense
3,751

 
3,119

 
7,543

 
5,746

Interest income
(749
)
 
(264
)
 
(1,548
)
 
(715
)
Other (income) expense, net
(225
)
 
201

 
(195
)
 
233

Income before income taxes
15,720

 
26,650

 
31,301

 
45,873

Provision for income taxes
4,354

 
6,668

 
8,405

 
11,570

Net income
$
11,366

 
$
19,982

 
$
22,896

 
$
34,303

Per share data:
 
 
 
 
 
 
 
Net income per common share, basic
$
0.45

 
$
0.78

 
$
0.90

 
$
1.34

Weighted-average shares outstanding, basic
25,274

 
25,640

 
25,407

 
25,619

 
 
 
 
 
 
 
 
Net income per common share, diluted
$
0.45

 
$
0.78

 
$
0.90

 
$
1.33

Weighted-average shares outstanding, diluted
25,358

 
25,750

 
25,488

 
25,752

See accompanying notes to these condensed consolidated financial statements.


6


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

 
Quarter ended
 
Six months ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
11,366

 
$
19,982

 
$
22,896

 
$
34,303

Unrealized (loss) gain on hedged transaction, net of tax
900

 
(615
)
 
(171
)
 
(469
)
Foreign currency translation adjustment
8,558

 
1,362

 
(6,085
)
 
(3,399
)
Comprehensive income
$
20,824

 
$
20,729

 
$
16,640

 
$
30,435

See accompanying notes to these condensed consolidated financial statements.


7



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

 
Common
Stock
(Shares)
 
Common
Stock
(Amount)
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at June 30, 2019
25,408,397

 
$
64,287

 
$
939,930

 
$
(90,088
)
 
$
914,129

Net income

 

 
11,530

 

 
11,530

Unrealized loss on hedged transaction, net of tax

 

 

 
(1,071
)
 
(1,071
)
Foreign currency translation adjustment

 

 

 
(14,639
)
 
(14,639
)
Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
786

 
(12
)
 

 

 
(12
)
Common stock repurchased
(168,068
)
 
(5,432
)
 

 

 
(5,432
)
Share-based compensation

 
1,246

 

 

 
1,246

Balance at September 30, 2019
25,241,115

 
$
60,089

 
$
951,460

 
$
(105,798
)
 
$
905,751

Net income

 

 
11,366

 

 
11,366

Unrealized loss on hedged transaction, net of tax

 

 

 
900

 
900

Foreign currency translation adjustment

 

 

 
8,558

 
8,558

Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes
104,683

 
(621
)
 

 

 
(621
)
Stock repurchased

 

 

 

 

Share-based compensation

 
1,627

 

 

 
1,627

Balance at December 31, 2019
25,345,798

 
$
61,095

 
$
962,825

 
$
(96,340
)
 
$
927,580

 
 
 
 
 
 
 
 
 
 
See accompanying notes to these condensed consolidated financial statements.

8



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

 
Common
Stock
(Shares)
 
Common
Stock
(Amount)
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at June 30, 2018
25,593,122

 
$
68,220

 
$
882,333

 
$
(84,177
)
 
$
866,376

Net income

 

 
14,322

 

 
14,322

Unrealized gain on hedged transaction, net of tax

 

 

 
146

 
146

Foreign currency translation adjustment

 

 

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

 
425

 

 

 
425

Share-based compensation

 
1,390

 

 

 
1,390

Balance at September 30, 2018
25,607,664

 
$
70,035

 
$
896,655

 
$
(88,793
)
 
$
877,897

Net income

 

 
19,982

 

 
19,982

Unrealized loss on hedged transaction, net of tax

 

 

 
(615
)
 
(615
)
Foreign currency translation adjustment

 

 

 
1,362

 
1,362

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

 
(321
)
 

 

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

 

 
(308
)
Share based compensation

 
1,506

 

 

 
1,506

Balance at December 31, 2018
25,702,342

 
$
70,912

 
$
916,637

 
$
(88,046
)
 
$
899,503

 
 
 
 
 
 
 
 
 
 
See accompanying notes to these condensed consolidated financial statements.


9


SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six months ended
 
December 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
22,896

 
$
34,303

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,889

 
18,203

Amortization of debt issuance costs
209

 
168

Provision for doubtful accounts
2,800

 
2,187

Share-based compensation
2,849

 
2,907

Deferred income taxes
(332
)
 
1,835

Change in fair value of contingent consideration
5,649

 
6,434

Contingent consideration payments excess
(3,050
)
 
(7,444
)
Finance lease interest
39

 

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
6,595

 
(30,818
)
Inventories
(48,559
)
 
(110,909
)
Prepaid expenses and other assets
(7,001
)
 
914

Other non-current assets
(7,919
)
 
1,849

Accounts payable
113,591

 
43,853

Accrued expenses and other liabilities
15,379

 
(3,993
)
Income taxes payable
(3,975
)
 
(11,259
)
Net cash provided by (used in) operating activities
118,060

 
(51,770
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(2,750
)
 
(5,780
)
Cash paid for business acquisitions, net of cash acquired
(48,921
)
 
(32,183
)
Net cash used in investing activities
(51,671
)
 
(37,963
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit
1,084,158

 
1,126,333

Repayments on revolving credit
(1,084,138
)
 
(1,003,022
)
Repayments on short-term borrowings, net

(2,450
)
 

Repayments on long-term debt
(2,210
)
 
(331
)
Repayments of finance lease obligations
(1,115
)
 
(330
)
Contingent consideration payments
(35,481
)
 
(35,616
)
Exercise and issuance of equity awards
720

 
1,509

Taxes paid on settlement of equity awards
(1,354
)
 
(1,404
)
Repurchase of common stock
(6,077
)
 
(308
)
Net cash (used in) provided by financing activities
(47,947
)
 
86,831

Effect of exchange rate changes on cash and cash equivalents
(255
)
 
121

Increase (decrease) in cash and cash equivalents
18,187

 
(2,781
)
Cash and cash equivalents at beginning of period
23,818

 
25,530

Cash and cash equivalents at end of period
$
42,005

 
$
22,749

 
 
 
 
See accompanying notes to these condensed consolidated financial statements.

10


SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) Business and Summary of Significant Accounting Policies

Business Description
ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “ScanSource”) is 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 telecom and cloud services to market. The Company operates in the United States, Canada, Brazil, additional Latin American countries, and Europe. The Company's two operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services, are based on product, customer and service type.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("U.S. GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position at December 31, 2019 and June 30, 2019, the results of operations for the quarters and six months ended December 31, 2019 and 2018, the statements of comprehensive income for the quarters and six months ended December 31, 2019 and 2018, the statements of shareholders' equity for the quarters and six months ended December 31, 2019 and 2018, and the statements of cash flows for the six months ended December 31, 2019 and 2018. The results of operations for the quarters and six months ended December 31, 2019 and 2018 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

Summary of Significant Accounting Policies

Except as described below, there have been no material changes to the Company’s significant accounting policies for the six months ended December 31, 2019 from the policies described in the notes to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2019. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

See Note 11 Leases for a discussion of the policies established upon adoption of Accounting Standards Update ("ASU") 2016-02, Leases (ASC Topic 842) in fiscal year 2020.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with original maturities of three months or less, when purchased, to be cash equivalents. The Company maintains zero-balance disbursement accounts at various financial institutions at which the Company does not maintain significant depository relationships. Due to the terms of the agreements governing these accounts, the Company generally does not have the right to offset outstanding checks written from these accounts against cash on hand, and the respective institutions are not legally obligated to honor the checks until sufficient funds are transferred to fund the checks. As a result, checks released but not yet cleared from these accounts in the amounts of $29.3 million and $7.4 million are included in accounts payable on the condensed consolidated balance at December 31, 2019 and June 30, 2019, respectively.

Long-lived Assets


11


The Company presents depreciation expense and intangible amortization expense on the Condensed Consolidated Income Statements. The Company's depreciation expense related to selling, general and administrative costs totaled $3.5 million and $7.0 million for the quarter and six months ended December 31, 2019, respectively, and $3.3 million and $6.5 million for the quarter and six months ended December 31, 2018, respectively. Depreciation expense reported as part of cost of goods sold on the Condensed Consolidated Income Statements totaled $0.6 million and $1.3 million for the quarter and six months ended December 31, 2019, respectively, and $1.0 million and $2.0 million for the quarter and six months ended December 31, 2018, respectively. The Company's amortization expense reported on the Condensed Consolidated Income Statements relates to selling, general and administrative costs, not the cost of selling goods. Intangible amortization expense totaled $5.6 million and $10.6 million for the quarter and six months ended December 31, 2019, respectively, and $4.7 million and $9.7 million for the quarter and six months ended December 31, 2018, respectively.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (ASC 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 are 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 is 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. This ASU is effective for the Company beginning in the first quarter of fiscal 2020. Entities are required to use the modified retrospective approach of adoption, with the option of applying the requirements of the standard either (1) retrospectively to each prior comparative reporting period presented or (2) retrospectively at the beginning of the period of adoption.  The Company adopted the standard on July 1, 2019 and applied it at the beginning of the period of adoption. Therefore, upon adoption, financial information and disclosures are not updated for comparative reporting periods under the new standard. Additionally, the Company has elected the transition package of practical expedients upon adoption which, among other things, allows an entity to not reassess the historical lease classification. Upon adoption, the Company recognize right-of-use assets and corresponding lease liabilities for both operating and finance leases of approximately $37.0 million on the Condensed Consolidated Balance Sheets. The adoption of this standard was not material to the Company’s Condensed Consolidated Income Statements. See Note 11 for additional lease disclosures.

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

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASC 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. The guidance requires adoption using a modified retrospective approach. The presentation and disclosure requirements apply prospectively. The Company adopted the standard in the current fiscal year, and it had no impact on the consolidated financial statements.

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

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.


12


(2) Revenue Recognition

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

The Company adopted ASC 606, effective July 1, 2018 utilizing the full retrospective method. In determining the appropriate amount of revenue to recognize, the Company applies the following five-step model: (i) identify contracts with customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company recognizes revenue as control of products and services are transferred to customers, which is generally at the point of shipment. The Company delivers products to customers in several ways, including: (i) shipment from the Company's warehouse, (ii) drop-shipment directly from the supplier, or (iii) electronic delivery for non-physical products.

Principal versus Agent Considerations

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

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

Related to the Company’s Intelisys business, the Company acts as a master agent connecting independent sales partners with service providers or suppliers who offer telecom and cloud services to end-customers. Intelisys’ sales partners earn commission payments from those service providers or suppliers on end-customer sales. Intelisys provides commission processing services to sales partners, earning a percentage of the commission stream. Because the Company acts as an agent, revenue is recognized on a net basis.

Variable Considerations

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

Contract Balances

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

Disaggregation of Revenue

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


13


 
 
Quarter ended December 31, 2019
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
686,237

 
$
287,910

 
$
974,147

Master agency and professional services(a)
 

 
15,356

 
15,356

 
 
$
686,237

 
$
303,266

 
$
989,503

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31, 2019
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
1,384,028

 
$
581,866

 
$
1,965,894

Master agency and professional services(a)
 

 
30,536

 
30,536

 
 
$
1,384,028

 
$
612,402

 
$
1,996,430

 
 
 
 
 
 
 
(a) Includes Intelisys Communications, Inc., Canpango, and Intelisys Global Ltd.

 
 
Quarter ended December 31, 2018
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
701,639

 
$
330,827

 
$
1,032,466

Master agency and professional services(a)
 

 
13,555

 
13,555

 
 
$
701,639

 
$
344,382

 
$
1,046,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31, 2018
 
 
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
Revenue by product/service:
 
 
 
 
 
 
Technology solutions
 
$
1,356,752

 
$
635,602

 
$
1,992,354

Master agency and professional services(a)
 

 
26,567

 
26,567

 
 
$
1,356,752

 
$
662,169

 
$
2,018,921

 
 
 
 
 
 
 
(a) Includes Intelisys Communications, Inc., Canpango, and Intelisys Global Ltd.


(3) Earnings Per Share

14



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

 
Quarter ended
 
Six months ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income
$
11,366

 
$
19,982

 
$
22,896

 
$
34,303

Denominator:
 
 
 
 
 
 
 
Weighted-average shares, basic
25,274

 
25,640

 
25,407

 
25,619

Dilutive effect of share-based payments
84

 
110

 
81

 
133

Weighted-average shares, diluted
25,358

 
25,750

 
25,488

 
25,752

 
 
 
 
 
 
 
 
Net income per common share, basic
$
0.45

 
$
0.78

 
$
0.90

 
$
1.34

Net income per common share, diluted
$
0.45

 
$
0.78

 
$
0.90

 
$
1.33



For the quarter and six months ended December 31, 2019, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 975,907 and 961,980, respectively. For the quarter and six months ended December 31, 2018, weighted-average shares outstanding excluded from the computation of diluted earnings per share were 573,475 and 433,993, respectively.

(4) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following: 
 
December 31, 2019
 
June 30, 2019
 
(in thousands)
Foreign currency translation adjustment
$
(93,994
)
 
$
(87,913
)
Unrealized loss on hedged transaction, net of tax
(2,346
)
 
(2,175
)
Accumulated other comprehensive loss
$
(96,340
)
 
$
(90,088
)
 
 
 
 


The tax effect of amounts in comprehensive income (loss) reflect a tax expense or benefit as follows:

 
Quarter ended December 31,
 
Six months ended December 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Tax (expense) benefit
$
(42
)
 
$
(509
)
 
$
434

 
$
(6
)

(5) Acquisitions
intY

On July 1, 2019, the Company acquired all of the outstanding shares of intY and its CASCADE cloud services distribution platform. The purchase price of this acquisition, net of cash acquired, was approximately $48.9 million. The allocation of the purchase price to the assets and liabilities acquired, including the valuation of the identifiable intangible assets, has not been concluded as of the reporting date. The impact of this acquisition was not material to the consolidated financial statements. The Company recognized $0 million and $0.4 million for the quarter and six months ended December 31, 2019, respectively, in acquisition-related costs

15


included in selling, general and administrative expenses on the Condensed Consolidated Income Statements in connection with this acquisition. This acquisition is included in the Worldwide Communications & Services segment.

RPM, Canpango and Intelisys Global

During the quarter ended December 31, 2018, the Company acquired the assets of RPM Software ("RPM"), a business process software developer with focus in the telecom channel business for calculating and paying agency commissions in an automated cloud-based system. During the quarter ended September 30, 2018, the Company completed the acquisition of Canpango, a global Salesforce implementation and consulting business with deep knowledge of customer relationship management (CRM) and integration with telecom systems. Intelisys Global was also acquired during the quarter ended September 30, 2018. The total combined purchase price for all companies, net of cash acquired, was approximately $32.2 million. The purchase price of these collective acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date. Purchase accounting was finalized during the year ended June 30, 2019. The impact of these acquisitions was not material to the consolidated financial statements. The Company recognized $0.4 million and $0.8 million during the quarter and six months ended December 31, 2018, respectively, in acquisition-related costs included in selling, general and administrative expenses on the Condensed Consolidated Income Statements in connection with these acquisitions. RPM, Canpango, and Intelisys Global are included in the Worldwide Communications & Services segment.

(6) Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the six months ended December 31, 2019, by reporting segment, are set forth in the table below. Additions to goodwill for the current year are due to the acquisition of intY. The allocation of the purchase price for the intY acquisition, including the valuation of the identifiable intangible assets, has not been concluded as of the reporting date.

 
Worldwide Barcode, Networking & Security Segment
 
Worldwide Communications & Services Segment
 
Total
 
(in thousands)
Balance at June 30, 2019
$
137,077

 
$
182,461

 
$
319,538

Additions

 
49,835

 
49,835

     Foreign currency translation adjustment
47

 
117

 
164

Balance at December 31, 2019
$
137,124

 
$
232,413

 
$
369,537



The following table shows changes in the amount recognized for net identifiable intangible assets for the six months ended December 31, 2019.

 
Net Identifiable Intangible Assets
 
(in thousands)
Balance at June 30, 2019
$
127,939

Additions

Amortization expense
(10,593
)
Foreign currency translation adjustment
635

Balance at December 31, 2019
$
117,981




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

The following table presents the Company’s debt at December 31, 2019 and June 30, 2019.


16


 
December 31, 2019
 
June 30, 2019
 
(in thousands)
Short-term borrowings
$
2,098

 
$
4,590

Current portion of long-term debt
5,964

 
4,085

Mississippi revenue bond, net of current portion
4,425

 
4,764

Senior secured term loan facility, net of current portion
142,500

 
146,250

Borrowings under revolving credit facility
202,758

 
200,817

Total debt
$
357,745

 
$
360,506



Short-term Borrowings

The Company has a bank overdraft facility with Bank     of America used by its European subsidiaries. The facility allows the Company to disburse checks in excess of bank balances up to $14.0 million U.S. dollar equivalent for up to seven days. Borrowings under the overdraft facility bear interest at a rate equal to a spread of 1.0% over the applicable currency's London Interbank Offered Rate ("LIBOR") with a zero percent floor. Since borrowings outstanding under the overdraft facility at December 31, 2019 were denominated in euros, which bore a negative LIBOR rate, the interest applicable to the Company was 1.0%. There was $2.1 million outstanding balance on the overdraft facility at December 31, 2019 and $4.6 million outstanding at June 30, 2019.

Credit Facility

The Company has a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (the “Amended Credit Agreement”). On April 30, 2019, the Company amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. The Amended Credit Agreement includes (i) a five-year $350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. Pursuant to an “accordion feature,” the Company may increase its borrowings up to an additional $250 million for a total of up to $750 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit, subject to obtaining additional credit commitments from the lenders participating in the increase. The Company incurred debt issuance costs of $1.1 million in connection with the amendments to the Amended Credit Agreement on April 30, 2019. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.

At the Company's option, loans under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the LIBOR or alternate base rate depending upon the Company's net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash to trailing four-quarter adjusted earnings before interest expense, taxes, depreciation and amortization ("EBITDA") (the "Leverage Ratio"). This spread ranges from 1.00% to 1.75% for LIBOR-based loans and 0.00% to 0.75% for alternate base rate loans. Additionally, the Company is charged commitment fees ranging from 0.15% to 0.30%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65% of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement. Under the terms of the revolving credit facility, the payment of cash dividends is restricted.

At December 31, 2019, the spread in effect was 1.750% for LIBOR-based loans and 0.750% for alternate base rate loans. The commitment fee rate in effect at December 31, 2019 was 0.30%. The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, the Company’s Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. The Company was in compliance with all covenants under the credit facility at December 31, 2019.


17


The average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the six month periods ended December 31, 2019 and 2018 was $253.1 million and $296.1 million, respectively. There was $147.2 million and $149.2 million available for additional borrowings at December 31, 2019 and June 30, 2019, respectively. There were letters of credit issued under the multi-currency revolving credit facility of $0.3 million at December 31, 2019. There were no letters of credit issued at June 30, 2019.

Mississippi Revenue Bond

On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100% of the principal amount outstanding. At December 31, 2019, the Company was in compliance with all covenants under this bond. The interest rates at December 31, 2019 and June 30, 2019 were 2.540% and 3.280%, respectively.
 
Debt Issuance Costs

At December 31, 2019, net debt issuance costs associated with the credit facility and bond totaled $1.8 million and are being amortized through the maturity date of each respective debt instrument.

(8) Derivatives and Hedging Activities

The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the 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, through forward contracts or other hedging instruments with third parties. These contracts hedge the exchange of various currencies, including the U.S. dollar, Brazilian real, euro, British pound, Canadian dollar, Mexican peso, Chilean peso, Colombian peso, and Peruvian nuevo sol. While the Company utilizes foreign exchange contracts to hedge foreign currency exposure, the Company's foreign exchange policy prohibits the use of derivative financial instruments for speculative purposes.

The Company had contracts outstanding for purposes of managing cash flows with notional amounts of $112.8 million and $110.7 million for the exchange of foreign currencies at December 31, 2019 and June 30, 2019, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures included in the Condensed Consolidated Income Statements for the quarters and six months ended December 31, 2019 and 2018 are as follows:

 
Quarter ended
 
Six months ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Net foreign exchange derivative contract losses (gains)
$
2,315

 
$
(964
)
 
$
200

 
$
(948
)
Net foreign currency transactional and re-measurement (gains) losses
(2,417
)
 
1,384

 
(391
)
 
1,465

Net foreign currency exchange (gains) losses
$
(102
)
 
$
420

 
$
(191
)
 
$
517




18


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

Interest Rates - The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. The Company manages its exposure to changes in interest rates by using interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating rate debt. The Company entered into an interest rate swap agreement, which was subsequently settled, and entered into a new amended agreement on April 30, 2019. The swap agreement has a notional amount of $100.0 million, with a $50.0 million tranche scheduled to mature on April 30, 2024 and a $50.0 million tranche scheduled to mature April 30, 2026. This swap agreement is designated as a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for the quarters ended December 31, 2019 and 2018.

The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive (Loss) Income for the quarters and six months ended December 31, 2019 and 2018, are as follows:

 
 
Quarter ended
 
Six months ended
 
 
December 31,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Net interest expense (income) recognized as a result of interest rate swap
 
$
136

 
$
(57
)
 
$
163

 
$
83

Unrealized gain (loss) in fair value of interest rate swap
 
1,068

 
(751
)
 
(372
)
 
(699
)
Net increase (decrease) in accumulated other comprehensive (loss) income
 
$
1,204

 
$
(808
)
 
$
(209
)
 
$
(616
)
Income tax effect
 
304

 
(193
)
 
(38
)
 
(147
)
Net increase (decrease) in accumulated other comprehensive (loss) income, net of tax
 
$
900

 
$
(615
)
 
$
(171
)
 
$
(469
)


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

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

 
$
125

 
$

 
$
165

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

 
$
320

 
$

 
$
168

Interest rate swap agreement
Other long-term liabilities
 
$
3,627

 
$

 
$
3,504

 
$





19


(9) Fair Value of Financial Instruments

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

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

The assets and liabilities maintained by the Company that are required to be measured or disclosed at fair value on a recurring basis include the Company’s various debt instruments, deferred compensation plan investments, outstanding forward foreign currency exchange contracts, interest rate swap agreements and contingent consideration owed to the previous owners of Network1 and Intelisys. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to a variable rate using the market approach (Level 2 criteria).

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at December 31, 2019:

 
Total
 
Quoted
prices in
active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan investments, current and non-current portion
$
28,839

 
$
28,839

 
$

 
$

Forward foreign currency exchange contracts
125

 

 
125

 

Total assets at fair value
$
28,964

 
$
28,839

 
$
125

 
$

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan investments, current and non-current portion
$
28,839

 
$
28,839

 
$

 
$

Forward foreign currency exchange contracts
320

 

 
320

 

Interest rate swap agreement
3,627

 

 
3,627

 

Liability for contingent consideration
45,043

 

 

 
45,043

Total liabilities at fair value
$
77,829

 
$
28,839

 
$
3,947

 
$
45,043


The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at June 30, 2019:


20


 
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
$
25,787

 
$
25,787

 
$

 
$

Forward foreign currency exchange contracts
165

 

 
165

 

Total assets at fair value
$
25,952

 
$
25,787

 
$
165

 
$

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan investments, current and non-current portion
$
25,787

 
$
25,787

 
$

 
$

Forward foreign currency exchange contracts
168

 

 
168

 

Interest rate swap agreement
3,504

 

 
3,504

 

Liability for contingent consideration
77,925

 

 

 
77,925

Total liabilities at fair value
$
107,384

 
$
25,787

 
$
3,672

 
$
77,925



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

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

Network1 and Intelisys are part of the Company's Worldwide Communications & Services segment. The final earnout payment due to former shareholders of Network1 was paid during fiscal year ended June 30, 2019. The table below provides a summary of the changes in fair value of the Company's contingent considerations for the Intelisys earnout, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended December 31, 2019.
 
Quarter ended December 31, 2019
Six months ended December 31, 2019
 
Worldwide Communications & Services Segment
 
(in thousands)
Fair value at beginning of period
$
80,397

 
$
77,925

Payments
(38,531
)
 
(38,531
)
Change in fair value of contingent consideration
3,176

 
5,649

Fair value at end of period
$
45,043

 
$
45,043



21



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

 
Quarter ended December 31, 2018
 
Six months ended December 31, 2018
 
Worldwide Communications & Services Segment
 
(in thousands)
Fair value at beginning of period
$
80,173

 
$
108,233

Payments
(10,813
)
 
(43,060
)
Change in fair value of contingent consideration
1,850

 
6,434

Foreign currency translation adjustment
676

 
279

Fair value at end of period
$
71,886

 
$
71,886



The fair values of amounts owed are recorded in current portion of contingent consideration and long-term portion of contingent consideration in the Company’s Condensed Consolidated Balance Sheets. In accordance with ASC 805, the Company will revalue the contingent consideration liability at each reporting date through the last payment, with changes in the fair value of the contingent consideration reflected in the change in fair value of contingent consideration line item on the Company’s Condensed Consolidated Income Statements that is included in the calculation of operating income. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including:

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

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

Reporting Period
 
Valuation Technique
 
Significant Unobservable Inputs
 
Weighted Average Rates(a)
December 31, 2019
 
Discounted cash flow
 
Weighted average cost of capital
 
13.9
%
 
 
 
 
Adjusted EBITDA growth rate
 
28.1
%
 
 
 
 
 
 
 
June 30, 2019
 
Discounted cash flow
 
Weighted average cost of capital
 
14.2
%
 
 
 
 
Adjusted EBITDA growth rate
 
21.5
%

(a) Weighted average rates identified for each significant unobservable input relate to the valuation of the Intelisys contingent consideration.

Network1

The final earnout payment was paid to the former shareholders of Network1 during the fiscal year ended June 30, 2019. There was minimal change in the fair value of the contingent consideration for the quarter ended December 31, 2018 recognized in the Condensed Consolidated Income Statements.

Intelisys

The fair value of the liability for the contingent consideration related to Intelisys recognized at December 31, 2019 was $45.0 million, all of which is classified as current. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $3.2 million and $5.6 million for the quarter and six months ended December 31, 2019, respectively. The change in fair value for the quarter is primarily driven by the recurring amortization of the unrecognized fair value discount and better than expected actual results. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $49.4 million, based on the Company’s best estimate of the earnout calculated on a multiple of adjusted earnings.


22


The fair value of the liability for the contingent consideration related to Intelisys recognized at December 31, 2018 was $71.9 million, of which $39.7 million was classified as current. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $1.9 million and $6.4 million for the quarter and six months ended December 31, 2018, respectively. The change in fair value for the prior-year quarter is primarily driven by the recurring amortization of the unrecognized fair value discount, offset by lower than projected actual results.

(10) Segment Information

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

Worldwide Barcode, Networking & Security Segment

The Worldwide Barcode, Networking & Security segment includes a portfolio of solutions primarily for enterprise mobile computing, data capture, barcode printing, POS, payments, networking, electronic physical security, cyber security and other technologies. We have business operations within this segment in the United States, Canada, Brazil, additional Latin American countries 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 and includes our recent acquisition of intY. We have business operations within this segment in the United States, Canada, Brazil, additional Latin American countries 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.

23


Selected financial information for each business segment is presented below:

 
Quarter ended
 
Six months ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Sales:
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
686,237

 
$
701,639

 
$
1,384,028

 
$
1,356,752

Worldwide Communications & Services
303,266

 
344,382

 
612,402

 
662,169

 
$
989,503

 
$
1,046,021

 
$
1,996,430

 
$
2,018,921

Depreciation and amortization:
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
4,435

 
$
4,283

 
$
8,722

 
$
9,016

Worldwide Communications & Services
4,684

 
3,783

 
8,579

 
7,397

Corporate
581

 
869

 
1,588

 
1,790

 
$
9,700

 
$
8,935

 
$
18,889

 
$
18,203

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

 
$

 
$

 
$

Worldwide Communications & Services
3,176

 
$
1,850

 
$
5,649

 
$
6,434

 
$
3,176

 
$
1,850

 
$
5,649

 
$
6,434

Operating income (loss):
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
14,076

 
$
18,581

 
$
26,068

 
$
32,112

Worldwide Communications & Services
5,572

 
11,539

 
12,942

 
19,794

Corporate
(1,151
)
 
(414
)
 
(1,909
)
 
(769
)
 
$
18,497

 
$
29,706

 
$
37,101

 
$
51,137

Capital expenditures:
 
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
915

 
$
2,784

 
$
1,446

 
$
3,740

Worldwide Communications & Services
894

 
2,006

 
1,304

 
2,036

Corporate

 

 

 
4

 
$
1,809

 
$
4,790

 
$
2,750

 
$
5,780

Sales by Geography Category:
 
 
 
 
 
 
 
United States and Canada
$
745,377

 
$
786,689

 
$
1,523,895

 
$
1,532,651

International(1)
253,378

 
266,570

 
490,845

 
501,513

Less intercompany sales
(9,252
)
 
(7,238
)
 
(18,310
)
 
(15,243
)
 
$
989,503

 
$
1,046,021

 
$
1,996,430

 
$
2,018,921

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



24


 
December 31, 2019
 
June 30, 2019
 
(in thousands)
Assets:
 
 
 
Worldwide Barcode, Networking & Security
$
1,195,012

 
$
1,097,207

Worldwide Communications & Services
949,840

 
905,439

Corporate
65,278

 
64,615

 
$
2,210,130

 
$
2,067,261

Property and equipment, net by Geography Category:
 
 
 
United States and Canada
$
56,861

 
$
58,961

International
4,764

 
4,402

 
$
61,625

 
$
63,363



(11) Leases

In accordance with ASC 842, at contract inception the Company determines if a contract contains a lease by assessing whether the contract contains an identified asset and whether the Company has the ability to control the asset. The Company also determines if the lease meets the classification criteria for an operating lease versus a finance lease under ASC 842. Substantially all of the Company's leases are operating leases for real estate, warehouse and office equipment ranging in duration from 1 year to 10 years. The Company has elected not to record short-term operating leases with an initial term of 12 months or less on the Condensed Consolidated Balance Sheets. Operating leases are recorded as other non-current assets, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company has finance leases for information technology equipment expiring in fiscal year 2022. Finance leases are recorded as property and equipment, net, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The gross amount of the balances recorded related to finance leases is immaterial to the financial statements at December 31, 2019 and June 30, 2019.

Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the net present value of future minimum lease payments over the lease term. The Company generally is not able to determine the rate implicit in its leases and has elected to apply an incremental borrowing rate as the discount rate for the present value determination, which is based on the Company's cost of borrowings for the relevant terms of each lease and geographical economic factors. Certain operating lease agreements contain options to extend or terminate the lease. The lease term used is adjusted for these options when the Company is reasonably certain it will exercise the option. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments not based on a rate or index, such as costs for common area maintenance, are expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable.

The following table presents amounts recorded on the Condensed Consolidated Balance Sheet related to operating leases at December 31, 2019:

Operating leases
 
Balance Sheet location
 
December 31, 2019
 
 
 
 
(in thousands)
Operating lease right-of-use assets
 
Other non-current assets
 
$
32,619

Current operating lease liabilities
 
Accrued expenses and other current liabilities

 
$
6,234

Long-term operating lease liabilities
 
Other long-term liabilities
 
$
28,405



The following table presents amounts recorded in operating lease expense as part of selling general and administrative expenses on the Condensed Consolidated Income Statements during the quarter and six months ended December 31, 2019. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less.


25


 
 
Quarter ended
 
Six months ended
 
 
December 31, 2019
 
December 31, 2019
 
 
(in thousands)
Operating lease cost
 
$
2,045

 
$
4,132

Variable lease cost
 
437

 
783

 
 
$
2,482

 
$
4,915


Supplemental cash flow information related to the Company's operating leases for the quarter and six months ended December 31, 2019 are presented in the table below:

 
 
Quarter ended
 
Six months ended
 
 
December 31, 2019
 
December 31, 2019
 
 
(in thousands)
Cash paid for amounts in the measurement of lease liabilities
 
$
2,021

 
$
4,072

Right-of-use assets obtained in exchange for lease obligations
 
270

 
1,803


The weighted-average remaining lease term and discount rate at December 31, 2019 are presented in the table below:

 
 
December 31, 2019
Weighted-average remaining lease term
 
6.36 years

Weighted-average discount rate
 
4.0
%


The following table presents the maturities of the Company's operating lease liabilities at December 31, 2019:

 
 
Operating leases
 
 
(in thousands)
Remainder of 2020
 
$
3,966

2021
 
7,049

2022
 
6,233

2023
 
5,679

2024
 
4,794

Thereafter
 
11,371

Total future payments
 
39,092

Less: amounts representing interest
 
4,453

Present value of lease payments
 
$
34,639


 
(12) Commitments and Contingencies

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

During the Company's due diligence for the Network1 acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company recorded indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as the funds were escrowed as part of the acquisition. The amount available after the impact of foreign currency translation for future pre-acquisition contingency settlements or to be released to the sellers was $6.4 million and $6.5 million, at December 31, 2019 and June 30, 2019, respectively.


26


The table below summarizes the balances and line item presentation of Network1's pre-acquisition contingencies and corresponding indemnification receivables in the Company's Condensed Consolidated Balance Sheets at December 31, 2019 and June 30, 2019:

 
December 31, 2019
 
June 30, 2019
 
Network1
 
(in thousands)
Assets
 
 
 
Prepaid expenses and other current assets
$
723

 
$
761

Other non-current assets
$
4,962

 
$
5,219

Liabilities
 
 
 
Accrued expenses and other current liabilities
$
723

 
$
761

Other long-term liabilities
$
4,962

 
$
5,219



(13) Income Taxes
Income taxes for the quarter and six months ended December 31, 2019 have been included in the accompanying condensed consolidated financial statements using an estimated annual effective tax rate. In addition to applying the estimated annual effective tax rate to pre-tax income, the Company also includes certain items treated as discrete events to arrive at an estimated overall tax provision. During the current period a discrete amount of $0.2 million was recognized which is attributable to a change in estimate of nondeductible expenses for a prior period.

The Company’s effective tax rate of 27.7% and 26.9% for the quarter and six months ended December 31, 2019, respectively, differs from the current federal statutory rate of 21% primarily as a result of income derived from tax jurisdictions with varying income tax rates, nondeductible expenses and state income taxes.

The Company has provided for U.S. income taxes for the current earnings of its Canadian subsidiary and will continue to distribute the earnings of its Canadian subsidiary. Earnings from Brazil will continue to be considered retained indefinitely for reinvestment and all other foreign geographies are immaterial. It has been the practice of the Company to reinvest those earnings in the businesses outside the United States. Apart from the one-time transition tax recognized in accordance with the U.S. government enacted Tax Cuts and Jobs Act (the “Tax Act”) during fiscal year 2018, any incremental deferred income taxes on the unremitted foreign earnings are not expected to be material.

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

The Company had approximately $1.3 million and $1.2 million of total gross unrecognized tax benefits at December 31, 2019 and June 30, 2019, respectively. Of this total at December 31, 2019, approximately $1.0 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company conducts business globally and one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before June 30, 2014.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At December 31, 2019 and June 30, 2019, the Company had approximately $1.1 million and $1.0 million, respectively, accrued for interest and penalties, respectively.

Financial results in Belgium produced a pre-tax income of approximately $1.1 million and $2.5 million for the quarters ended December 31, 2019 and 2018. The valuation of Belgium's net deferred tax asset will depend on future profitability and potential future transactions. In the judgment of management, it is more likely than not that the deferred tax asset will be realized.

27



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

ScanSource is at the center of the technology solution delivery channel, connecting businesses and providing solutions for their complex needs. 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, telecom and cloud services to our customers. We serve approximately 38,000 sales partners located in the United States, Canada, Brazil, additional Latin America and Europe and provide solutions and services from over 550 technology suppliers.

We segment our business into two technology-focused areas that each operate in the United States, Canada, Brazil, additional Latin American countries, and Europe:
Worldwide Barcode, Networking & Security
Worldwide Communications & Services

We sell products to the United States and Canada from our facilities located in the United States; into Latin America from facilities located in the United States, Mexico, Brazil, Colombia and Chile; and into Europe from facilities in Europe 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 8x8, ACC Business, AT&T, Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, CenturyLink/Level 3, Cisco, Comcast Business, Datalogic, Dell, Dialogic, Elo, Epson, F5, Fortinet, Hanwha, Honeywell, HID, Ingenico, Jabra, March Networks, Masergy, Microsoft, Mitel, NCR, NICE inContact, Oracle, Panasonic, Plantronics/Polycom (Poly), RingCentral, Ruckus, Samsung, Sony, Spectralink, Spectrum, Toshiba Global Commerce Solutions, TPx, Ubiquiti, Verifone, Verizon, Windstream, Zayo 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, 2019, we announced plans to divest our physical product distribution businesses in Europe, UK, Mexico, Colombia, Chile, Peru and our Miami-based export operations (the "Planned Divestitures"). We will continue to operate our digital businesses in these locations. During the September quarter, we began a process to market and sell the Planned Divestitures. There can be no assurance that this sale process will result in a transaction or the timing of any transaction.
Our Strategy

We rely on a channel sales model offering hardware, software, services, and connectivity solutions from technology suppliers to sales partners that serve end customers. We sell technology solutions that solve end customers' business needs. While we do not manufacture products, we provide technology solutions and services from leading technology suppliers. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services, such as custom configuration, key injection, integration support, custom development and other services, to deliver solutions. We also offer the flexibility of on-premise, cloud and hybrid solutions.

As a trusted adviser to our sales partners, we provide more complete solutions through a better understanding of end customer needs. We drive growth through enhancing our sales partners' 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, custom development and marketing to help our sales partners extend their capabilities, develop new technology practices or reach new end customers.

28


Results of Operations

Net Sales
The following tables summarize our net sales results by technology segment and by geographic location for the quarters ended December 31, 2019 and 2018.

 
Quarter ended December 31,
 
 
 
% Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
Net Sales by Segment:
2019
 
2018
 
$ Change
 
% Change
 
 
(in thousands)
 
 
 
 
Worldwide Barcode, Networking & Security
$
686,237

 
$
701,639

 
$
(15,402
)
 
(2.2
)%
 
(0.4
)%
Worldwide Communications & Services
303,266

 
344,382

 
(41,116
)
 
(11.9
)%
 
(14.0
)%
Total net sales
$
989,503

 
$
1,046,021

 
$
(56,518
)
 
(5.4
)%
 
(5.0
)%
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
% Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
 
2019
 
2018
 
$ Change
 
% Change
 
 
(in thousands)
 
 

 
 
Worldwide Barcode, Networking & Security
$
1,384,028

 
$
1,356,752

 
$
27,276

 
2.0
 %
 
3.8
 %
Worldwide Communications & Services
612,402

 
662,169

 
(49,767
)
 
(7.5
)%
 
(10.3
)%
Total net sales
$
1,996,430

 
$
2,018,921

 
$
(22,491
)
 
(1.1
)%
 
(1.0
)%
(a) A reconciliation of non-GAAP net sales in constant currency, excluding Planned Divestitures and acquisitions is presented at the end of Results of Operations in the non-GAAP section.

Worldwide Barcode, Networking & Security

The Worldwide Barcode, Networking & Security segment consists of sales to customers in North America, Europe, Brazil and additional Latin American countries. For the quarter ended December 31, 2019, net sales for the Barcode, Networking & Security segment decreased $15.4 million or 2.2%, compared to the prior-year quarter largely due to lower sales volume in Europe and North America. Excluding the foreign exchange negative impact and Planned Divestitures, adjusted net sales decreased $2.5 million, or 0.4%, for the quarter ended December 31, 2019 compared to the prior-year quarter.

Net sales increased $27.3 million, or 2.0%, for the six months ended December 31, 2019 compared to the prior-year six month period. Excluding the foreign exchange negative impact and Planned Divestitures, adjusted net sales increased $42.0 million, or 3.8%, for the six months ended December 31, 2019. The increase in net sales and adjusted net sales for the six months ended December 31, 2019 is primarily due to higher sales volume across key technologies and higher big deals in North America.

Worldwide Communications & Services
The Worldwide Communications & Services segment consists of sales to customers in North America, Europe, Brazil, and additional Latin American countries. For the quarter and six months ended December 31, 2019, net sales decreased $41.1 million and $49.8 million, compared to the prior year quarter and six month period, respectively. Excluding the foreign exchange negative impact and net sales from Planned Divestitures and acquisitions, adjusted net sales decreased $41.1 million, or 14.0%, for the quarter and $58.3 million, or 10.3% for the six month period. The decrease in both net sales and adjusted net sales is due to lower sales in the premise based communications business in North America, partially offset by increases in net sales from our master agency business.


29


 
Quarter ended December 31,
 
 
 
% Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a)
Net Sales by Geography:
2019
 
2018
 
$ Change
 
% Change
 
 
(in thousands)
 
 
 
 
United States and Canada
$
736,129

 
$
779,455

 
$
(43,326
)
 
(5.6
)%
 
(5.8
)%
International
$
253,374

 
$
266,566

 
(13,192
)
 
(4.9
)%
 
2.1
 %
Total net sales
$
989,503

 
$
1,046,021

 
$
(56,518
)
 
(5.4
)%
 
(5.0
)%
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
% Change, Constant Currency, Excluding Acquisitions (a)
 
2019
 
2018
 
$ Change
 
% Change
 
 
(in thousands)
 
 
 
 
United States and Canada
$
1,505,766

 
$
1,517,412

 
$
(11,646
)
 
(0.8
)%
 
(1.1
)%
International
490,664

 
501,509

 
(10,845
)
 
(2.2
)%
 
0.1
 %
Total net sales
$
1,996,430

 
$
2,018,921

 
$
(22,491
)
 
(1.1
)%
 
(1.0
)%
(a) A reconciliation of non-GAAP net sales in constant currency, excluding Planned Divestitures and acquisitions is presented at the end of Results of Operations in the non-GAAP section.

Gross Profit
The following tables summarize our gross profit for the quarters and six month periods ended December 31, 2019 and 2018:

 
Quarter ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
60,136

 
$
64,825

 
$
(4,689
)
 
(7.2
)%
 
8.8
%
 
9.2
%
Worldwide Communications & Services
53,748

 
55,653

 
(1,905
)
 
(3.4
)%
 
17.7
%
 
16.2
%
Gross profit
$
113,884

 
$
120,478

 
$
(6,594
)
 
(5.5
)%
 
11.5
%
 
11.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
118,406

 
$
126,776

 
$
(8,370
)
 
(6.6
)%
 
8.6
%
 
9.3
%
Worldwide Communications & Services
107,577

 
105,916

 
1,661

 
1.6
 %
 
17.6
%
 
16.0
%
Gross profit
$
225,983

 
$
232,692

 
$
(6,709
)
 
(2.9
)%
 
11.3
%
 
11.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Worldwide Barcode, Networking & Security

Gross profit dollars and gross profit margin for the Worldwide Barcode, Networking & Security segment decreased for the quarter and six months ended December 31, 2019 compared to the prior-year periods primarily due to lower vendor program recognition.

Worldwide Communications & Services

For the Worldwide Communications & Services segment, gross profit dollars decreased $1.9 million, for the quarter ended December 31, 2019. Gross profit dollars increased by $1.7 million for the six months ended December 31, 2019. The gross profit margin increased for both periods primarily due to a more favorable sales mix including results contributed by Intelisys recurring revenue.

30



Operating Expenses

The following tables summarize our operating expenses for the quarters and six month periods ended December 31, 2019 and 2018:
 
Quarter ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Selling, general and administrative expenses
$
83,121

 
$
80,950

 
$
2,171

 
2.7
 %
 
8.4
%
 
7.7
%
Depreciation expense
3,459

 
3,272

 
187

 
5.7
 %
 
0.3
%
 
0.3
%
Intangible amortization expense
5,631

 
4,700

 
931

 
19.8
 %
 
0.6
%
 
0.4
%
Change in fair value of contingent consideration
3,176

 
1,850

 
1,326

 
71.7
 %
 
0.3
%
 
0.2
%
Operating expenses
$
95,387

 
$
90,772

 
$
4,615

 
5.1
 %
 
9.6
%
 
8.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
165,632

 
$
158,880

 
$
6,752

 
4.2
 %
 
8.3
%
 
7.9
%
Depreciation expense
7,008

 
6,538

 
470

 
7.2
 %
 
0.4
%
 
0.3
%
Intangible amortization expense
10,593

 
9,703

 
890

 
9.2
 %
 
0.5
%
 
0.5
%
Change in fair value of contingent consideration
5,649

 
6,434

 
(785
)
 
(12.2
)%
 
0.3
%
 
0.3
%
Operating expenses
$
188,882

 
$
181,555

 
$
7,327

 
4.0
 %
 
9.5
%
 
9.0
%

Selling, general and administrative expenses ("SG&A") increased $2.2 million and $6.8 million for the quarter and six months ended December 31, 2019, respectively, as compared to the prior-year periods. Higher SG&A expenses for the quarter and six months reflect investments in future growth for our recurring revenue and service-based businesses. These investments have primarily resulted in increased employee-related expenses.

Depreciation expense remained consistent for the quarter ended December 31, 2019 compared to the prior-year quarter. Depreciation expense increased $0.2 million and $0.5 million for the quarter and six months ended December 31, 2019, respectively, compared to the prior-year periods, primarily due to additional expense related to assets capitalized during the prior year. The purchase price allocation for the intY acquisition, including the valuation of the identifiable intangible assets, was not concluded as of the reporting date. The increase in intangible amortization expense for the quarter and six months ended December 31, 2019 reflects estimated intangible amortization for the intY acquisition.

We recorded expense from change in fair value of contingent consideration of $3.2 million and $5.6 million for the quarter and six months ended December 31, 2019, all of which relates to Intelisys. The expense from change in fair value of contingent consideration for the quarter and six months ended December 31, 2019 is largely from recurring amortization of the unrecognized fair value discount of the contingent consideration liability and better than expected actual results.

Operating Income

The following tables summarize our operating income for the quarters and six month periods ended December 31, 2019 and 2018:

31


 
 
Quarter ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
14,076

 
$
18,581

 
$
(4,505
)
 
(24.2
)%
 
2.1
%
 
2.6
%
Worldwide Communications & Services
5,572

 
11,539

 
(5,967
)
 
(51.7
)%
 
1.8
%
 
3.4
%
Corporate
(1,151
)
 
(414
)
 
(737
)
 
nm*

 
nm*

 
nm*

Operating income
$
18,497

 
$
29,706

 
$
(11,209
)
 
(37.7
)%
 
1.9
%
 
2.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Worldwide Barcode, Networking & Security
$
26,068

 
$
32,112

 
$
(6,044
)
 
(18.8
)%
 
1.9
%
 
2.4
%
Worldwide Communications & Services
12,942

 
19,794

 
(6,852
)
 
(34.6
)%
 
2.1
%
 
3.0
%
Corporate
(1,909
)
 
(769
)
 
(1,140
)
 
nm*

 
nm*

 
nm*

Operating income
$
37,101

 
$
51,137

 
$
(14,036
)
 
(27.4
)%
 
1.9
%
 
2.5
%
*nm - percentages are not meaningful

Worldwide Barcode, Networking & Security

For the Worldwide Barcode, Networking & Security segment, operating income decreased $4.5 million and $6.0 million for the quarter and six months ended December 31, 2019, respectively, compared to the prior-year periods. Operating margin decreased to 2.1% and 1.9% for the quarter and six months ended December 31, 2019 compared to the prior-year periods, primarily due to lower gross profit margins.

Worldwide Communications & Services

For the Worldwide Communications & Services segment, operating income decreased $6.0 million and $6.9 million for the quarter and six months ended December 31, 2019. Operating margin decreased to 1.8% and 2.1% for the quarter and six months ended December 31, 2019, respectively, compared to the prior-year periods, largely due to SG&A investments in future growth of our master agency and service-based businesses..

Corporate

Corporate incurred $1.2 million and $1.9 million in acquisition and divestiture expenses for the quarter and six months ended December 31, 2019, respectively, compared to $0.4 million and $0.8 million in acquisition expenses for the quarter and six months ended December 31, 2018, respectively.

Total Other (Income) Expense

The following tables summarize our total other (income) expense for the quarters and six month periods ended December 31, 2019 and 2018:


32


 
Quarter ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Interest expense
$
3,751

 
$
3,119

 
$
632

 
20.3
 %
 
0.4
 %
 
0.3
 %
Interest income
(749
)
 
(264
)
 
(485
)
 
(183.7
)%
 
(0.1
)%
 
(0.0
)%
Net foreign exchange (gains) losses
(102
)
 
420

 
(522
)
 
(124.3
)%
 
(0.0
)%
 
0.0
 %
Other, net
(123
)
 
(219
)
 
96

 
43.8
 %
 
(0.0
)%
 
(0.0
)%
Total other (income) expense, net
$
2,777

 
$
3,056

 
$
(279
)
 
(9.1
)%
 
0.3
 %
 
0.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Interest expense
$
7,543

 
$
5,746

 
$
1,797

 
31.3
 %
 
0.4
 %
 
0.3
 %
Interest income
(1,548
)
 
(715
)
 
(833
)
 
116.5
 %
 
(0.1
)%
 
(0.0
)%
Net foreign exchange (gains) losses
(191
)
 
517

 
(708
)
 
(136.9
)%
 
(0.0
)%
 
0.0
 %
Other, net
(4
)
 
(284
)
 
280

 
(98.6
)%
 
(0.0
)%
 
(0.0
)%
Total other (income) expense, net
$
5,800

 
$
5,264

 
$
536

 
10.2
 %
 
0.3
 %
 
0.3
 %

Interest expense consists primarily of interest incurred on borrowings, non-utilization fees charged on the revolving credit facility and amortization of debt issuance costs. Interest expense increased for the quarter and six months ended December 31, 2019 compared to the prior-year periods, principally from higher borrowings on our multi-currency senior secured revolving credit facility and senior secured term loan facility.

Interest income for the quarter and six months ended December 31, 2019 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents. Interest income increased for the quarter and six months ended December 31, 2019 compared to the prior-year principally from interest earned on customer receivables in North America and Brazil, coupled with higher cash balances in Brazil.

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 gains and losses.

Provision for Income Taxes

For the quarter and six months ended December 31, 2019, income tax expense was $4.4 million and $8.4 million, respectively, reflecting an effective tax rate of 27.7% and 26.9%, respectively. The effective tax rate for the quarter and six months ended December 31, 2018 was 25.0% and 25.2%, respectively. The increase in the effective tax rate is primarily due to a change in the geographical mix of income as compared to the prior-year quarter. We expect the effective tax rate, excluding discrete items, for fiscal year 2020 to be approximately 25.5% to 26.5%. See Note 13- Income Taxes to the Notes to Consolidated Financial Statements for further discussion.

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 net sales, non-GAAP gross profit, non-GAAP operating income, non-GAAP other expense, net, non-GAAP pre-tax income, non-GAAP net

33


income, non-GAAP earnings per share ("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 Planned Divestitures and 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 and the impact of Planned Divestitures 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 Planned Divestitures and acquisitions. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding Planned Divestitures and acquisitions:

Net Sales by Segment:
 
 
 
 
 
 
Quarter ended December 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Worldwide Barcode, Networking & Security:
in thousands
 
 
 
 
Net sales, reported
$
686,237

 
$
701,639

 
$
(15,402
)
 
(2.2
)%
Planned Divestitures
(111,237
)
 
(122,326
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
575,000

 
579,313

 
(4,313
)
 
(0.7
)%
Foreign exchange impact(a)
1,799

 

 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
576,799

 
$
579,313

 
$
(2,514
)
 
(0.4
)%
 
 
 
 
 
 
 
 
Worldwide Communications & Services:
 
 
 
 
 
Net sales, reported
$
303,266

 
$
344,382

 
$
(41,116
)
 
(11.9
)%
Planned Divestitures
(44,530
)
 
(51,285
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
258,736

 
293,097

 
(34,361
)
 
(11.7
)%
Foreign exchange impact(a)
5,187

 

 
 
 
 
Less: Acquisitions
(12,036
)
 
(98
)
 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
251,887

 
$
292,999

 
$
(41,112
)
 
(14.0
)%
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
Net sales, reported
$
989,503

 
$
1,046,021

 
$
(56,518
)
 
(5.4
)%
Planned Divestitures
(155,767
)
 
(173,611
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
833,736

 
872,410

 
(38,674
)
 
(4.4
)%
Foreign exchange impact(a)
6,986

 

 
 
 
 
Less: Acquisitions
(12,036
)
 
(98
)
 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
828,686

 
$
872,312

 
$
(43,626
)
 
(5.0
)%
 
 
 
 
 
 
 
 
(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 quarter ended December 31, 2019 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2018.

34


 
 
 
 
 
 
 
 
Net Sales by Segment:
 
 
 
 
 
 
Six months ended December 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Worldwide Barcode, Networking & Security:
(in thousands)
 
 
 
 
Net sales, as reported
$
1,384,028

 
$
1,356,752

 
$
27,276

 
2.0
 %
Planned Divestitures
(227,840
)

(240,693
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
1,156,188


1,116,059

 
40,129

 
3.6
 %
Foreign exchange impact (a)
1,894



 
 
 
 
Less: Acquisitions



 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
1,158,082


$
1,116,059

 
$
42,023

 
3.8
 %
 
 
 
 
 
 
 
 
Worldwide Communications & Services:
 
 
 
 
 
 
 
Net sales, as reported
$
612,402

 
$
662,169

 
$
(49,767
)
 
(7.5
)%
Planned Divestitures
(83,442
)
 
(92,564
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
528,960

 
569,605

 
(40,645
)
 
(7.1
)%
Foreign exchange impact (a)
5,431

 

 
 
 
 
Less: Acquisitions
(24,193
)
 
(1,062
)
 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
510,198

 
$
568,543

 
$
(58,345
)
 
(10.3
)%
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
Net sales, as reported
$
1,996,430

 
$
2,018,921

 
$
(22,491
)
 
(1.1
)%
Planned Divestitures
(311,282
)
 
(333,257
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
1,685,148

 
1,685,664

 
(516
)
 
 %
Foreign exchange impact (a)
7,325

 

 
 
 
 
Less: Acquisitions
(24,193
)
 
(1,062
)
 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
1,668,280

 
$
1,684,602

 
$
(16,322
)
 
(1.0
)%
 
 
 
 
 
 
 
 
(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 six months ended December 31, 2019 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2018.

Net Sales by Geography:
 
 
 
 
 
 
Quarter ended December 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
United States and Canada:
(in thousands)
 
 
 
 
Net sales, as reported
$
736,129

 
$
779,455

 
$
(43,326
)
 
(5.6
)%
Less: Acquisitions
(2,312
)
 
(98
)
 
 
 
 
Non-GAAP Net sales, excluding acquisitions
$
733,817

 
$
779,357

 
$
(45,540
)
 
(5.8
)%
 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
Net sales, as reported
$
253,374

 
$
266,566

 
$
(13,192
)
 
(4.9
)%
Planned Divestitures
(155,767
)
 
(173,611
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
97,607

 
92,955

 
4,652

 
5.0
 %
Foreign exchange impact (a)
6,986

 

 
 
 
 
Less: Acquisitions
(9,724
)
 

 
 
 
 

35


Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
94,869

 
$
92,955

 
$
1,914

 
2.1
 %
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
Net sales, as reported
$
989,503

 
$
1,046,021

 
$
(56,518
)
 
(5.4
)%
Planned Divestitures
(155,767
)
 
(173,611
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
833,736

 
872,410

 
(38,674
)
 
(4.4
)%
Foreign exchange impact(a)
6,986

 

 
 
 
 
Less: Acquisitions
(12,036
)
 
(98
)
 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
828,686

 
$
872,312

 
$
(43,626
)
 
(5.0
)%
 
 
 
 
 
 
 
 
(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 quarter ended December 31, 2019 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2018.  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
United States and Canada:
(in thousands)
 
 
 
 
Net sales, as reported
$
1,505,766

 
$
1,517,412

 
$
(11,646
)
 
(0.8
)%
Less: Acquisitions
(5,907
)
 
(1,062
)
 
 
 
 
Net sales, constant currency excluding acquisitions
$
1,499,859

 
$
1,516,350

 
$
(16,491
)
 
(1.1
)%
 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
Net sales, as reported
$
490,664

 
$
501,509

 
$
(10,845
)
 
(2.2
)%
Planned Divestitures
(311,282
)
 
(333,257
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
179,382

 
168,252

 
11,130

 
6.6
 %
Foreign exchange impact (a)
7,325

 

 
 
 
 
Less: Acquisitions
(18,286
)
 

 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
168,421

 
$
168,252

 
$
169

 
0.1
 %
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
Net sales, as reported
$
1,996,430

 
$
2,018,921

 
$
(22,491
)
 
(1.1
)%
Planned Divestitures
(311,282
)
 
(333,257
)
 
 
 
 
Non-GAAP net sales, excluding Planned Divestitures
1,685,148

 
1,685,664

 
(516
)
 
 %
Foreign exchange impact (a)
7,325

 

 
 
 
 
Less: Acquisitions
(24,193
)
 
(1,062
)
 
 
 
 
Non-GAAP net sales, constant currency excluding Planned Divestitures and acquisitions
$
1,668,280

 
$
1,684,602

 
$
(16,322
)
 
(1.0
)%
 
 
 
 
 
 
 
 
(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 six months ended December 31, 2019 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2018.  


Income Statement Non-GAAP Metrics

To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP net sales, non-GAAP gross profit, non-GAAP operating income, non-GAAP other expense, net, 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 and divestiture costs, restructuring costs, impact of Planned Divestitures and other non-GAAP adjustments. These metrics are useful in assessing and understanding our operating

36


performance, especially when comparing results with previous periods or forecasting performance for future periods. Below we provide a non-GAAP reconciliation of the aforementioned metrics adjusted for the costs and charges mentioned above:
 
Quarter ended December 31, 2019
 
Reported GAAP measure
 
Intangible amortization expense
 
Change in fair value of contingent consideration
 
Acquisition and divestiture costs(a)
 
Restructuring costs
 
Impact of Planned Divestitures
 
Non-GAAP measure
 
(in thousands, except per share data)
Net sales
$
989,503

 
$

 
$

 
$

 
$

 
$
(155,767
)
 
$
833,736

Gross profit
113,884

 

 

 

 

 
(15,471
)
 
98,413

Operating income
18,497

 
5,631

 
3,176

 
1,151

 
490

 
(371
)
 
28,574

Other expense, net
2,777

 

 

 

 

 
(238
)
 
2,539

Pre-tax income
15,720

 
5,631

 
3,176

 
1,151

 
490

 
(133
)
 
26,035

Net income
11,366

 
4,289

 
2,401

 
1,151

 
378

 
(121
)
 
19,464

Diluted EPS
$
0.45

 
$
0.17

 
$
0.09

 
$
0.05

 
$
0.01

 
$

 
$
0.77

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended December 31, 2018
 
Reported GAAP measure
 
Intangible amortization expense
 
Change in fair value of contingent consideration
 
Acquisition costs(a)
 
Restructuring costs
 
Impact of Planned Divestitures
 
Non-GAAP measure
 
(in thousands, except per share data)
Net sales
$
1,046,021

 
$

 
$

 
$

 
$

 
$
(173,611
)
 
$
872,410

Gross profit
120,478

 

 

 

 

 
(16,998
)
 
103,480

Operating income
29,706

 
4,700

 
1,850

 
414

 

 
(2,102
)
 
34,568

Other expense, net
3,056

 

 

 

 

 
(513
)
 
2,543

Pre-tax income
26,650

 
4,700

 
1,850

 
414

 

 
(1,588
)
 
32,026

Net income
19,982

 
3,567

 
1,408

 
414

 

 
(650
)
 
24,721

Diluted EPS
$
0.78

 
$
0.14

 
$
0.05

 
$
0.02

 
$

 
$
(0.03
)
 
$
0.96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Acquisition and divestiture costs are generally nondeductible for tax purposes.


37


 
Six months ended December 31, 2019
 
Reported GAAP measure
 
Intangible amortization expense
 
Change in fair value of contingent consideration
 
Acquisition and divestiture costs(a)
 
Restructuring costs
 
Impact of Planned Divestitures
 
Non-GAAP measure
 
(in thousands, except per share data)
Net sales
$
1,996,430

 
$

 
$

 
$

 
$

 
$
(311,282
)
 
$
1,685,148

Gross profit
225,983

 

 

 

 

 
(28,867
)
 
197,116

Operating income
37,101

 
10,593

 
5,649

 
1,909

 
659

 
136

 
56,047

Other expense, net
5,800

 

 

 

 

 
(378
)
 
5,422

Pre-tax income
31,301

 
10,593

 
5,649

 
1,909

 
659

 
514

 
50,625

Net income
22,896

 
8,035

 
4,270

 
1,909

 
505

 
323

 
37,938

Diluted EPS
$
0.90

 
$
0.32

 
$
0.17

 
$
0.07

 
$
0.02

 
$
0.01

 
$
1.49

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 31, 2018
 
Reported GAAP measure
 
Intangible amortization expense
 
Change in fair value of contingent consideration
 
Acquisition and divestiture costs(a)
 
Restructuring costs
 
Impact of Planned Divestitures
 
Non-GAAP measure
 
(in thousands, except per share data)
Net sales
$
2,018,921

 
$

 
$

 
$

 
$

 
$
(333,257
)
 
$
1,685,664

Gross profit
232,692

 

 

 

 

 
(32,196
)
 
200,496

Operating income
51,137

 
9,703

 
6,434

 
769

 
1,328

 
(2,150
)
 
67,221

Other expense, net
5,264

 

 

 

 

 
(346
)
 
4,918

Pre-tax income
45,873

 
9,703

 
6,434

 
769

 
1,328

 
(1,804
)
 
62,303

Net income
34,303

 
7,365

 
4,895

 
769

 
955

 
(697
)
 
47,590

Diluted EPS
$
1.33

 
$
0.29

 
$
0.19

 
$
0.03

 
$
0.04

 
$
(0.03
)
 
$
1.85

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Acquisition and divestiture costs are generally nondeductible for tax purposes.



38


 
 
 
 
 
 
 
 
 
 
 
 
Operating Income by Segment:
 
 
 
 
 
 
 
 
 
 
Quarter ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
Worldwide Barcode, Networking & Security:
(in thousands)
 
 
 
 
 
 
 
 
GAAP operating income
$
14,076

 
$
18,581

 
$
(4,505
)
 
(24.2
)%
 
2.1
%
 
2.6
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangible assets
1,968

 
1,854

 
114

 
 
 
 
 
 
Restructuring costs

 

 

 
 
 
 
 
 
Planned Divestitures
(735
)
 
(2,292
)
 
1,557

 
 
 
 
 
 
Non-GAAP operating income
$
15,309

 
$
18,143

 
$
(2,834
)
 
(15.6
)%
 
2.7
%
 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide Communications & Services:
 
 
 
 
 
 
 
 
 
 
 
GAAP operating income
$
5,572

 
$
11,539

 
$
(5,967
)
 
(51.7
)%
 
1.8
%
 
3.4
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangible assets
3,664

 
2,846

 
818

 
 
 
 
 
 
Change in fair value of contingent consideration
3,176

 
1,850

 
1,326

 
 
 
 
 
 
Restructuring costs
490

 

 
490

 
 
 
 
 
 
Planned Divestitures
364

 
190

 
174

 
 
 
 
 
 
Non-GAAP operating income
$
13,266

 
$
16,425

 
$
(3,159
)
 
(19.2
)%
 
5.1
%
 
5.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Corporate:
 
 
 
 
 
 
 
 
 
 
 
GAAP operating income
$
(1,151
)
 
$
(414
)
 
$
(737
)
 
nm*

 
nm*

 
nm*

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Acquisition and divestiture costs
1,151

 
414

 
737

 
 
 
 
 
 
Non-GAAP operating income
$

 
$

 
$

 
nm*

 
nm*

 
nm*

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
GAAP operating income
$
18,497

 
$
29,706

 
$
(11,209
)
 
(37.7
)%
 
1.9
%
 
2.8
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangible assets
5,631

 
4,700

 
931

 
 
 
 
 
 
Change in fair value of contingent consideration
3,176

 
1,850

 
1,326

 
 
 
 
 
 
Acquisition and divestiture costs
1,151

 
414

 
737

 
 
 
 
 
 
Restructuring costs
490

 

 
490

 
 
 
 
 
 
Planned Divestitures
(371
)
 
(2,102
)
 
1,731

 
 
 
 
 
 
Non-GAAP operating income
$
28,574

 
$
34,568

 
$
(5,994
)
 
(17.3
)%
 
3.4
%
 
4.0
%

39


 
 
 
 
 
 
 
 
 
 
 
 
Operating Income by Segment:
 
 
 
 
 
 
 
 
 
 
Six months ended December 31,
 
 
 
 
 
% of Net Sales December 31,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
Worldwide Barcode, Networking & Security:
(in thousands)
 
 
 
 
 
 
 
 
GAAP operating income
$
26,068

 
$
32,112

 
$
(6,044
)
 
(18.8
)%
 
1.9
%
 
2.4
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangible assets
3,935

 
4,163

 
(228
)
 
 
 
 
 
 
Restructuring Costs

 
708

 
(708
)
 
 
 
 
 
 
Planned Divestitures
(1,634
)
 
(2,769
)
 
1,135

 
 
 
 
 
 
Non-GAAP operating income
$
28,369

 
$
34,214

 
$
(5,845
)
 
(17.1
)%
 
2.5
%
 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide Communications & Services:
 
 
 
 
 
 
 
 
 
 
 
GAAP operating income
$
12,942

 
$
19,794

 
$
(6,852
)
 
(34.6
)%
 
2.1
%
 
3.0
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangible assets
6,658

 
5,540

 
1,118

 
 
 
 
 
 
Change in fair value of contingent consideration
5,649

 
6,434

 
(785
)
 
 
 
 
 
 
Restructuring costs
490

 
620

 
(130
)
 
 
 
 
 
 
Planned Divestitures
1,770

 
619

 
1,151

 
 
 
 
 
 
Non-GAAP operating income
$
27,509

 
$
33,007

 
$
(5,498
)
 
(16.7
)%
 
5.2
%
 
5.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Corporate:
 
 
 
 
 
 
 
 
 
 
 
GAAP operating income
$
(1,909
)
 
$
(769
)
 
$
(1,140
)
 
nm*

 
nm*

 
nm*

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Acquisition and divestiture costs
1,909

 
769

 
1,140

 
 
 
 
 
 
Restructuring costs
169

 

 
169

 
 
 
 
 
 
Non-GAAP operating income
$
169

 
$

 
$
169

 
nm*

 
nm*

 
nm*

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
GAAP operating income
$
37,101

 
$
51,137

 
$
(14,036
)
 
(27.4
)%
 
1.9
%
 
2.5
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Amortization of intangible assets
10,593

 
9,703

 
890

 
 
 
 
 
 
Change in fair value of contingent consideration
5,649

 
6,434

 
(785
)
 
 
 
 
 
 
Acquisition and divestiture costs
1,909

 
769

 
1,140

 
 
 
 
 
 
Restructuring costs
659

 
1,328

 
(669
)
 
 
 
 
 
 
Planned Divestitures
136

 
(2,150
)
 
2,286

 
 
 
 
 
 
Non-GAAP operating income
56,047

 
67,221

 
$
(11,174
)
 
(16.6
)%
 
3.3
%
 
4.0
%
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.


40


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 quarters ended December 31, 2019 and 2018, respectively:

  
Quarter ended December 31,
 
2019
 
2018
Return on invested capital ratio, annualized(a)
9.9
%
 
12.7
%
(a)
The annualized EBITDA amount is divided by days in the quarter times 365 days per year, or 366 days for leap year. There were 92 days in the current and prior-year quarter.

The components of this calculation and reconciliation to our financial statements are shown on the following schedule:

 
Quarter ended December 31,
 
2019
 
2018
 
(in thousands)
Reconciliation of net income to EBITDA:
 
Net income (GAAP)
$
11,366

 
$
19,982

Plus: Interest expense
3,751

 
3,119

Plus: Income taxes
4,354

 
6,668

Plus: Depreciation and amortization
9,700

 
8,935

EBITDA (non-GAAP)
29,171

 
38,704

Plus: Change in fair value of contingent consideration
3,176

 
1,850

Plus: Acquisition and divestiture costs (a)

1,151

 
414

Plus: Restructuring costs
490

 

Plus: Impact of Planned Divestitures
(870
)
 
(1,864
)
Adjusted EBITDA (numerator for ROIC) (non-GAAP)
$
33,118

 
$
39,104

 
Quarter ended December 31,
 
2019
 
2018
 
(in thousands)
Invested capital calculations:
 
Equity – beginning of the quarter
$
905,751

 
$
877,897

Equity – end of the quarter
927,580

 
899,503

Plus: Change in fair value of contingent consideration, net of tax
2,401

 
1,408

Plus: Acquisition and divestiture costs (a)
1,151

 
414

Plus: Restructuring, net of tax

378

 

Plus: Impact of Planned Divestitures, net of tax
(121
)
 
(650
)
Average equity
918,570

 
889,286

Average funded debt (b) 
411,614

 
333,138

Invested capital (denominator for ROIC) (non-GAAP)
$
1,330,184

 
$
1,222,424

(a)
Acquisition and divestiture costs are generally nondeductible for tax purposes.
(b)
Average funded debt is calculated as the average daily amounts outstanding on our current and long-term interest-bearing debt.



41


Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under our $350 million revolving credit facility. Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit. In general, as our sales volumes increase, our net investment in working capital increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.

Our cash and cash equivalents balance totaled $42.0 million at December 31, 2019, compared to $23.8 million at June 30, 2019, including $27.7 million and $18.9 million held outside of the United States at December 31, 2019 and June 30, 2019, respectively. Checks released but not yet cleared in the amounts of $29.3 million and $7.4 million are included in accounts payable at December 31, 2019 and June 30, 2019, respectively.

We conduct business in many locations throughout the world where we generate and use cash. We provide for U.S. income taxes for the earnings of our Canadian subsidiary, but earnings from Brazil will continue to be considered retained indefinitely for reinvestment. All other foreign geographies are immaterial. It has been our practice to reinvest those earnings in the businesses outside the United States.
 
Our net investment in working capital at December 31, 2019 was $707.0 million compared to $776.4 million at June 30, 2019 and $759.0 million at December 31, 2018. 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 and payments to vendors.

 
Six months ended
 
December 31,
 
2019
 
2018
Cash provided by (used in):
(in thousands)
Operating activities
$
118,060

 
$
(51,770
)
Investing activities
(51,671
)
 
(37,963
)
Financing activities
(47,947
)
 
86,831

Effect of exchange rate change on cash and cash equivalents
(255
)
 
121

Increase (decrease) in cash and cash equivalents
$
18,187

 
$
(2,781
)
 
Net cash provided by operating activities was $118.1 million for the six months ended December 31, 2019, compared to $51.8 million used by operating activities in the prior-year period. Cash provided by operating activities for the six months ended December 31, 2019 is primarily attributable to increases in accounts payable and cash from net income, partially offset by increases in inventory. Cash used in operating activities for the six months ended December 31, 2018 is primarily attributable to increases in inventory and accounts receivable, partially offset by cash from net income and increases in accounts payable.

Excluding Intelisys, the number of days sales outstanding ("DSO") was 59 days at December 31, 2019, compared to 62 days at June 30, 2019 and 58 days at December 31, 2018. Inventory turned 4.8 times during the second quarter of fiscal year 2020 compared to 5.1 for the previous quarter and 5.4 times in the prior-year quarter.

Cash used in investing activities for the six months ended December 31, 2019 was $51.7 million, compared to $38.0 million used in the prior-year period. Cash used in investing activities primarily represents cash used to acquire intY in the six months ended December 31, 2019, compared to cash used to acquire Canpango, Intelisys Global and RPM in the prior-year period.

Management expects capital expenditures for fiscal year 2020 to range from $4 million to $6 million, primarily for rental equipment investments, IT investments and facility improvements.

For the six months ended December 31, 2019, cash used for financing activities totaled $47.9 million, compared to $86.8 million provided in the prior-year period. Cash used in financing activities for the six months ended December 31, 2019 primarily represents contingent consideration payments to the former shareholders of Intelisys and the repurchase of common stock. Cash provided by financing activities for the six months ended December 31, 2018 was primarily from net borrowings on the revolving credit facility, partially offset by cash used to pay contingent consideration payments to the former shareholders of Intelisys and Network1.

42



We have a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks. On April 30, 2019, we amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. The Amended Credit Agreement established (i) a five-year $350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. Pursuant to an “accordion feature,” we may increase borrowings up to an additional $250 million for a total of up to $750 million. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit, subject to obtaining additional credit commitments from the lenders participating in the increase.

At our option, loans 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 our net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash to trailing four-quarter adjusted EBITDA.

This spread ranges from 1.00% to 1.75% for LIBOR-based loans and 0.00% to 0.75% for alternate base rate loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent. The Amended Credit Agreement contains customary yield protection provisions. Additionally, the Company is assessed commitment fees ranging from 0.15% to 0.30%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The secured term loan facility will amortize based on the percentage of original principal amount with 2.5% in Year 1, 5.0% in Year 2, 5.0% in Year 3, 7.5% in Year 4 and 10.0% in Year 5. 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 Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, our Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, our Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. We were in compliance with all covenants under the credit facility at December 31, 2019. There was $202.8 million and $200.8 million in outstanding borrowings on our revolving credit facility at December 31, 2019 and June 30, 2019, respectively.

On a gross basis, we borrowed $1,084 million and repaid $1,084 million on our revolving credit facility in the six months ended December 31, 2019. In the prior-year period, on a gross basis, we borrowed $1,126 million and repaid $1,003 million. The average daily balances during the six month periods ended December 31, 2019 and 2018 were $253.1 million and $296.1 million, respectively. There were letters of credit issued under the multi-currency revolving credit facility of $0.3 million at December 31, 2019. There were no letters of credit issued at June 30, 2019. There was $147.2 million and $149.2 million available for additional borrowings at December 31, 2019 and June 30, 2019, respectively. Future availability will depend upon, among other things, the levels of our Leverage Ratio and Interest Coverage Ratio, which, in turn, will depend upon (1) our overall net debt relative to our EBITDA and (2) EBITDA relative to total interest expense, respectively.  As a result, our availability will increase if EBITDA increases (subject to the limit of the facility) and decrease if EBITDA decreases.

We have a bank overdraft facility with Bank    of America used by our European subsidiaries. The facility allows us to disburse checks in excess of bank balances up to $14.0 million U.S. dollar equivalent for up to seven days. Borrowings under the overdraft facility bear interest at a rate equal to a spread of 1.0% over the applicable currency's LIBOR with a zero percent floor. There was $2.1 million outstanding balance on the overdraft facility at December 31, 2019 and $4.6 million outstanding at June 30, 2019.

At December 31, 2019, we were obligated to pay certain earnout payments to the former shareholders of Intelisys related to the acquisition on August 29, 2016. See Note 9 - Fair Value of Financial Instruments for a discussion on the liabilities recorded. Future earnout payments for Intelisys are expected to be funded by cash from operations and our existing revolving credit facility.

We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet the present and future working capital and cash requirements for at least the next twelve months.

Off-Balance Sheet Arrangements and Contractual Obligations

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect 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

43


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. 

At December 31, 2019, we have made adjustments to our contingent consideration owed to the former shareholders of Intelisys. See Note 9 - Fair Value of Financial Instruments for a discussion on the liabilities recorded. There have been no other material changes in our contractual obligations and commitments disclosed in our Annual Report on Form 10-K filed on August 22, 2019.

Accounting Standards Recently Issued

See Note 1 of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on our consolidated financial position and results of operations.

Critical Accounting Policies and Estimates

Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. See Management's Discussion and Analysis of Financial Condition and Results from Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 for a complete discussion.

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. 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. An impairment charge could occur if proceeds received in exchange for the Planned Divestitures are lower than the fair value estimates used in our goodwill impairment testing.

44


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

For a description of the Company's market risks, see Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. No material changes have occurred to our market risks since June 30, 2019.

45



Item 4.
Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the effectiveness of the Company’s disclosure controls and procedures at December 31, 2019. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures are effective at December 31, 2019. During the quarter ended December 31, 2019, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


46


PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

The Company and its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to us, we believe that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on our financial condition or results of operations. For a description of our material legal proceedings, see Note 12 - Commitments and Contingencies in the notes to the condensed consolidated financial statements, which is incorporated herein by reference.

Item 1A.
Risk Factors

In addition to the risk factors discussed in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2019, which could materially affect our business, financial condition and/or future operating results.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

On August 29, 2016, we announced a Board of Directors ("BOD") authorization to repurchase shares up to $120 million of our common stock over three years. The share repurchase authorization expired in August 2019. The following table presents the share-repurchase activity, including shares withheld from employees for stock based awards, for the quarter ended December 31, 2019.
Period
 
Total number of shares purchased(a)
 
Average price paid per share
 
Total number of shares purchased as part of the publicly announced plan or program
 
Approximate dollar value of shares that may yet be purchased under the plan or program(b)
October 1, 2019 through October 31, 2019

 

 
$

 

 
$

November 1, 2019 through November 30, 2019

 

 
$

 

 
$

December 1, 2019 through December 31, 2019

 
36,393

 
$
36.85

 

 
$

Total
 
36,393

 
$
36.85

 

 
$

 
 
 
 
 
 
 
 
 
(a) Total number of shares purchased represents shares withheld from employees for stock-based awards in order to satisfy the required tax withholding obligations in combination with shares repurchased under the program defined above for the quarter ended December 31, 2019.
(b) Share repurchase program expired in August 2019.

We have never declared or paid a cash dividend. Under the terms of our credit facility, the payment of cash dividends is restricted.


47


Item 6.
Exhibits
Exhibit
Number
Description
 
 
10.1
 
 
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101
The following materials from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2019, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at December 31, 2019 and June 30, 2019; (ii) the Condensed Consolidated Income Statements for the quarter and six months ended December 31, 2019 and 2018; (iii) the Condensed Consolidated Statements of Comprehensive Income for the quarter and six months ended December 31, 2019 and 2018; (iv) the Condensed Consolidated Statements of Shareholder's Equity at December 31, 2019 and 2018; (v) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2019 and 2018; and (vi) the Notes to the Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
 
 

48


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
ScanSource, Inc.
 
 
 
 
 
/s/ MICHAEL L. BAUR
 
 
Michael L. Baur
Date:
February 4, 2020
Chairman and Chief Executive Officer
(Principal Executive Officer)

 
 
/s/ GERALD LYONS
 
 
Gerald Lyons
Date:
February 4, 2020
Executive Vice President and Chief Financial Officer (Principal Financial Officer)




49
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