PSDO Presidio Inc

Presidio, Inc.

(Exact name of registrant as specified in its charter)

Delaware				47-2398593
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification Number)

☐		Large accelerated filer				☐		Accelerated filer
☒		Non-accelerated filer	(Do not check if a smaller reporting company)			☐		Smaller reporting company
☐		Emerging growth company

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PART I - FINANCIAL INFORMATION

Item 1.         Financial Statements

PRESIDIO, INC.

Consolidated Balance Sheets

(in millions, except share data)

(unaudited)

		As of June 30, 2017				As of December 31, 2017
Assets
Current Assets
Cash and cash equivalents		$	27.5			$	20.7
Accounts receivable, net		576.3				547.5
Unbilled accounts receivable, net		159.8				194.5
Financing receivables, current portion		84.2				82.2
Inventory		27.7				29.9
Prepaid expenses and other current assets		63.4				63.5
Total current assets		938.9				938.3
Property and equipment, net		32.1				34.1
Financing receivables, less current portion		113.6				113.3
Goodwill		781.5				784.1
Identifiable intangible assets, net		751.9				719.0
Other assets		32.7				33.0
Total assets		$	2,650.7			$	2,621.8
Liabilities and Stockholders’ Equity
Current Liabilities
Current maturities of long-term debt		$	—			$	—
Accounts payable – trade		350.5				433.2
Accounts payable – floor plan		264.9				199.6
Accrued expenses and other current liabilities		216.3				190.8
Discounted financing receivables, current portion		79.9				77.7
Total current liabilities		911.6				901.3
Long-term debt, net of debt issuance costs and current maturities		730.7				684.3
Discounted financing receivables, less current portion		104.7				99.0
Deferred income tax liabilities		270.4				181.6
Other liabilities		30.4				26.8
Total liabilities		2,047.8				1,893.0
Commitments and contingencies (Note 10)
Stockholders’ Equity
Preferred stock:
$0.01 par value; 100 shares authorized and zero shares issued and outstanding at December 31, 2017 and June 30, 2017		—				—
Common stock:
$0.01 par value; 250,000,000 shares authorized, 91,821,644 shares issued and outstanding at December 31, 2017 and 90,969,919 shares issued and outstanding at June 30, 2017		0.9				0.9
Additional paid-in capital		625.3				632.3
Retained earnings (accumulated deficit)		(23.3		)		95.6
Total stockholders’ equity		602.9				728.8
Total liabilities and stockholders’ equity		$	2,650.7			$	2,621.8

See Notes to the Consolidated Financial Statements.

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PRESIDIO, INC.

Consolidated Statements of Operations

(in millions, except share and per-share data)

(unaudited)

		Three months ended December 31,								Six months ended December 31,
		2016				2017				2016				2017
Revenue
Product		$	612.2			$	540.3			$	1,238.6			$	1,168.9
Service		109.6				121.3				220.9				257.7
Total revenue		721.8				661.6				1,459.5				1,426.6
Cost of revenue
Product		491.5				431.6				991.0				929.7
Service		87.4				92.6				177.0				203.2
Total cost of revenue		578.9				524.2				1,168.0				1,132.9
Gross margin		142.9				137.4				291.5				293.7
Operating expenses
Selling expenses		66.6				65.3				134.1				130.7
General and administrative expenses		25.8				26.0				52.8				51.7
Transaction costs		2.6				1.7				6.0				2.1
Depreciation and amortization		20.4				21.1				40.8				41.7
Total operating expenses		115.4				114.1				233.7				226.2
Operating income		27.5				23.3				57.8				67.5
Interest and other (income) expense
Interest expense		20.9				12.7				41.6				25.2
Loss on extinguishment of debt		0.8				0.7				0.8				1.4
Other (income) expense, net		0.1				(0.1		)		0.1				(0.1		)
Total interest and other (income)   expense		21.8				13.3				42.5				26.5
Income before income taxes		5.7				10.0				15.3				41.0
Income tax expense (benefit)		2.3				(89.2		)		6.3				(77.9		)
Net income		$	3.4			$	99.2			$	9.0			$	118.9
Earnings per share:
Basic		$	0.05			$	1.08			$	0.13			$	1.30
Diluted		$	0.05			$	1.03			$	0.12			$	1.23
Weighted-average common shares outstanding:
Basic		71,937,504				91,712,178				71,934,986				91,440,895
Diluted		74,769,907				96,678,815				74,624,390				96,504,207

See Notes to the Consolidated Financial Statements.

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PRESIDIO, INC.

Consolidated Statements of Cash Flows

(in millions)

(unaudited)

		Six months ended December 31, 2016				Six months ended December 31, 2017
Cash flows from operating activities:
Net income		$	9.0			$	118.9
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of intangible assets		36.8				37.2
Depreciation of property and equipment in operating expenses		4.0				4.5
Depreciation of property and equipment in cost of revenue		2.8				2.9
Provision for sales returns and credit losses		1.4				0.9
Amortization of debt issuance costs		3.4				2.6
Loss on extinguishment of debt		0.8				1.4
Noncash lease income		(1.7		)		(2.2		)
Share-based compensation expense		1.0				2.6
Deferred income tax benefit		(9.3		)		(88.9		)
Other		0.2				0.1
Change in assets and liabilities, net of acquisitions and dispositions:
Unbilled and accounts receivable		(49.1		)		(4.6		)
Inventory		8.3				(2.2		)
Prepaid expenses and other assets		(18.1		)		0.4
Accounts payable – trade		75.3				80.7
Accrued expenses and other liabilities		18.5				(29.7		)
Net cash provided by operating activities		83.3				124.6
Cash flows from investing activities:
Acquisition of businesses, net of cash and cash equivalents acquired		—				(9.5		)
Proceeds from collection of escrow related to acquisition of business		0.6				0.2
Additions of equipment under sales-type and direct financing leases		(63.9		)		(49.7		)
Proceeds from collection of financing receivables		7.7				2.2
Additions to equipment under operating leases		(0.8		)		(1.2		)
Proceeds from disposition of equipment under operating leases		0.5				0.7
Purchases of property and equipment		(6.7		)		(7.2		)
Net cash used in investing activities		(62.6		)		(64.5		)
Cash flows from financing activities:
Proceeds from issuance of common stock under share-based compensation plans		0.1				4.5
Proceeds from the discounting of financing receivables		66.1				47.0
Retirements of discounted financing receivables		(4.3		)		(2.5		)
Net repayments on the receivables securitization facility		(5.0		)		—
Deferred financing costs		—				(0.6		)
Repayments of term loans		(28.7		)		(50.0		)
Net change in accounts payable — floor plan		(36.4		)		(65.3		)
Net cash used in financing activities		(8.2		)		(66.9		)
Net increase (decrease) in cash and cash equivalents		12.5				(6.8		)
Cash and cash equivalents:
Beginning of the period		33.0				27.5
End of the period		$	45.5			$	20.7
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	37.4			$	22.6
Income taxes, net of refunds		$	1.7			$	22.9
Reduction of discounted lease assets and liabilities		$	43.6			$	55.1

See Notes to the Consolidated Financial Statements.

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PRESIDIO, INC.

Consolidated Statement of Stockholders’ Equity

(in millions, except share data)

(unaudited)

		Preferred stock							Common stock							Additional paid-in capital				Retained earnings (accumulated deficit)				Total
		Shares			Amount				Shares			Amount
Balance, June 30, 2017		—			$	—			90,969,919			$	0.9			$	625.3			$	(23.3	)		$	602.9
Common stock issued   under share-based   compensation plans		—			—				851,725			—				4.4				—				4.4
Net income		—			—				—			—				—				118.9				118.9
Share-based compensation   expense		—			—				—			—				2.6				—				2.6
Balance, December 31, 2017		—			$	—			91,821,644			$	0.9			$	632.3			$	95.6			$	728.8

See Notes to the Consolidated Financial Statements.

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Note 1.         Nature of Business and Significant Accounting Policies

Description of the Company

Presidio, Inc., a Delaware corporation, through its subsidiaries (collectively, the “Company”, “we” and “our”) is a leading provider of information technology (“IT”) solutions to the middle market in North America, assisting clients as they harness technology innovation and simplify IT complexity to digitally transform their businesses and drive return on IT investment. Our Digital Infrastructure, Cloud and Security solutions enable our middle market, enterprise and government clients to take advantage of new digital revenue streams, omnichannel customer experience models, and the rich data insights generated by those interactions. We deliver this technology expertise through a full life-cycle model of professional, managed, and ongoing support services, including strategy, consulting, design and implementation.

During the three months ended September 30, 2017, the Company made an acquisition, which expands our geographic footprint in Minnesota, that is immaterial to the consolidated financial statements.

The Company is headquartered in New York, New York and all of its direct and indirect subsidiaries are located in the United States.

Stock Split

On February 24, 2017, the Company's Board of Directors declared a 2 -for- 1 stock split of the Company’s common stock in the form of a stock dividend payable on each share of common stock issued and outstanding as of February 24, 2017. The number of shares subject to and the exercise price of the Company’s outstanding options were adjusted to equitably reflect the split. All common stock share and per-share data included in these financial statements give effect to the stock split and have been adjusted retroactively for the historical periods presented.

Public Offerings

On March 15, 2017, the Company completed an initial public offering (“IPO”) in which the Company issued and sold 18,766,465 shares of common stock, inclusive of 2,099,799 shares issued and sold on March 21, 2017, pursuant to the underwriters’ option to purchase additional shares, at the public offering price of $14.00 per share. 

    

On November 21, 2017, the Company completed a secondary public offering of 8,000,000 shares of the Company’s common stock, held by certain funds affiliated with Apollo Global Management, LLC (the “Selling Stockholder”) at a price to the public of $14.25 per share. In addition, the underwriters purchased an additional 1,200,000 shares of common stock from the Selling Stockholder. The Company did not sell any shares and did not receive any proceeds from the offering. In conjunction with this secondary offering, the Company incurred $0.9 million of expenses, which is presented within transaction costs on the consolidated statement of operations for the three and six months ended December 31, 2017.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Securities and Exchange Commission ("SEC") rules and regulations for interim reporting periods. The consolidated financial statements do not include all disclosures normally made in annual financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included within the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017. All financial information presented in the financial statements and notes herein is presented in millions except for share and per-share information and percentages.

In management’s opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the periods shown have been made. All other adjustments are of a normal recurring nature.

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

The Company has evaluated subsequent events through the issue date of these consolidated financial statements. See Note 17 for further information on subsequent events.

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of Presidio, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, asset residual values, vendor rebates and consideration, goodwill, identifiable intangibles, measurement of income tax assets and liabilities and provisions for doubtful accounts, credit losses, inventory obsolescence, and other contingencies. Actual results could differ from management’s estimates.

Other Comprehensive Income (Loss)

The Company did not have any components of other comprehensive income (loss) for any of the periods presented.

Recent Accounting Pronouncements Adopted During the Fiscal Year

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory , which restricts the valuation of inventory to the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The standard has an effective date for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard in the three months ended September 30, 2017. The adoption of this standard had an immaterial impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

The Company is still evaluating the impact of the following additional accounting pronouncements not yet adopted as of December 31, 2017.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , along with subsequent clarifying ASUs, which outline a single, comprehensive model for accounting for revenue from contracts with customers. Under the standard, revenue is to be recognized upon the transfer of promised goods or services to a customer, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The standard, as amended, is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted.

The standard allows entities to apply the standard retrospectively to each prior reporting period presented ("full retrospective adoption") or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application ("modified retrospective adoption"). The Company has formed an implementation committee and engaged external advisors to assist in evaluating the potential differences compared to existing GAAP and to assist in the implementation process associated with the adoption of this standard. The Company's analysis and evaluation of the new standard will continue through the standard's effective date as the significant number of customers and related terms and conditions of our contracts must be reviewed. The Company is still evaluating both the full retrospective and modified retrospective options and their effect on the Company's financial statements and business and an adoption method has not yet been elected. We plan to adopt ASU 2014-09 on its effective date beginning July 1, 2018.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which changes the accounting for leases in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

sheet and disclosing key information about leasing arrangements. The standard has an effective date for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements. The adoption of the standard is not expected to have a material impact on the Company’s leasing business from a lessor perspective.    

Note 2.         Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in millions):

		June 30, 2017				December 31, 2017
Partner incentive program receivable		$	26.2			$	23.2
Prepaid income taxes		—				4.6
Deferred product costs and other current assets		37.2				35.7
Total prepaid expenses and other current assets		$	63.4			$	63.5

Note 3.         Financing Receivables and Operating Leases

The Company records the lease receivables related to sales-type or direct financing leases as financing receivables, and the related liability resulting from discounting customer payment streams as discounted financing receivables, in the Company’s consolidated balance sheets. Discounted customer payment streams are typically collateralized by a security interest in the underlying assets being leased.

Financing receivables – The assets and related liabilities for discounted and not discounted sales-type and direct financing leases to financial institutions were as follows as of June 30, 2017 (in millions):

		Discounted to financial institutions				Not discounted to financial institutions				Total
Financing receivables:
Minimum lease payments		$	197.2			$	4.2			$	201.4
Estimated net residual values		—				7.2				7.2
Unearned income		(9.4		)		(0.8		)		(10.2		)
Provision for credit losses		—				(0.6		)		(0.6		)
Total, net		$	187.8			$	10.0			$	197.8
Reported as:
Current		$	80.8			$	3.4			$	84.2
Long-term		107.0				6.6				113.6
Total, net		$	187.8			$	10.0			$	197.8
Discounted financing receivables:
Nonrecourse		$	183.7			$	—			$	183.7
Recourse		—				—				—
Total		$	183.7			$	—			$	183.7
Reported as:
Current		$	79.3			$	—			$	79.3
Long-term		104.4				—				104.4
Total		$	183.7			$	—			$	183.7

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

The assets and related liabilities for discounted and not discounted sales-type and direct financing leases to financial institutions were as follows as of December 31, 2017 (in millions):

		Discounted to financial institutions				Not discounted to financial institutions				Total
Financing receivables:
Minimum lease payments		$	198.4			$	2.3			$	200.7
Estimated net residual values		—				6.8				6.8
Unearned income		(10.8		)		(0.8		)		(11.6		)
Provision for credit losses		—				(0.4		)		(0.4		)
Total, net		$	187.6			$	7.9			$	195.5
Reported as:
Current		$	79.8			$	2.4			$	82.2
Long-term		107.8				5.5				113.3
Total, net		$	187.6			$	7.9			$	195.5
Discounted financing receivables:
Nonrecourse		$	175.8			$	—			$	175.8
Recourse		—				—				—
Total		$	175.8			$	—			$	175.8
Reported as:
Current		$	77.0			$	—			$	77.0
Long-term		98.8				—				98.8
Total		$	175.8			$	—			$	175.8

The discounted financing receivables associated with sales-type and direct financing type leases are presented in the consolidated balance sheets together with the discounted financing receivables associated with operating leases which is discussed below.

Operating leases – Equipment under operating leases and accumulated depreciation are reported as part of other assets in the consolidated balance sheets and were as follows (in millions):  

		June 30, 2017				December 31, 2017
Equipment under operating leases		$	4.6			$	3.6
Accumulated depreciation		(2.9		)		(1.5		)
Total equipment under operating leases, net		$	1.7			$	2.1

Depreciation expense associated with equipment under operating leases that is included in cost of product revenue within the Company’s consolidated statements of operations was $0.4 million and $0.5 million for the three months ended December 31, 2017 and 2016 , respectively, and $0.7 million and $1.0 million for the six months ended December 31, 2017 and 2016 , respectively.

Liabilities for discounted operating leases to financial institutions were as follows (in millions):

		June 30, 2017				December 31, 2017
Discounted operating leases:
Current		$	0.7			$	0.6
Noncurrent		0.2				0.2
Total		$	0.9			$	0.8

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

The discounted financing receivables associated with operating leases are presented in the consolidated balance sheets together with the discounted financing receivables associated with sales-type and direct financing type leases which are discussed above.

Note 4.         Property and Equipment

Property and equipment and accumulated depreciation and amortization were as follows (in millions):

		Estimated useful lives		June 30, 2017				December 31, 2017
Furniture and fixtures		3 to 7 years		$	5.3			$	5.6
Equipment		3 to 7 years		22.2				27.5
Software		3 years		19.9				21.9
Leasehold improvements		Life of lease		13.3				14.3
Total property and equipment				60.7				69.3
Accumulated depreciation and amortization				(28.6		)		(35.2		)
Total property and equipment, net				$	32.1			$	34.1

Depreciation and amortization associated with property and equipment that is included in depreciation and amortization within the Company’s consolidated statements of operations was $2.3 million and $2.0 million for the three months ended December 31, 2017 and 2016 , respectively, and $4.5 million and $4.0 million for the six months ended December 31, 2017 and 2016 , respectively.

Depreciation and amortization expense associated with property and equipment directly utilized in support of managed services and managed cloud contracts that is included in cost of service revenue within the Company’s consolidated statements of operations was $1.1 million and $0.9 million for the three months ended December 31, 2017 and 2016 , respectively, and $2.2 million and $1.8 million for the six months ended December 31, 2017 and 2016 , respectively.

Note 5.         Goodwill and Identifiable Intangible Assets

Goodwill

As described in Note 1, we completed an acquisition during the three months ended September 30, 2017 that was immaterial to the consolidated financial statements which resulted in a $2.6 million increase in goodwill.

From June 30, 2017 through the date of the consolidated financial statements, no significant events have occurred that would lead us to believe that goodwill was more likely than not impaired.

Identifiable Intangible Assets

Identifiable intangible assets consisted of the following as of June 30, 2017 (in millions):

		Range of life (years)		Gross amount				Accumulated amortization				Total, net
Finite-lived intangible assets:
Customer relationships		5 – 10		$	703.2			$	(159.8	)		$	543.4
Developed technology		5		3.6				(1.6		)		2.0
Trade names		2		5.1				(3.6		)		1.5
Indefinite-lived intangible assets:
Trade names		Indefinite		205.0				—				205.0
Total intangible assets				$	916.9			$	(165.0	)		$	751.9

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Identifiable intangible assets consisted of the following as of December 31, 2017 :

		Range of life (years)		Gross amount				Accumulated amortization				Total, net
Finite-lived intangible assets:
Customer relationships		5 – 10		$	707.0			$	(195.2	)		$	511.8
Developed technology		5		3.6				(1.9		)		1.7
Trade names		1 – 2		5.6				(5.1		)		0.5
Indefinite-lived intangible assets:
Trade names		Indefinite		205.0				—				205.0
Total intangible assets				$	921.2			$	(202.2	)		$	719.0

Amortization associated with intangible assets was $18.8 million and $18.4 million for the three months ended December 31, 2017 and 2016 , respectively, and $37.2 million and $36.8 million for the six months ended December 31, 2017 and 2016 , respectively. The weighted-average remaining useful life of the finite-lived intangible assets was 7.2 years and 7.7 years as of December 31, 2017 and June 30, 2017 , respectively.

As described in Note 1, we completed an acquisition during the three months ended September 30, 2017 that was immaterial to the consolidated financial statements which resulted in a $4.3 million increase in finite-lived intangible assets.

From June 30, 2017 through the date of the consolidated financial statements, no significant events have occurred that would lead us to believe that the indefinite-lived trade names were more likely than not impaired.

Based on the finite-lived intangible assets recorded at December 31, 2017 , the future amortization expense is expected to be as follows (in millions):

	Years ending June 30,
2018 (remaining six months)	$	36.4
2019	71.9
2020	71.7
2021	71.1
2022	71.1
2023 and thereafter	191.8
Total	$	514.0

Note 6.         Accounts Payable – Floor Plan

The accounts payable – floor plan balances on the consolidated balance sheets relate to an agreement with a financial institution that provides an indirect wholly-owned subsidiary of the Company with funding for discretionary inventory purchases from approved vendors. Payables are due within 90 days and are noninterest bearing, provided they are paid when due. In accordance with the agreement, the financial institution has been granted a senior security interest in the indirect wholly-owned subsidiary’s inventory purchased under the agreement and accounts receivable arising from the sale thereof. Payments on the facility are guaranteed by Presidio LLC and subsidiaries. As of December 31, 2017 and June 30, 2017 , the aggregate availability for purchases under the floor plan was the lesser of $325.0 million or the liquidation value of the pledged assets. The balances outstanding under the accounts payable - floor plan facility were $199.6 million and $ 264.9 million as of December 31, 2017 and June 30, 2017 , respectively.

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Note 7.         Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in millions):

		June 30, 2017				December 31, 2017
Accrued compensation		$	64.5			$	56.4
Accrued interest		11.7				11.5
Accrued equipment purchases/vendor expenses		78.3				62.5
Accrued income taxes		7.3				—
Accrued non-income taxes		7.4				10.2
Customer deposits		5.1				3.4
Unearned revenue		40.0				44.6
Other accrued expenses and current liabilities		2.0				2.2
Total accrued expenses and other current liabilities		$	216.3			$	190.8

Note 8.         Long-Term Debt and Credit Agreements

Long-term debt consisted of the following (in millions):

		June 30, 2017				December 31, 2017
Revolving credit facility		$	—			$	—
Receivables securitization facility		—				—
Term loan facility, due February 2022		626.6				576.6
Senior notes, 10.25% due February 2023		125.0				125.0
Total long-term debt		751.6				701.6
Unamortized debt issuance costs		(20.9		)		(17.3		)
Total long-term debt, net of debt issuance costs		$	730.7			$	684.3
Reported as:
Current		$	—			$	—
Long-term		730.7				684.3
Total long-term debt, net of debt issuance costs		$	730.7			$	684.3

As of December 31, 2017 , there were no outstanding borrowings on the revolving credit facility and there were $ 1.5 million in letters of credit outstanding. The Company was in compliance with the covenants and had $ 48.5 million available for borrowings under the facility as of December 31, 2017 .

Receivables Securitization Facility

On November 28, 2017, the Company entered into Amendment No. 2 to Second Amended and Restated Receivables Purchase Agreement and Reaffirmation of Performance Guaranty which, among other things, extended the maturity of the facility to November 28, 2020. The Company incurred  $0.6 million  in deferred financing costs associated with this amendment.

As of December 31, 2017 , there were no outstanding borrowings under the receivables securitization facility. The Company had $ 240.6 million available under the receivables securitization facility based on the collateral available as of December 31, 2017 .

February 2015 Term Loan

On August 8, 2017, the Borrowers entered into Amendment No. 5 to that certain Credit Agreement, dated as of February 2, 2015 (as previously amended, amended and restated, supplemented or otherwise modified, the "Credit Agreement") to, among other things, revise certain reporting requirements thereunder.

13

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

During the three and six months ended December 31, 2017, the Company made aggregate voluntary prepayments of $25.0 million and $50.0 million , respectively, on the term loan, resulting in a $0.7 million and $1.4 million loss on extinguishment of debt, respectively, in the Company’s consolidated statement of operations associated with the write-off of debt issuance costs.

Note 9.         Fair Value Measurements

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts and unbilled receivables, accounts payable – trade, accounts payable – floor plan, and other accrued liabilities, the carrying amount approximates fair value due to the short-term maturities of these instruments. Additionally, the Company’s financing receivables, and acquisition-related liabilities were measured at their respective fair values upon initial recognition.

The fair value hierarchy for the Company’s financial assets and liabilities measured at fair value were as follows as of June 30, 2017 (in millions):

						Fair value measurement
		Carrying value				Level 1				Level 2				Level 3
Term loans		$	626.6			$	—			$	627.4			$	—
Senior notes		125.0				—				138.8				—
Total		$	751.6			$	—			$	766.2			$	—

The fair value hierarchy for the Company’s financial assets and liabilities measured at fair value were as follows as of December 31, 2017 (in millions):

						Fair value measurement
		Carrying value				Level 1				Level 2				Level 3
Term loans		$	576.6			$	—			$	578.0			$	—
Senior notes		125.0				—				135.7				—
Total		$	701.6			$	—			$	713.7			$	—

The fair value of the Company’s term loans and 10.25% Senior Notes due 2023 (the "Senior Notes") are estimated based on quoted market prices for the debt which is traded in over-the-counter secondary markets that are not considered active. The carrying value of the Company’s term loans and Senior Notes exclude unamortized debt issuance costs.

For certain of the Company’s nonfinancial assets, including goodwill, intangible assets, and property and equipment, the Company may be required to assess the fair values of these assets, on a recurring or nonrecurring basis, and record an impairment if the carrying value exceeds the fair value. In determining the fair value of these assets, the Company may use a combination of valuation methods which include Level 3 inputs. For the periods presented, there were no impairments charges.

Note 10.     Commitments and Contingencies

Claims and assessments – In the normal course of business, the Company is subject to certain claims and assessments that arise in the ordinary course of business. The Company records a liability when the Company believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine the outcome and the estimated amount of a loss related to such matters. Management believes that there are no claims or assessments outstanding which would materially affect the consolidated results of operations or financial position of the Company.

On July 14, 2015, the Company received a subpoena from the Office of Inspector General for the General Services Administration (“GSA”) seeking various records relating to GSA contracting activity by us during the period beginning in April 2005 through the present. The subpoena is part of an ongoing law enforcement investigation being conducted by the GSA and requests a broad range of documents relating to business conduct in the GSA Multiple Award Schedule program. The Company is fully cooperating with the Inspector General in connection with the subpoena.

14

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

As this matter is ongoing, the Company is unable to determine the likely outcome and is unable to reasonably estimate a range of loss, if any, at this time. Accordingly, no provision for this matter has been recorded.

Note 11.     Share-based Compensation

During the six months ended December 31, 2017 , the Company did not issue any equity awards pursuant to the Company's Amended and Restated 2015 Long-Term Incentive Plan (the "2015 LTIP"). During the six months ended December 31, 2017 , the Company granted 203,000 service-based non-qualified stock options that vest in four equal installments on each of the first four anniversaries of the grant date and 150,000 service-based restricted stock units that vest in two equal installments over a two -year period; all of which were issued pursuant to the Company's 2017 Long-Term Incentive Plan (the "2017 LTIP").

During the six months ended December 31, 2017 , there were 693,820 service-based and rolled options exercised and 328,658 service-based and rolled options expired or forfeited. As of December 31, 2017 , 5,982,113 service-based and rolled options were outstanding, of which 2,086,608 were vested.

During the six months ended December 31, 2017 , there were 359,998 performance-based and market-based options forfeited. As of December 31, 2017, the performance condition for these options was deemed met; however, as the market condition for vesting had not yet been realized, the total balance of 3,093,038 options outstanding were unvested.

As of December 31, 2017, there were 1,342,095 remaining shares available for issuance under the Presidio, Inc. Employee Stock Purchase Plan (the "ESPP"). On December 31, 2017, the Company held $0.4 million of contributions made by employees that were used to purchase 22,078 shares under the ESPP on January 5, 2018.

Share-Based Compensation Expense

The following table summarizes the share-based compensation expense recorded in our operating expenses, as follows (in millions):

		Three months ended December 31,								Six months ended December 31,
		2016				2017				2016				2017
Selling expenses		$	0.2			$	0.3			$	0.4			$	0.7
General and administrative expenses		0.3				1.4				0.6				1.9
Total		$	0.5			$	1.7			$	1.0			$	2.6

As of December 31, 2017 , there was $9.0 million of unrecognized share-based compensation expense, $7.4 million of which relates to service-based awards from the 2015 LTIP and 2017 LTIP grants and $1.6 million of which relates to the restricted stock unit grants.

15

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Note 12.     Earnings Per Share

The following is a reconciliation of the weighted-average number of shares used to compute basic and diluted earnings per share (in millions, except share and per-share data):

		Three months ended December 31,								Six months ended December 31,
		2016				2017				2016				2017
Numerator:
Earnings		$	3.4			$	99.2			$	9.0			$	118.9
Denominator:
Weighted-average shares – basic		71,937,504				91,712,178				71,934,986				91,440,895
Effect of dilutive securities:
Share-based awards		2,832,403				4,966,637				2,689,404				5,063,312
Weighted-average shares – diluted		74,769,907				96,678,815				74,624,390				96,504,207
Earnings per share:
Basic		$	0.05			$	1.08			$	0.13			$	1.30
Diluted		$	0.05			$	1.03			$	0.12			$	1.23

Potentially dilutive securities that have been excluded from the computation of diluted weighted-average common shares outstanding because their inclusion would have been anti-dilutive consisted of the following:

		Three months ended December 31,						Six months ended December 31,
		2016			2017			2016			2017
Share-based awards excluded from EPS because of anti-dilution		482,220			1,949,689			482,220			1,949,689
Share-based awards excluded from EPS because performance or market condition had not been met (1)		3,503,554			—			3,503,554			—
Total share-based awards excluded from   EPS		3,985,774			1,949,689			3,985,774			1,949,689

___________________________________

(1) For the three and six months ended December 31, 2016, all performance and market-based stock options were excluded from EPS as the performance condition was not considered probable. For the three and six months ended December 31, 2017, the performance condition for all performance and market-based stock options had been deemed met due to the completion of the Company's IPO. As a result, the performance and market-based stock options are included in the Company's EPS calculation to the extent the market condition was deemed to have been met on December 31, 2017 as if it was the end of the contingency period.

Note 13.     Income Taxes

Recent U.S. federal income tax legislation, commonly referred to as the The Tax Cuts and Jobs Act (“the TCJA”), was enacted on December 22, 2017 which, among other things, reduces the U.S. federal corporate tax rate from 35.0% to 21.0% effective on January 1, 2018. The rate change is administratively effective at the beginning of Presidio’s fiscal year, resulting in a blended rate of 28.1% for the fiscal year ending June 30, 2018, which is accounted for in the interim and annual periods that include December 22, 2017. As the Company has a June 30 fiscal year-end, the U.S. federal corporate tax rate for our fiscal year ended June 30, 2019 will be 21.0% .

The Company recognized provisional amounts of $89.2 million of income tax benefit for the three months ended December 31, 2017 relating to the re-measurement of deferred tax asset and liability balances due to the change in tax rates enacted in the period. The Company is still analyzing certain aspects of the TCJA and refining its calculations, which could potentially affect the measurement of these balances. The changes included in the TCJA are broad and complex and could materially affect the estimates recorded for the quarter, due to, among other things, changes in legislative interpretations or further guidance issued on

16

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

the application of certain provisions of the TCJA. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the TCJA to finalize the recording of the related tax impacts.

The Company recorded an income tax benefit for the three and six months ended December 31, 2017 of $89.2 million and $77.9 million , respectively, compared to income tax expense for the three and six months ended December 31, 2016 of $2.3 million and $6.3 million , respectively. The Company's effective tax rates for the three and six months ended December 31, 2017 were (892.0)% and (190.0)% , compared to the three and six months ended December 31, 2016 of 39.7% and 41.6% , respectively.

The Company’s effective tax rates differed from the U.S. federal statutory tax rate primarily due to the $89.2 million impact of revaluation of deferred tax asset and liability balances, or (892.0)% and (217.6)% effective tax rate impact for the three months and six months ended December 31, 2017, respectively. The other drivers of the differences in our effective tax rates from the U.S. federal statutory tax rates include state taxes: the favorable excess tax benefit deduction for the three and six months ended December 31, 2017 related to share-based compensation of $0.9 million and $2 million , respectively: and a $2.2 million adjustment recorded in the three months ended December 31, 2017 to adjust our statutory federal tax rate from 35.0% to 28.1% .

Note 14.     Related Party Transactions

Apollo Global Management, LLC (together with its subsidiaries, “Apollo”) is a leading alternative investment management firm which owns and operates businesses across a variety of industries. The Company recorded revenue to parties affiliated with Apollo or our directors of $0.3 million and $1.9 million for the three months ended December 31, 2017 and 2016 , respectively, and $0.9 million and $2.1 million for the six months ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and June 30, 2017 , the outstanding receivables associated with parties affiliated with Apollo or our directors were $0.4 million and $1.7 million , respectively.

The Company leases an office that is owned by members of the Company’s management. The office location was carried over from a prior acquisition and the Company has continued to renew the lease. Rent expense for the office was $0.1 million for both the three months ended December 31, 2017 and 2016 , respectively, and $0.2 million for both the six months ended December 31, 2017 and 2016, respectively.

Note 15.     Segment Information

Geographic Areas

Revenue earned by the Company from customers outside of the United States is not material for any of the periods presented. Additionally, the Company does not have long-lived assets outside of the United States.

Revenue by Solution Area

    

The following table presents total revenue by solution area (in millions):

		Three months ended December 31,								Six months ended December 31,
		2016				2017				2016				2017
Cloud		$	136.4			$	108.9			$	248.1			$	244.4
Security		69.8				85.3				136.5				194.3
Digital Infrastructure		515.6				467.4				1,074.9				987.9
Total revenue		$	721.8			$	661.6			$	1,459.5			$	1,426.6

The type of solution sold by the Company to its customers is based upon internal classifications.

17

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Note 16.     Supplemental Consolidating Information

The following financial statements set forth condensed consolidating financial information for the Company. The condensed consolidating financial information presents Presidio, Inc. on a standalone basis, Presidio Holdings Inc. and subsidiaries on a consolidated basis as borrowers or guarantors of the Credit Agreement and that certain Indenture, dated as of February 2, 2015 (as amended, supplemented or otherwise modified from time to time, the "Indenture"), by and among Presidio Holdings, Inc., the guarantors party thereto and Wilmington Trust, National Association, as trustee, and the consolidating intercompany adjustments between the entities.

The following condensed consolidating financing information was prepared on the same basis as the consolidated financial statements (in millions):

18

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Condensed Consolidating Balance Sheet
As of June 30, 2017
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Adjustments				Consolidated
Assets
Current Assets
Cash and cash equivalents		$	0.7			$	26.8			$	—			$	27.5
Accounts receivable, net		—				576.3				—				576.3
Unbilled accounts receivable, net		—				159.8				—				159.8
Financing receivables, current portion		—				84.2				—				84.2
Inventory		—				27.7				—				27.7
Prepaid expenses and other current assets		1.3				69.1				(7.0		)		63.4
Total current assets		2.0				943.9				(7.0		)		938.9
Property and equipment, net		—				32.1				—				32.1
Deferred tax asset		2.7				—				(2.7		)		—
Financing receivables, less current portion		—				113.6				—				113.6
Goodwill		—				781.5				—				781.5
Identifiable intangible assets, net		—				751.9				—				751.9
Other assets		605.2				32.7				(605.2		)		32.7
Total assets		$	609.9			$	2,655.7			$	(614.9	)		$	2,650.7
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable – trade		—				350.5				—				350.5
Accounts payable – floor plan		—				264.9				—				264.9
Accrued expenses and other current liabilities		7.0				216.3				(7.0		)		216.3
Discounted financing receivables, current portion		—				79.9				—				79.9
Total current liabilities		7.0				911.6				(7.0		)		911.6
Long-term debt, net of debt issuance costs and current maturities		—				730.7				—				730.7
Discounted financing receivables, less current portion		—				104.7				—				104.7
Deferred income tax liabilities		—				273.1				(2.7		)		270.4
Other liabilities		—				30.4				—				30.4
Total liabilities		7.0				2,050.5				(9.7		)		2,047.8
Total stockholders’ equity		602.9				605.2				(605.2		)		602.9
Total liabilities and stockholders’ equity		$	609.9			$	2,655.7			$	(614.9	)		$	2,650.7

19

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Condensed Consolidating Balance Sheet
As of December 31, 2017
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Adjustments				Consolidated
Assets
Current Assets
Cash and cash equivalents		$	1.0			$	19.7			$	—			$	20.7
Accounts receivable, net		—				547.5				—				547.5
Unbilled accounts receivable, net		—				194.5				—				194.5
Financing receivables, current portion		—				82.2				—				82.2
Inventory		—				29.9				—				29.9
Prepaid expenses and other current assets		1.7				66.8				(5.0		)		63.5
Total current assets		2.7				940.6				(5.0		)		938.3
Property and equipment, net		—				34.1				—				34.1
Deferred tax asset		1.6				—				(1.6		)		—
Financing receivables, less current portion		—				113.3				—				113.3
Goodwill		—				784.1				—				784.1
Identifiable intangible assets, net		—				719.0				—				719.0
Other assets		730.4				33.0				(730.4		)		33.0
Total assets		$	734.7			$	2,624.1			$	(737.0	)		$	2,621.8
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable – trade		—				433.2				—				433.2
Accounts payable – floor plan		—				199.6				—				199.6
Accrued expenses and other current liabilities		5.9				189.9				(5.0		)		190.8
Discounted financing receivables, current portion		—				77.7				—				77.7
Total current liabilities		5.9				900.4				(5.0		)		901.3
Long-term debt, net of debt issuance costs and current maturities		—				684.3				—				684.3
Discounted financing receivables, less current portion		—				99.0				—				99.0
Deferred income tax liabilities		—				183.2				(1.6		)		181.6
Other liabilities		—				26.8				—				26.8
Total liabilities		5.9				1,893.7				(6.6		)		1,893.0
Total stockholders’ equity		728.8				730.4				(730.4		)		728.8
Total liabilities and stockholders’ equity		$	734.7			$	2,624.1			$	(737.0	)		$	2,621.8

20

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Condensed Consolidating Statement of Operations
Three months ended December 31, 2016
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Adjustments				Consolidated
Total revenue		$	—			$	721.8			$	—			$	721.8
Total cost of revenue		—				578.9				—				578.9
Gross margin		—				142.9				—				142.9
Operating expenses
Selling, general and administrative, and transaction costs		—				95.0				—				95.0
Depreciation and amortization		—				20.4				—				20.4
Total operating expenses		—				115.4				—				115.4
Operating income		—				27.5				—				27.5
Interest and other (income) expense
Interest expense		—				20.9				—				20.9
Loss on extinguishment of debt		—				0.8				—				0.8
Other (income) expense, net		(3.4		)		0.1				3.4				0.1
Total interest and other (income) expense		(3.4		)		21.8				3.4				21.8
Income before income taxes		3.4				5.7				(3.4		)		5.7
Income tax expense		—				2.3				—				2.3
Net income		$	3.4			$	3.4			$	(3.4	)		$	3.4

Condensed Consolidating Statement of Operations
Three months ended December 31, 2017
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Adjustments				Consolidated
Total revenue		$	—			$	661.6			$	—			$	661.6
Total cost of revenue		—				524.2				—				524.2
Gross margin		—				137.4				—				137.4
Operating expenses
Selling, general and administrative, and transaction costs		1.0				92.0				—				93.0
Depreciation and amortization		—				21.1				—				21.1
Total operating expenses		1.0				113.1				—				114.1
Operating income (loss)		(1.0		)		24.3				—				23.3
Interest and other (income) expense
Interest expense		—				12.7				—				12.7
Loss on extinguishment of debt		—				0.7				—				0.7
Other (income) expense, net		(100.8		)		(0.1		)		100.8				(0.1		)
Total interest and other (income) expense		(100.8		)		13.3				100.8				13.3
Income before income taxes		99.8				11.0				(100.8		)		10.0
Income tax expense (benefit)		0.6				(89.8		)		—				(89.2		)
Net income		$	99.2			$	100.8			$	(100.8	)		$	99.2

21

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Condensed Consolidating Statement of Operations
Six months ended December 31, 2016
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Adjustments				Consolidated
Total revenue		$	—			$	1,459.5			$	—			$	1,459.5
Total cost of revenue		—				1,168.0				—				1,168.0
Gross margin		—				291.5				—				291.5
Operating expenses
Selling, general and administrative, and transaction costs		—				192.9				—				192.9
Depreciation and amortization		—				40.8				—				40.8
Total operating expenses		—				233.7				—				233.7
Operating income		—				57.8				—				57.8
Interest and other (income) expense
Interest expense		—				41.6				—				41.6
Loss on extinguishment of debt		—				0.8				—				0.8
Other (income) expense, net		(9.0		)		0.1				9.0				0.1
Total interest and other (income) expense		(9.0		)		42.5				9.0				42.5
Income before income taxes		9.0				15.3				(9.0		)		15.3
Income tax expense		—				6.3				—				6.3
Net income		$	9.0			$	9.0			$	(9.0	)		$	9.0

Condensed Consolidating Statement of Operations
Six months ended December 31, 2017
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Eliminations				Consolidated
Total revenue		$	—			$	1,426.6			$	—			$	1,426.6
Total cost of revenue		—				1,132.9				—				1,132.9
Gross margin		—				293.7				—				293.7
Operating expenses
Selling, general and administrative, and transaction costs		1.1				183.4				—				184.5
Depreciation and amortization		—				41.7				—				41.7
Total operating expenses		1.1				225.1				—				226.2
Operating income (loss)		(1.1		)		68.6				—				67.5
Interest and other (income) expense
Interest expense		—				25.2				—				25.2
Loss on extinguishment of debt		—				1.4				—				1.4
Other (income) expense, net		(120.6		)		(0.1		)		120.6				(0.1		)
Total interest and other (income) expense		(120.6		)		26.5				120.6				26.5
Income before income taxes		119.5				42.1				(120.6		)		41.0
Income tax expense (benefit)		0.6				(78.5		)		—				(77.9		)
Net income		$	118.9			$	120.6			$	(120.6	)		$	118.9

22

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Condensed Consolidating Statement of Cash Flows
Six months ended December 31, 2016
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Adjustments				Consolidated
Net cash provided by operating activities		$	0.2			$	83.1			$	—			$	83.3
Cash flows from investing activities:
Proceeds from collection of escrow related to acquisition   of business		—				0.6				—				0.6
Capital contribution to subsidiary		(25.0		)		—				25.0				—
Additions of equipment under sales-type and direct   financing leases		—				(63.9		)		—				(63.9		)
Proceeds from collection of financing receivables		—				7.7				—				7.7
Additions to equipment under operating leases		—				(0.8		)		—				(0.8		)
Proceeds from disposition of equipment under operating   leases		—				0.5				—				0.5
Purchases of property and equipment		—				(6.7		)		—				(6.7		)
Net cash used in investing activities		(25.0		)		(62.6		)		25.0				(62.6		)
Cash flows from financing activities:
Proceeds from issuance of comment stock under share-   based compensation plans		0.1				—				—				0.1
Proceeds from the discounting of financing receivables		—				66.1				—				66.1
Retirements of discounted financing receivables		—				(4.3		)		—				(4.3		)
Net repayments on the receivables securitization facility		—				(5.0		)		—				(5.0		)
Capital contribution from parent		—				25.0				(25.0		)		—
Repayments of term loans		—				(28.7		)		—				(28.7		)
Net change in accounts payable — floor plan		—				(36.4		)		—				(36.4		)
Net cash used in financing activities		0.1				16.7				(25.0		)		(8.2		)
Net increase (decrease) in cash and cash   equivalents		(24.7		)		37.2				—				12.5
Cash and cash equivalents:
Beginning of the period		26.1				6.9				—				33.0
End of the period		$	1.4			$	44.1			$	—			$	45.5

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Condensed Consolidating Statement of Cash Flows
Six months ended December 31, 2017
		Presidio, Inc.				Presidio Holdings Inc. & Subsidiaries				Intercompany Adjustments				Consolidated
Net cash provided by (used in) operating activities		$	(2.0	)		$	126.6			$	—			$	124.6
Cash flows from investing activities:
Acquisition of businesses, net of cash and cash equivalents   acquired		—				(9.5		)		—				(9.5		)
Proceeds from collection of escrow related to acquisition of business		—				0.2				—				0.2
Additions of equipment under sales-type and direct financing   leases		—				(49.7		)		—				(49.7		)
Proceeds from collection of financing receivables		—				2.2				—				2.2
Additions to equipment under operating leases		—				(1.2		)		—				(1.2		)
Proceeds from disposition of equipment under operating leases		—				0.7				—				0.7
Purchases of property and equipment		—				(7.2		)		—				(7.2		)
Net cash used in investing activities		—				(64.5		)		—				(64.5		)
Cash flows from financing activities:
Proceeds from issuance of common stock under share-based   compensation plans		2.3				2.2				—				4.5
Proceeds from the discounting of financing receivables		—				47.0				—				47.0
Retirements of discounted financing receivables		—				(2.5		)		—				(2.5		)
Deferred financing costs		—				(0.6		)		—				(0.6		)
Repayments of term loans		—				(50.0		)		—				(50.0		)
Net change in accounts payable — floor plan		—				(65.3		)		—				(65.3		)
Net cash provided by (used in) financing activities		2.3				(69.2		)		—				(66.9		)
Net increase (decrease) in cash and cash equivalents		0.3				(7.1		)		—				(6.8		)
Cash and cash equivalents:
Beginning of the period		0.7				26.8				—				27.5
End of the period		$	1.0			$	19.7			$	—			$	20.7

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PRESIDIO, INC.

Notes to the Consolidated Financial Statements

(unaudited)

Note 17.     Subsequent Events

On January 5, 2018, Presidio LLC and Presidio Networked Solutions LLC (together, the “Borrowers”), indirect wholly-owned subsidiaries of the Company, entered into an Incremental Assumption Agreement and Amendment No. 6 (the “Amendment”) amending the Credit Agreement, by and among the Borrowers, the guarantors party thereto, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

    

Pursuant to the Amendment, the Borrowers (i) refinanced all $576.6 million in aggregate principal amount of term loans outstanding under the Credit Agreement (the “Existing Term Loans”) and (ii) borrowed $140.0 million in aggregate principal amount of incremental term loans, in each case with new term loans (the “New Term Loans”) under the Credit Agreement.

The Amendment provides, among other things, that the New Term Loans will have an interest rate of LIBOR plus 2.75% (with a LIBOR floor of 1.0% ) or base rate plus 1.75% (reduced from the interest rates of LIBOR plus 3.25% or base rate plus 2.25% applicable to the Existing Term Loans), and a maturity date of February 2, 2024 ( two years longer than the maturity date of the Existing Term Loans). The New Term Loans were issued at a price equal to 99.75% of their face value.

Proceeds from the New Term Loans were used to (i) refinance all of the Existing Term Loans, (ii) redeem all of the $125.0 million outstanding aggregate principal amount of the Senior Notes, in accordance with the optional redemption provisions contained in the Indenture, and (iii) pay the redemption premium on the Senior Notes, accrued and unpaid interest, and other fees and expenses payable in connection with the foregoing.

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

Unless otherwise indicated or the context otherwise requires, as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the terms “we,” “us,” “the Company,” “our,” “Presidio,” and similar terms refer to Presidio, Inc. and its subsidiaries. You should read the following discussion in conjunction with the historical consolidated financial statements of Presidio, Inc. and its subsidiaries and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2017. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in "Part II, Item 1A. Risk Factors." Our actual results may differ materially from those contained in any forward-looking statements.

Cautionary Statements Concerning Forward-Looking Statements

This quarterly report contains “forward-looking statements” that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “would,” “could,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates, and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this quarterly report.

Important factors that could cause actual results to differ materially from our expectations, which we refer to as “cautionary statements,” are disclosed under Part II, Item 1A. Risk Factors and elsewhere in this quarterly report. All forward-looking information in this quarterly report and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include:

 

•	general economic conditions;

•	a reduced demand for our information technology solutions;

•	a decrease in spending on technology products by our federal and local government clients;

•	the availability of products from vendor partners and maintenance of vendor relationships;

•	the role of rapid innovation and the introduction of new products in our industry;

•	our ability to compete effectively in a competitive industry;

•	the termination of our client contracts;

•	the failure to effectively develop, maintain and operate our information technology systems;

•	our inability to adequately maintain the security of our information technology systems and clients’ confidential information;

•	investments in new services and technologies may not be successful;

•	the costs of litigation and losses if we infringe on the intellectual property rights of third parties;

•	inaccurate estimates of pricing terms with our clients;

•	failure to comply with the terms of our public sector contracts;

•	any failures by third-party contractors upon whom we rely to provide our services;

•	any failures by third-party commercial delivery services;

•	our inability to retain or hire skilled technology professionals and key personnel;

•	the disruption to our supply chain if suppliers fail to provide products;

•	the risks associated with accounts receivables and inventory exposure;

•	the failure to realize the entire investment in leased equipment;

•	our inability to realize the full amount of our backlog;

•	our acquisitions may not achieve expectations;

•	fluctuations in our operating results;

•	potential litigation and claims;

•	changes in accounting rules, tax legislation and other legislation;

•	increased costs of labor and benefits;

•	our inability to focus our resources, maintain our business structure and manage costs effectively;

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•	the failure to deliver technical support services of sufficient quality;

•	the failure to meet our growth objectives and strategies;

•	ineffectiveness of our internal controls;

•	the risks pertaining to our substantial level of indebtedness; and

•	the other factors discussed in the section of this quarterly report entitled “Risk Factors.”

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this quarterly report may not, in fact, occur. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors. Accordingly, investors should not place undue reliance on those statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Overview

Presidio is a leading provider of IT solutions to the middle market in North America. We enable business transformation through our expertise in IT solutions, with a specific focus on Digital Infrastructure, Cloud and Security solutions. Our solutions are delivered through a broad suite of professional services, including strategy, consulting, design and implementation. We complement our professional services with project management, technology acquisition, managed services, maintenance and support to offer a full lifecycle model. Our services-led, lifecycle model leads to ongoing client engagement. As of June 30, 2017, we served approximately 7,500 middle-market, large, and government organizations across a diverse range of industries.

We develop and maintain our long-term client relationships through a localized direct sales force of approximately 500 employees based in over 60 offices across the United States as of June 30, 2017. As a strategic partner and trusted advisor to our clients, we provide the expertise to implement new solutions, as well as optimize and better leverage existing IT resources. We provide strategy, consulting, design, customized deployment, integration and lifecycle management through our team of over 1,500 engineers as of June 30, 2017, enabling us to architect and manage the ideal IT solutions for our clients. Our local delivery model, combining relationship managers and expert engineering teams, allows us to win, retain and expand our client relationships.

We have three solution areas: (i) Digital Infrastructure, (ii) Cloud, and (iii) Security. Within these areas, we offer customers enterprise-class solutions that are critical to driving digital transformation and expanding business capabilities. Examples of our solutions include advanced networking, IoT, data analytics, data center modernization, hybrid and multi-cloud, cyber risk management, and enterprise mobility. These solutions are enabled by our expertise in foundational technologies, built upon our investments in network, data center, security, collaboration, and mobility.

Digital Infrastructure Solutions : Our enterprise-class Digital Infrastructure solutions enable clients to deploy IT infrastructure that is cloud-flexible, mobile-ready, secure, and insight-driven. We also make clients’ existing IT infrastructure more efficient and flexible for emerging technologies. Within Digital Infrastructure, we are focused on networking, collaboration, enterprise mobility, IoT, and data analytics. Given the millions of potential configurations across technologies, our clients rely on our expertise to simplify the highly complex IT landscape.

Cloud Solutions : Companies are increasingly turning to us for help with their cloud strategy and adoption. We combine our highly specialized cloud professional services with our deep experience in cloud-managed services, converged infrastructure, server, storage, support, and capacity-on-demand economic models to provide a complete lifecycle of cloud infrastructure solutions for our clients. Our proprietary tools, technical expertise, and vendor-agnostic approach help our customers accelerate and simplify cloud adoption across the entire IT lifecycle.

Security Solutions : We use a risk-based security consulting methodology to assess, design, implement, manage, and maintain information security solutions that protect our customers’ critical business data and protects against loss of client loyalty, corporate reputation, and disruptions in ongoing operations. We offer cyber risk management, infrastructure security, and managed security solutions to our clients. Through our next generation risk management solution ("NGRM"), we provide comprehensive risk assessments, detailed reporting, ongoing reviews, process and program development, and training services. NGRM ensures that identified vulnerabilities are mitigated and business risk has been properly addressed. Because our customers’ infrastructures are constantly changing, our NGRM offering is structured as a recurring service with regular periodic assessments of the current security posture combined with ongoing monitoring and surveillance through our 7x24 Security Operations Centers. Our experience spans all major verticals including retail, education, healthcare, government, banking, pharmaceutical, and others. We have expertise with HIPAA, PCI DSS, FISMA, the Sarbanes-Oxley Act, and others. We help our clients design and implement information security programs consistent with industry best practices and comply with the regulatory mandates of their specific vertical that are flexible enough to help ensure information security in an ever-changing risk environment. Findings,

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recommendations and real time security posture status, including our proprietary Risk Management Score, are provided through a 7x24 portal that is accessible by our clients and is updated with the up to date vulnerabilities identified by several industry sources.

We help our clients establish both technical and non-technical security controls and practices to prevent, detect, correct, and minimize the risk of loss or damage to information resources, disruption of access to information resources, and unauthorized disclosure of information. In addition to our NGRM program, we offer options for security strategy program development, security awareness training, technology exposure assessments, and incident response.

Factors Affecting Our Operating Performance

We believe that the financial performance of our business and our future success are dependent upon many factors, including those highlighted in this section. Our operating performance will depend upon many variables, including the success of our growth strategies and the timing and size of investments and expenditures that we choose to undertake, as well as market growth and other factors that are not within our control.

Macroeconomic environment: Weak economic conditions generally, U.S. federal or other government spending cuts, a rising interest rate environment, uncertain tax and regulatory policies, weakening business confidence or a tightening of credit markets could cause our clients and potential clients to postpone or reduce spending on technology solutions, products or services. Our clients are diverse, including both public and private sector parties, but any long-term, severe or sustained economic downturn may adversely affect all of our clients.

Competitive markets: We believe that we are uniquely positioned to take advantage of the markets in which we operate because of our expertise and specialization. We focus on the middle-market segment of the IT services market. Since most large-scale IT service providers focus on larger enterprises and because smaller regional competitors are typically unable to provide end-to-end solutions, we believe the middle market is under-penetrated and under-served. Strategic and investment decisions by our competitors may affect our operating performance.

Delivery of complex technology solutions: Our vendor agnostic approach to the market allows us to develop optimal IT solutions for our clients based on what we view as the best mix of technologies. We deliver our end-to-end solutions through a full lifecycle model, which combines consulting, engineering, managed services, and technology to give us a significant competitive advantage compared to other IT providers. Our ability to effectively manage project engagements, including logistics, product availability, client requirements, engineering resources, and service levels, will affect our financial performance.

Vendor relationships: We are focused on developing and strengthening our relationships with OEMs. We partner with OEMs to deploy product offerings. Pricing and incentive programs are subject to change, and the loss of, change in business relationship with or change in the behavior, including the timing of fulfillment, of any key vendor partners, or the diminished availability of their products, may impact the timing of our sales or could reduce the supply and increase the cost of the products we sell. While we maintain existing relationships with large vendors, there is no guarantee that our vendor partners will continue to develop or produce information technology products that are popular with our clients. We maintain the ability to evolve our vendor relationships as necessary to respond to market trends.

Seasonality : Our results may be affected by slight variances as a result of seasonality we may experience across our business. This seasonality is typically driven by budget cycles and spending patterns across our diverse client base. For example, our local, state and federal government clients operate on an annual budget cycle, most often on the basis of a fiscal year that begins October 1. Our private sector clients operate on an annual budget cycle, most often on the basis of a fiscal year that begins January 1. It is not uncommon to experience a higher level of contract awards, funding actions and overall government and private demand for services in the final months and weeks of the government and private fiscal years, respectively. Consequently, our revenue in the first and second quarters of our fiscal year may be greater than revenue recognized in the third and fourth quarters of our fiscal year.

Components of Results of Operations

There are a number of factors that impact the revenue and margin profile of the solutions we provide, including, but not limited to, solution and technology complexity, technical expertise requiring the combination of products and value-added services provided, as well as other elements that may be specific to a particular engagement.

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Revenue and cost of revenue : Revenue from the sale of our solutions is primarily comprised of the sale of third-party products, software, and third-party support service contracts along with the sale of Company and third-party services. We separately present product revenue and service revenue, along with the associated cost of revenue, in our consolidated statements of operations.

Product revenue : Our product revenue includes:

Revenue for hardware and software : Revenue from the sale of hardware and software products is generally recognized on a gross basis with the selling price to the client recorded as revenue and the acquisition cost of the product recorded as cost of revenue, net of vendor rebates. Revenue is generally recognized when the title and risk of loss are passed to the client. Hardware and software items can be delivered to clients in a variety of ways including as physical products shipped from our warehouse, via drop-shipment by the vendor or supplier, or via electronic delivery for software licenses. In certain cases, our solutions include the sale of software subscriptions where we are the agent in the arrangement with the customer and recognize the related revenue net of the related cost of revenue.

Revenue for third-party support service contracts : Revenue from the sale of third-party support service contracts is recognized net of the related cost of revenue. In a third-party support service contract, all services are provided by our third-party providers and as a result, we are acting as an agent and recognize revenue on a net basis at the date of sale, with revenue being equal to the gross margin on the transaction. As we are under no obligation to perform additional services, revenue is recognized at the time of sale as opposed to over the life of the third-party support service agreement.

Revenue from leasing arrangements : Revenue recognition for information technology hardware and software products leased to clients is based on the type of the lease. Each lease is classified as either a direct financing lease, sales-type lease or operating lease. The majority of our leases are sales-type leases. At the inception of a sales-type lease, the present value of the non-cancelable rentals is recorded as revenue and equipment costs, less the present value of the estimated residual values, are recorded in cost of revenue. At the inception of an operating lease, the equipment assigned to the lease is recorded at cost as equipment under operating leases presented within other assets in our consolidated balance sheets and is depreciated on a straight-line basis over its useful life. Monthly payments are recorded as revenue within our consolidated statements of operations, with the depreciation expense associated with the equipment recorded in cost of product revenue.

Service revenue : Our service revenue includes consulting and integration services, project management, managed services, and support services and includes:

Revenue for professional services : Revenue for professional services is generally recognized as the services are performed. For time and material service contracts, revenue is recognized at the contractual hourly rates for the hours performed during the period. For fixed price service contracts, revenue is recognized on a proportional performance method based on the labor hours completed compared to the total estimated hours for the scope of work under contract and revenue accrued or deferred as appropriate. Cost of revenue associated with professional services includes the compensation, benefits, and other costs associated with our delivery and project management engineering team, as well as costs charged by subcontractors.

Revenue for managed services : Revenue for managed services is generally recognized on a straight-line basis over the term of the arrangement. We may incur upfront costs associated with professional and managed services including, but not limited to, purchasing third-party support service arrangements and software licenses. These costs are initially deferred as prepaid expenses or other assets and expensed over the period that services are being provided as cost of revenue. In addition, cost of revenue includes the compensation, benefits and other costs associated with our managed services engineering team, costs charged by subcontractors, and depreciation of the software used to deliver our managed services and managed cloud contracts.

Gross margin : Our product gross margin is impacted by the types of technology sold in our solutions, as well as the mix of third-party support service contracts. As described previously, our third-party support service sales are recognized on a net basis, resulting in the gross margin being recognized as revenue. Accordingly, higher attach rates of third-party support service contracts to the sale of hardware and more successful renewals of expiring contracts have a significant favorable impact to our gross margin percentage.

Our service gross margin is primarily impacted by our ability to deliver on fixed price professional services engagements within scope, the ability to keep our delivery engineers utilized and the hourly bill rate charged to clients. The complexity of the solutions sold to our clients may require specialized engineering capabilities that can favorably impact the bill rate we charge. Our service revenue and cost of revenue also includes third-party services. Generally, a higher mix of professional services delivered by our delivery engineers has a favorable impact on service gross margin. In addition, our managed services gross margins are favorably impacted by our ability to negotiate longer contracts with our clients, as well as renewing contracts at a high rate, which improves our operating efficiency. Generally, a higher percentage of our overall revenue relates to services sold to our clients

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when the technology complexity of our solutions increases. Accordingly, our gross margins are favorably impacted by our ability to deliver more complex solutions, which include professional and managed services.

Operating expenses : Our operating expenses include selling expenses, general and administrative expenses, transaction costs, and depreciation and amortization.

Selling expenses are comprised of compensation (including share-based compensation), variable incentive pay, and benefits related to our sales personnel along with travel expenses and other employee related costs. Variable incentive pay is largely driven by our gross margin performance. We expect selling expenses to increase as a result of higher gross margin, as well as continued investment in our direct and indirect sales resources. However, we expect selling expenses to decline as a percentage of our total revenue.

General and administrative expenses are comprised of compensation (including share-based compensation) and benefits of administrative and operational support personnel, including variable incentive pay and other administrative costs such as facilities expenses, professional fees, and bad debt expense. We expect general and administrative expenses to increase due to our growth. However, we expect general and administrative expenses to decline as a percentage of our total revenue as we realize the benefits of scale.

Transaction costs include acquisition-related expenses (such as stay and retention bonuses), severance charges, advisory and diligence fees, transaction-related legal, accounting, and tax fees, as well as professional fees and related out-of-pocket expenses associated with refinancing of debt and credit agreements.

Depreciation and amortization primarily includes the amortization of acquired intangible assets associated with our acquisitions and depreciation associated with our property and equipment.

Total interest and other (income) expense : Total interest and other (income) expense primarily includes interest expense associated with our outstanding debt. In addition, we include losses on extinguishment of debt and other noncash gains or losses within total interest and other (income) expense.

Key Business Metrics

Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. In addition to financial information presented in accordance with GAAP, our management uses Adjusted EBITDA and Adjusted Net Income (each which are non-GAAP measures defined below) in its evaluation of past performance and prospects for the future. Our non-GAAP measures should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income or revenue, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. These non-GAAP measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for analysis of our operating results as reported under GAAP and they include adjustments for items that may occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other peer companies over time.

We believe that the most important GAAP and non-GAAP measures include (in millions, except percentages):

		Three months ended December 31,								Six months ended December 31,
		2016				2017				2016				2017
Total revenue		$	721.8			$	661.6			$	1,459.5			$	1,426.6
Gross margin		142.9				137.4				291.5				293.7
Net income		3.4				99.2				9.0				118.9
Adjusted EBITDA		54.7				49.4				112.9				116.9
Adjusted EBITDA margin		7.6		%		7.5		%		7.7		%		8.2		%
Adjusted Net Income		$	22.4			$	28.3			$	46.9			$	63.1

Adjusted EBITDA – Adjusted EBITDA is a non-GAAP financial measure. We believe Adjusted EBITDA provides helpful information with respect to our operating performance as viewed by our management, including a view of our business

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that is not dependent on (a) the impact of our capitalization structure and (b) items that are not part of our day-to-day operations. We define Adjusted EBITDA as net income plus (i) total depreciation and amortization, (ii) interest and other (income) expense, and (iii) income tax expense, as further adjusted to eliminate noncash share-based compensation expense, purchase accounting adjustments, transaction costs, other costs and earnings from disposed business. We define Adjusted EBITDA margin as the ratio of Adjusted EBITDA to total revenue.

The reconciliation of Adjusted EBITDA from Net income for each of the periods presented is as follows (in millions):  

		Three months ended December 31,								Six months ended December 31,
		2016				2017				2016				2017
Adjusted EBITDA Reconciliation:
Net income		$	3.4			$	99.2			$	9.0			$	118.9
Total depreciation and amortization (1)		21.8				22.6				43.6				44.6
Interest and other (income) expense		21.8				13.3				42.5				26.5
Income tax expense (benefit)		2.3				(89.2		)		6.3				(77.9		)
EBITDA		49.3				45.9				101.4				112.1
Adjustments:
Share-based compensation expense		0.5				1.8				1.0				2.6
Purchase accounting adjustments (2)		0.2				—				0.6				0.1
Transaction costs (3)		2.6				1.7				6.0				2.1
Other costs (4)		2.1				—				3.9				—
Total adjustments		5.4				3.5				11.5				4.8
Adjusted EBITDA		$	54.7			$	49.4			$	112.9			$	116.9

 

(1)	“Total depreciation and amortization” equals the sum of (i) depreciation and amortization included within total operating expenses and (ii) depreciation and amortization recorded as part of cost of revenue within our consolidated financial statements.

(2)

“Purchase accounting adjustments” include charges associated with noncash adjustments to acquired assets and liabilities in connection with purchase accounting, such as recognition of increased cost of revenue in connection with an inventory step up fair value adjustment, recognition of reduced revenue in connection with a deferred revenue step down fair value adjustment and recognition of increased office rent expense associated with a fair value adjustment to the liability associated with deferred rent.

(3)

“Transaction costs” (i) of $2.6 million for the three months ended December 31, 2016 includes acquisition-related expenses of $0.7 million related to stay and retention bonuses, $1.7 million related to transaction-related advisory and diligence fees and $0.2 million related to transaction-related legal, accounting and tax fees; (ii) of $1.7 million for the three months ended December 31, 2017 includes acquisition-related expenses of $0.7 million related to stay and retention bonuses and $1.0 million related to transaction-related advisory and diligence fees in connection with the secondary offering of our common stock in November 2017; (iii) of $6.0 million for the six months ended December 31, 2016 includes acquisition expenses of $2.2 million related to stay and retention bonuses, $3.4 million related to transaction-related advisory and diligence fees and $0.4 million related to transaction-related legal, accounting and tax fees; and (iv) of $2.1 million for the six months ended December 31, 2017 includes acquisition-related expenses of $1.0 million related to stay and retention bonuses, $1.0 million related to transaction-related advisory and diligence fees in connection with the secondary offering of our common stock in November 2017 and $0.1 million related to transaction-related legal, accounting and tax fees.

 

(4)

“Other costs” (i) of  $2.1 million for the three months ended December 31, 2016 includes $1.8 million related to certain non-recurring costs incurred in the development of our new cloud service offerings and $0.3 million related to severance charges; and (ii) of $3.9 million for the six months ended December 31, 2016  includes $3.6 million related to certain non-recurring costs incurred in the development of our new cloud service offerings and $0.3 million related to severance charges.

Adjusted Net Income – Adjusted Net Income is a non-GAAP measure, which management uses to provide additional information regarding our operating performance while considering the interest expense associated with our outstanding debt, as well as the impact of depreciation on our fixed assets and income taxes. We define Adjusted Net Income as net income adjusted to exclude (i) amortization of intangible assets, (ii) amortization of debt issuance costs, (iii) losses on extinguishment of debt,

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(iv) noncash share-based compensation expense, (v) purchase accounting adjustments, (vi) transaction costs, (vii) other costs and (viii) the income tax impact associated with the foregoing items to arrive at an appropriate effective tax rate on Adjusted Net Income and adjusted for (1) the impact of permanently nondeductible expenses and (2) the impact of tax-deductible goodwill and intangible assets resulting from certain historical acquisitions and further adjusted for discrete tax items.

The reconciliation of Adjusted Net Income from net income for each of the periods presented is as follows (in millions):  

		Three months ended December 31,								Six months ended December 31,
		2016				2017				2016				2017
Adjusted Net Income reconciliation:
Net income		$	3.4			$	99.2			$	9.0			$	118.9
Adjustments:
Amortization of intangible assets		18.4				18.8				36.8				37.2
Amortization of debt issuance costs		1.7				1.3				3.4				2.6
Loss on extinguishment of debt		0.8				0.7				0.8				1.4
Share-based compensation expense		0.5				1.8				1.0				2.6
Purchase accounting adjustments		0.2				—				0.6				0.1
Transaction costs		2.6				1.7				6.0				2.1
Other costs		2.1				—				3.9				—
Revaluation of federal deferred taxes		—				(89.2		)		—				(89.2		)
Income tax impact of adjustments (1)		(7.3		)		(6.0		)		(14.6		)		(12.6		)
Total adjustments		19.0				(70.9		)		37.9				(55.8		)
Adjusted Net Income		$	22.4			$	28.3			$	46.9			$	63.1

 

(1)

“Income tax impact of adjustments” includes an estimated tax impact of the adjustments to net income at our average statutory rate to arrive at an appropriate effective tax rate on Adjusted Net Income, except for (i) the adjustment of certain transaction costs that are permanently nondeductible for tax purposes and (ii) the impact of tax-deductible goodwill and intangible assets resulting from certain historical acquisitions and further adjusted for discrete tax items such as the remeasurement of deferred tax liabilities due to state rate changes or the excess tax benefit related to share-based compensation activity.

 

32

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Results of Operations - Three Months Ended December 31, 2017 compared to the Three Months Ended December 31, 2016  

		Three months ended December 31, 2016				Three months ended December 31, 2017				Change
(in millions)										$				%
Revenue
Product		$	612.2			$	540.3			$	(71.9	)		(11.7	)%
Service		109.6				121.3				11.7				10.7	%
Total revenue		721.8				661.6				(60.2		)		(8.3	)%
Cost of revenue
Product		491.5				431.6				(59.9		)		(12.2	)%
Service		87.4				92.6				5.2				5.9	%
Total cost of revenue		578.9				524.2				(54.7		)		(9.4	)%
Gross margin		142.9				137.4				(5.5		)		(3.8	)%
Product gross margin		120.7				108.7				(12.0		)		(9.9	)%
Service gross margin		22.2				28.7				6.5				29.3	%
Product gross margin %		19.7		%		20.1		%						0.4	%
Service gross margin %		20.3		%		23.7		%						3.4	%
Total gross margin %		19.8		%		20.8		%						1.0	%
Operating expenses
Selling expenses		66.6				65.3				(1.3		)		(2.0	)%
General and administrative expenses		25.8				26.0				0.2				0.8	%
Transaction costs		2.6				1.7				(0.9		)		(34.6	)%
Depreciation and amortization		20.4				21.1				0.7				3.4	%
Total operating expenses		115.4				114.1				(1.3		)		(1.1	)%
Selling, general and administrative   expenses % of total revenue		12.8		%		13.8		%						1.0	%
Operating income		27.5				23.3				(4.2		)		(15.3	)%
Interest and other (income) expense
Interest expense		20.9				12.7				(8.2		)		(39.2	)%
Loss on extinguishment of debt		0.8				0.7				(0.1		)		(12.5	)%
Other (income) expense, net		0.1				(0.1		)		(0.2		)		(200.0	)%
Total interest and other (income)   expense		21.8				13.3				(8.5		)		(39.0	)%
Income before income taxes		5.7				10.0				4.3				75.4	%
Income tax expense (benefit)		2.3				(89.2		)		(91.5		)		n.m.
Net income		$	3.4			$	99.2			$	95.8			n.m.
Adjusted EBITDA		$	54.7			$	49.4			$	(5.3	)		(9.7	)%
Adjusted Net Income		$	22.4			$	28.3			$	5.9			26.3	%

____________________

n.m. - not meaningful

Revenue

		Three months ended December 31, 2016				Three months ended December 31, 2017				Change
(in millions)										$				%
Revenue
Product		$	612.2			$	540.3			$	(71.9	)		(11.7	)%
Service		109.6				121.3				11.7				10.7	%
Total revenue		$	721.8			$	661.6			$	(60.2	)		(8.3	)%

Total revenue decrease d $60.2 million , or 8.3% , to $661.6 million for the three months ended December 31, 2017 , compared to total revenue of $721.8 million for the three months ended December 31, 2016 . Our revenue in the period was

33

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impacted by delays in the delivery of certain solutions which resulted in a strong increase in our backlog orders believed to be firm as of December 31, 2017. In addition, we experienced a decline in sales to the federal government due to curtailed spending among the specific federal agencies where we have exposure. These trends were partially offset by the continued growth of Security solutions and a higher proportion of services as part of our solutions.

Revenue from sales of product decrease d $71.9 million , or 11.7% , to $540.3 million for the three months ended December 31, 2017 , compared to product revenue of $612.2 million for the three months ended December 31, 2016 . The decline in product revenue is attributable to declines in sales of collaboration and networking infrastructure hardware.

Revenue from sales of services increase d $11.7 million , or 10.7% , to $121.3 million for the three months ended December 31, 2017 , compared to service revenue of $109.6 million for the three months ended December 31, 2016 . The increase in service revenue reflects the increased need of our clients for our technical expertise and our ability to partner with our vendors to engage clients on all of their IT transformation projects, as well as, a significant increase in revenue from our managed services offerings.

 

		Three months ended December 31, 2016				Three months ended December 31, 2017				Change
(in millions)										$				%
Revenue by solution area
Cloud		$	136.4			$	108.9			$	(27.5	)		(20.2	)%
Security		69.8				85.3				15.5				22.2	%
Digital Infrastructure		515.6				467.4				(48.2		)		(9.3	)%
Total revenue		$	721.8			$	661.6			$	(60.2	)		(8.3	)%

Cloud revenue decrease d $27.5 million , or 20.2% , to $108.9 million in the three months ended December 31, 2017 , compared to $136.4 million for the three months ended December 31, 2016 . During the quarter, we saw an increasing number of clients choose Presidio to implement and manage their public cloud instances as part of a multi-cloud solution. This migration results in recurring revenue recognition as previous on-premises instances move to the cloud. The decline in Cloud revenue occurred in both our middle-market and government clients. In the middle-market, decline was driven by healthcare and media, communications, and entertainment clients. State and local government and federal clients experienced a decline in Cloud revenue in the period.

Security revenue increase d $15.5 million , or 22.2% , to $85.3 million in the three months ended December 31, 2017 , compared to $69.8 million in the three months ended December 31, 2016 as continued high profile data security breaches have driven strong demand for our security solutions. We are seeing growth across our portfolio of security services and technology partners driven by higher demand in middle-market and large clients. In the middle-market, education and energy and utility clients experienced strong growth, while in the large client sector our growth was driven by media, communications, and entertainment and retail clients.

Digital Infrastructure revenue decrease d $48.2 million , or 9.3% , to $467.4 million in the three months ended December 31, 2017 compared to $515.6 million in the three months ended December 31, 2016 . The decline was led by delayed investment in collaboration and networking technologies, as well as lower revenue generated by our federal government clients. The refresh cycle that will be driven by new innovative product offerings in this space has been slowed by delays in product availability and delivery driving an increase in our revenue backlog at the end of the period.

34

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Gross Margin

		Three months ended December 31, 2016				Three months ended December 31, 2017				Change
(in millions)										$				%
Gross margin
Product gross margin		$	120.7			$	108.7			$	(12.0	)		(9.9	)%
Service gross margin		22.2				28.7				6.5				29.3	%
Gross margin		$	142.9			$	137.4			$	(5.5	)		(3.8	)%
Product gross margin %		19.7		%		20.1		%						0.4	%
Service gross margin %		20.3		%		23.7		%						3.4	%
Total gross margin %		19.8		%		20.8		%						1.0	%

Total gross margin decrease d $5.5 million , or 3.8% , to $137.4 million for the three months ended December 31, 2017 , as compared to $142.9 million for the three months ended December 31, 2016 , a result of a decrease in total revenue of 8.3% between periods offset by the impact of an expansion of both product and service margins. As a percentage of total revenue, total gross margin increase d 100 basis points to 20.8% for the three months ended December 31, 2017 , up from 19.8% of revenue for the three months ended December 31, 2016 .

Product gross margin decrease d $12.0 million , or 9.9% , to $108.7 million for the three months ended December 31, 2017 , as compared to $120.7 million for the three months ended December 31, 2016 due to the decline in product revenue of 11.7% . Product gross margin as a percentage of product revenue was 20.1% for the three months ended December 31, 2017 , an increase of 40 basis points from 19.7% for the three months ended December 31, 2016 . The increase in gross margin percentage was due to an increased mix of revenue from third party support services in relation to hardware sales as we continued to win renewal and takeaway opportunities with our customers.

Service gross margin increase d $6.5 million , or 29.3% , to $28.7 million for the three months ended December 31, 2017 , as compared to $22.2 million for the three months ended December 31, 2016 . Services gross margin as a percentage of revenue was 23.7% for the three months ended December 31, 2017 , an increase of 340 basis points from 20.3% for the three months ended December 31, 2016 . The primary driver of the increase in total service margins was an increase in utilized hours of our engineers and an increase in bill rate, as well as, improved margins on vendor partner services and reduced investment in new cloud-related service offerings.

Operating Expenses

		Three months ended December 31, 2016				Three months ended December 31, 2017				Change
(in millions)										$				%
Operating expenses
Selling expenses		$	66.6			$	65.3			$	(1.3	)		(2.0	)%
General and administrative expenses		25.8				26.0				0.2				0.8	%
Selling, general and administrative   expenses		92.4				91.3				(1.1		)		(1.2	)%
Transaction costs		2.6				1.7				(0.9		)		(34.6	)%
Depreciation and amortization		20.4				21.1				0.7				3.4	%
Total operating expenses		$	115.4			$	114.1			$	(1.3	)		(1.1	)%
Selling, general and administrative   expenses % of total revenue		12.8		%		13.8		%						1.0	%

We define selling, general and administrative expenses (“SG&A”) as the sum of selling expenses and general and administrative expenses. SG&A decrease d $1.1 million , or 1.2% , to $91.3 million during the three months ended December 31, 2017 , as compared to $92.4 million for the three months ended December 31, 2016 . The decrease in SG&A was primarily attributed to a reduction in selling and administrative personnel, as well as a reduction in incentive compensation. SG&A as a percentage of revenue increased 100 basis points from 12.8% of revenue for the three months ended December 31, 2016 to 13.8% for three months ended December 31, 2017 due to the 8.3% decline in total revenue.

35

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Interest and Other (Income) Expense

		Three months ended December 31, 2016				Three months ended December 31, 2017				Change
(in millions)										$				%
Interest and other (income) expense
Interest expense		$	20.9			$	12.7			$	(8.2	)		(39.2	)%
Loss on extinguishment of debt		0.8				0.7				(0.1		)		(12.5	)%
Other (income) expense, net		0.1				(0.1		)		(0.2		)		(200.0	)%
Total interest and other (income)   expense		$	21.8			$	13.3			$	(8.5	)		(39.0	)%

Interest and other (income) expense decrease d $8.5 million , or 39.0% , to $13.3 million for the three months ended December 31, 2017 , from $21.8 million in the three months ended December 31, 2016 primarily due to lower interest expense resulting from lower outstanding debt and reduced interest rates on outstanding debt. The $8.2 million decline in interest expense for the three months ended December 31, 2017 resulted from $5.5 million of lower interest expense associated with the Company’s Senior Notes and Senior Subordinated Notes that were redeemed and repurchased in the Company’s March 2017 initial public offering and $3.0 million of lower interest expense associated with the Company’s term loan facility reflecting the impact of a lower average interest rate on our outstanding debt in the current period and a reduction in the outstanding principal due to voluntary prepayments.

Income Tax Expense (Benefit)

		Three months ended December 31, 2016				Three months ended December 31, 2017				Change
(in millions)										$				%
Income before income taxes		$	5.7			$	10.0			$	4.3			75.4	%
Income tax expense (benefit)		2.3				(89.2		)		(91.5		)		n.m.
Net income		$	3.4			$	99.2			$	95.8			n.m.

The income tax benefit was $89.2 million in the three months ended December 31, 2017 , compared to income tax expense of $2.3 million in the three months ended December 31, 2016 . The effective tax rate was (892.0)% in the three months ended December 31, 2017 , compared to 39.7% in the three months ended December 31, 2016 . The decline in the effective tax rate in the current year was impacted by the $89.2 million revaluation of deferred income tax assets and liabilities, or 892.0%, the impact of the $0.9 million excess tax benefit on share-based compensation, or 9.0%, and the impact of permanent differences including the cumulative impact of the TCJA which reduced our U.S. federal statutory rate from 35.0% to 28.1% for the fiscal year ending June 30, 2018.

Adjusted EBITDA

Adjusted EBITDA decrease d $5.3 million , or 9.7% , to $49.4 million for the three months ended December 31, 2017 , from $54.7 million for the three months ended December 31, 2016 , driven by a decline in revenue offset slightly by gross margin percent expansion and a reduction in selling, general and administrative expenses as described above. Adjusted EBITDA margin was 7.5% for the three months ended December 31, 2017 compared to 7.6% for the three months ended December 31, 2016 .

Adjusted Net Income

Adjusted Net Income increase d $5.9 million , or 26.3% , to $28.3 million for the three months ended December 31, 2017 , from $22.4 million in the three months ended December 31, 2016 . The results were favorably impacted by the TCJA and lower interest expense in the three months ended December 31, 2017 .

36

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Results of Operations - Six Months Ended December 31, 2017 compared to the Six Months Ended December 31, 2016  

		Six months ended December 31, 2016				Six months ended December 31, 2017				Change
(in millions)										$				%
Revenue
Product		$	1,238.6			$	1,168.9			$	(69.7	)		(5.6	)%
Service		220.9				257.7				36.8				16.7	%
Total revenue		1,459.5				1,426.6				(32.9		)		(2.3	)%
Cost of revenue
Product		991.0				929.7				(61.3		)		(6.2	)%
Service		177.0				203.2				26.2				14.8	%
Total cost of revenue		1,168.0				1,132.9				(35.1		)		(3.0	)%
Gross margin		291.5				293.7				2.2				0.8	%
Product gross margin		247.6				239.2				(8.4		)		(3.4	)%
Service gross margin		43.9				54.5				10.6				24.1	%
Product gross margin %		20.0		%		20.5		%						0.5	%
Service gross margin %		19.9		%		21.1		%						1.2	%
Total gross margin %		20.0		%		20.6		%						0.6	%
Operating expenses
Selling expenses		134.1				130.7				(3.4		)		(2.5	)%
General and administrative expenses		52.8				51.7				(1.1		)		(2.1	)%
Transaction costs		6.0				2.1				(3.9		)		(65.0	)%
Depreciation and amortization		40.8				41.7				0.9				2.2	%
Total operating expenses		233.7				226.2				(7.5		)		(3.2	)%
Selling, general and administrative   expenses % of total revenue		12.8		%		12.8		%						—	%
Operating income		57.8				67.5				9.7				16.8	%
Interest and other (income) expense
Interest expense		41.6				25.2				(16.4		)		(39.4	)%
Loss on extinguishment of debt		0.8				1.4				0.6				75.0	%
Other (income) expense, net		0.1				(0.1		)		(0.2		)		(200.0	)%
Total interest and other (income)   expense		42.5				26.5				(16.0		)		(37.6	)%
Income before income taxes		15.3				41.0				25.7				168.0	%
Income tax expense (benefit)		6.3				(77.9		)		(84.2		)		n.m.
Net income		$	9.0			$	118.9			$	109.9			n.m.
Adjusted EBITDA		$	112.9			$	116.9			$	4.0			3.5	%
Adjusted Net Income		$	46.9			$	63.1			$	16.2			34.5	%

____________________

n.m. - not meaningful

Revenue

		Six months ended December 31, 2016				Six months ended December 31, 2017				Change
(in millions)										$				%
Revenue
Product		$	1,238.6			$	1,168.9			$	(69.7	)		(5.6	)%
Service		220.9				257.7				36.8				16.7	%
Total revenue		$	1,459.5			$	1,426.6			$	(32.9	)		(2.3	)%

Total revenue decrease d $32.9 million , or 2.3% , to $1,426.6 million for the six months ended December 31, 2017 , compared to total revenue of $1,459.5 million for the six months ended December 31, 2016 . Our revenue in the period was impacted

37

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by delays in the delivery of certain solutions which resulted in a strong increase in our backlog orders believed to be firm as of December 31, 2017, as well as a decline in sales to the federal government among the specific federal agencies where we have exposure. This was partially offset by the continued growth of Security solutions and a higher proportion of services as part of our solutions.

Revenue from sales of product decrease d $69.7 million , or 5.6% , to $1,168.9 million for the six months ended December 31, 2017 , compared to product revenue of $1,238.6 million for the six months ended December 31, 2016 . The decline in product revenue is attributable to decline in hardware sales, particularly collaboration equipment.

Revenue from sales of services increase d $36.8 million , or 16.7% , to $257.7 million for the six months ended December 31, 2017 , compared to service revenue of $220.9 million for the six months ended December 31, 2016 . The increase in service revenue reflects our ability to partner with our vendors to engage clients on all of their IT transformation projects as well as strong growth in our managed services offerings. In the period, several large vendor partner engagements contributed to the overall growth in services revenue.

		Six months ended December 31, 2016				Six months ended December 31, 2017				Change
(in millions)										$				%
Revenue by solution area
Cloud		$	248.1			$	244.4			$	(3.7	)		(1.5	)%
Security		136.5				194.3				57.8				42.3	%
Digital Infrastructure		1,074.9				987.9				(87.0		)		(8.1	)%
Total revenue		$	1,459.5			$	1,426.6			$	(32.9	)		(2.3	)%

Cloud revenue decrease d $3.7 million , or 1.5% , to $244.4 million in the six months ended December 31, 2017 , compared to $248.1 million for the six months ended December 31, 2016 . During our second quarter, we saw an increasing number of clients choose Presidio to implement and manage their public cloud instances as part of a multi-cloud solution. This migration results in recurring revenue recognition as previous on-premises instances move to the cloud. The decline in Cloud revenue was mainly driven by government clients particularly in the state and local sector.

Security revenue increase d $57.8 million , or 42.3% , to $194.3 million in the six months ended December 31, 2017 , compared to $136.5 million in the six months ended December 31, 2016 as continued high profile data security breaches have driven strong demand for our security solutions. We are seeing growth across our portfolio of security services and technology partners driven by higher demand in middle-market and large clients. In the middle-market, education and healthcare clients experienced strong growth, while in the large client sector our growth was driven by financial services and retail clients.

Digital Infrastructure revenue decrease d $87.0 million , or 8.1% , to $987.9 million in the six months ended December 31, 2017 , compared to $1,074.9 million in the six months ended December 31, 2016 . Government clients, including state and local government, experienced the most pronounced decline in core infrastructure solutions, particularly in collaboration and networking technologies. The refresh cycle that will be driven by new innovative product offerings in this space has been slowed by delays in product availability and delivery driving an increase in our revenue backlog at the end of the period.

Gross Margin

		Six months ended December 31, 2016				Six months ended December 31, 2017				Change
(in millions)										$				%
Gross margin
Product gross margin		$	247.6			$	239.2			$	(8.4	)		(3.4	)%
Service gross margin		43.9				54.5				10.6				24.1	%
Gross margin		$	291.5			$	293.7			$	2.2			0.8	%
Product gross margin %		20.0		%		20.5		%						0.5	%
Service gross margin %		19.9		%		21.1		%						1.2	%
Total gross margin %		20.0		%		20.6		%						0.6	%

38

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Total gross margin increase d $2.2 million , or 0.8% , to $293.7 million for the six months ended December 31, 2017 , as compared to $291.5 million for the six months ended December 31, 2016 , the result of an expansion of both product and services margins more than offsetting the decline in total revenue. As a percentage of total revenue, total gross margin increase d 60 basis points to 20.6% for the six months ended December 31, 2017 , up from 20.0% of revenue for the six months ended December 31, 2016 .

Product gross margin decrease d $8.4 million , or 3.4% , to $239.2 million for the six months ended December 31, 2017 , as compared to $247.6 million for the six months ended December 31, 2016 . Product gross margin as a percentage of revenue was 20.5% for the six months ended December 31, 2017 , an increase of 50 basis points from 20.0% for the six months ended December 31, 2016 . The increase in gross margin percentage was due to an improved product mix of higher margin solution offerings including software subscription sales.

Service gross margin increase d $10.6 million , or 24.1% , to $54.5 million for the six months ended December 31, 2017 , as compared to $43.9 million for the six months ended December 31, 2016 primarily attributed to the 16.7% service revenue growth in the period. In addition, services gross margin as a percentage of revenue was 21.1% for the six months ended December 31, 2017 , an increase of 120 basis points from 19.9% for the six months ended December 31, 2016 . More efficient delivery of service engagements and reduced investments in cloud-related service offerings drove the 1.2% margin expansion in the period.

Operating Expenses

		Six months ended December 31, 2016				Six months ended December 31, 2017				Change
(in millions)										$				%
Operating expenses
Selling expenses		$	134.1			$	130.7			$	(3.4	)		(2.5	)%
General and administrative expenses		52.8				51.7				(1.1		)		(2.1	)%
Selling, general and administrative   expenses		186.9				182.4				(4.5		)		(2.4	)%
Transaction costs		6.0				2.1				(3.9		)		(65.0	)%
Depreciation and amortization		40.8				41.7				0.9				2.2	%
Total operating expenses		$	233.7			$	226.2			$	(7.5	)		(3.2	)%
Selling, general and administrative   expenses % of total revenue		12.8		%		12.8		%						—	%

SG&A decrease d $4.5 million , or 2.4% , to $182.4 million during the six months ended December 31, 2017 , as compared to $186.9 million for the six months ended December 31, 2016 . The decrease in SG&A was primarily attributed to a reduction in administrative and selling personnel, as well as, lower incentive compensation attributed to improved compensation plans. SG&A as a percentage of revenue was 12.8% of revenue for the six months ended December 31, 2017 and for the six months ended December 31, 2016 .

Transaction costs primarily relate to professional fees and other costs incurred as a result of transaction-related activities and declined by $3.9 million to $2.1 million in the six months ended December 31, 2017 .

Interest and Other (Income) Expense

		Six months ended December 31, 2016				Six months ended December 31, 2017				Change
(in millions)										$				%
Interest and other (income) expense
Interest expense		$	41.6			$	25.2			$	(16.4	)		(39.4	)%
Loss on extinguishment of debt		0.8				1.4				0.6				75.0	%
Other (income) expense, net		0.1				(0.1		)		(0.2		)		(200.0	)%
Total interest and other (income)   expense		$	42.5			$	26.5			$	(16.0	)		(37.6	)%

Interest and other (income) expense decrease d $16.0 million , or 37.6% , to $26.5 million for the six months ended December 31, 2017 , from $42.5 million in the six months ended December 31, 2016 primarily due to lower interest expense resulting from lower outstanding debt and reduced interest rates on outstanding debt. The $16.4 million decline in interest expense

39

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for the six months ended December 31, 2017 was primarily related to $10.9 million of lower interest expense associated with the Company’s Senior Notes and Senior Subordinated Notes that were redeemed and repurchased in the Company’s March 2017 initial public offering and $5.8 million of lower interest expense associated with the Company’s term loan facility reflecting the impact of a lower average interest rate on our outstanding debt in the current period and a reduction in the outstanding principal due to voluntary prepayments.

Income Tax Expense (Benefit)

		Six months ended December 31, 2016				Six months ended December 31, 2017				Change
(in millions)										$				%
Income before income taxes		$	15.3			$	41.0			$	25.7			168.0	%
Income tax expense (benefit)		6.3				(77.9		)		(84.2		)		n.m.
Net income		$	9.0			$	118.9			$	109.9			n.m.

The income tax benefit was $77.9 million in the six months ended December 31, 2017 , compared to income tax expense of $6.3 million in the six months ended December 31, 2016 . The effective tax rate was (190.0)% in the six months ended December 31, 2017 , compared to 41.6% in the six months ended December 31, 2016 . The decline in the effective tax rate in the current year was impacted by the $89.2 million revaluation of deferred income tax assets and liabilities, or 217.6%, the impact of the $2.1 million excess tax benefit on share-based compensation, or 5.1%, and the impact of permanent differences including the TCJA which reduced our U.S. federal statutory rate from 35.0% to 28.1% for our fiscal year ending June 30, 2018.

Adjusted EBITDA

Adjusted EBITDA increase d $4.0 million , or 3.5% , to $116.9 million for the six months ended December 31, 2017 , from $112.9 million for the six months ended December 31, 2016 , driven by gross margin percent expansion and a reduction in selling, general and administrative expenses as described above, partly offset by revenue decline. Adjusted EBITDA margin was 8.2% for the six months ended December 31, 2017 compared to 7.7% for the six months ended December 31, 2016 .

Adjusted Net Income

Adjusted Net Income increase d $16.2 million , or 34.5% , to $63.1 million for the six months ended December 31, 2017 , from $46.9 million in the six months ended December 31, 2016 . The increase was attributable to the impact of the TCJA, lower interest expense, and higher Adjusted EBITDA in the six months ended December 31, 2017 .

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Liquidity and Capital Resources

We fund our operations and capital expenditures through a combination of internally generated cash from operations and from borrowings under our various debt facilities. We believe that our current sources of funds will be sufficient to fund our cash operating requirements for at least the next fiscal year. In addition, we believe that, despite the uncertainty of future macroeconomic conditions, we have adequate sources of liquidity and funding available to meet our long-term needs. These long-term needs primarily include meeting debt service requirements, working capital requirements and capital expenditures. We may also pursue strategic acquisition opportunities that may impact our future cash requirements.

There are a number of factors that may negatively impact our available sources of funds in the future including the ability to generate cash from operations and borrow on debt facilities. The amount of cash generated from operations is dependent upon factors such as the successful execution of our business strategies and general economic conditions. The amount of cash available for borrowings under our various debt facilities is largely dependent on our ability to maintain sufficient collateral and general financial conditions in the marketplace.

Historical Sources and Uses of Cash

The following table summarizes our sources and uses of cash over the periods indicated (in millions):  

		Six months ended December 31, 2016				Six months ended December 31, 2017
Net cash provided by (used in)
Operating activities		$	83.3			$	124.6
Investing activities		(62.6		)		(64.5		)
Net change in accounts payable — floor plan		(36.4		)		(65.3		)
Other financing activities		28.2				(1.6		)
Financing activities		(8.2		)		(66.9		)
Net increase (decrease) in cash and cash equivalents		$	12.5			$	(6.8	)

Operating Activities

Net cash provided by operating activities consist of net income adjusted for noncash items, such as depreciation and amortization of property and equipment and intangible assets, deferred income taxes, share-based compensation, losses on extinguishment of debt or disposals of businesses and for changes in net working capital assets and liabilities. The cash impact of changes in deferred income taxes primarily relates to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Generally, the most significant factor relates to nondeductible book amortization expense associated with intangible assets. The timing between the conversion of our billed and unbilled receivables into cash from our customers and disbursements to our vendors is the primarily driver of changes in our working capital.

Our net cash provided by operating activities for our historical periods includes the impact of tax-deductible goodwill and intangible assets resulting from certain historical acquisitions. The reductions in current tax expense associated with the tax-deductible goodwill and intangible assets were (in millions):

 

		Six months ended December 31, 2016				Six months ended December 31, 2017
Impact of tax deductible goodwill and intangible assets		$	6.0			$	5.1

Six months ended December 31, 2017 : Net cash provided by operating activities for the six months ended December 31, 2017 was $124.6 million . This was primarily attributed to net income of $118.9 million adjusted for: $37.2 million of intangible amortization expense, $7.4 million of total property and equipment depreciation expense, $2.6 million of amortization of debt issuance costs, $1.4 million of losses on extinguishment of debt, $2.6 million of share-based compensation expense and a $44.6 million decrease in our working capital components, partially offset by a $88.9 million deferred income tax benefit . The net decrease in our working capital components was primarily driven by a decrease in cash disbursements for accounts payable — trade partially offset by an increase in cash disbursements for accrued expenses and other liabilities.

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Six months ended December 31, 2016 : Net cash provided by operating activities for the six months ended December 31, 2016 was $83.3 million . This was primarily attributed to net income of $9.0 million adjusted for: $36.8 million of intangible amortization expense, $6.8 million for total property and equipment depreciation expense, $3.4 million of amortization of debt issuance costs, a $9.3 million deferred income tax benefit offset by a net $34.9 million decrease in our working capital components.   The net decrease in our working capital components was primarily driven by lower disbursements for accounts payable – trade and accrued expenses in the period associated with our purchases from vendors, partially offset by an increase in unbilled and accounts receivable.

Investing Activities

Net cash flows from investing activities consist of the cash flows associated with acquisitions and/or dispositions, leasing activities and capital expenditures. During the periods presented all purchases of property and equipment were of a normal recurring nature. With respect to our leasing activities, we reduce our financial exposure and increase liquidity by partnering with various third-party lenders and discounting the customer lease financing receivables. This results in us carrying both a lease asset and an offsetting financial liability to the lenders on our balance sheet. Accordingly, the investment in leased assets appears in our investing activities and the funding we receive from third-party lenders is recognized in our financing activities, discussed below.

Six months ended December 31, 2017 : Net cash used in investing activities for the six months ended December 31, 2017 was $ 64.5 million . Cash was primarily used for additional investments in discounted client equipment leases of $ 49.7 million in support of our business, $ 9.5 million related to an acquisition and the purchase of property and equipment of $7.2 million .

Six months ended December 31, 2016 : Net cash used in investing activities for the six months ended December 31, 2016 was $ 62.6 million . Cash was primarily used for additional investments in discounted client equipment leases of $ 63.9 million in support of our business and the purchase of property and equipment of $ 6.7 million , partially offset by proceeds received from our leasing assets of $ 7.7 million .

Financing Activities

Net cash flows from financing activities is primarily associated with cash activity associated with our capitalization, including debt and equity activity, cash flow associated with discounting client leases and activity on our accounts payable floor plan facility.

Six months ended December 31, 2017 : Net cash used in financing activities for the six months ended December 31, 2017 was $ 66.9 million , comprised of a $ 65.3 million reduction in accounts payable — floor plan and $1.6 million of other financing activities. The $1.6 million use in other financing activities was primarily the result of $ 50.0 million in repayments on term loans and $ 2.5 million of retirements of discounted financing receivables which was mostly offset by $ 47.0 million in proceeds from discounting financing receivables and $ 4.5 million of proceeds from issuance of common stock under share-based compensation plans.

Six months ended December 31, 2016 : Net cash used in financing activities for the six months ended December 31, 2016 was $ 8.2 million , comprised of a $ 36.4 million reduction in accounts payable — floor plan and $ 28.2 million of other financing activities. The $ 28.2 million of other financing activities was primarily the result of repayments of $5.0 million on the receivables securitization facility and $28.7 million on our term loan facility and $ 4.3 million of retirements of discounted financing receivable, which was more than offset by $ 66.1 million in proceeds from discounting financing receivables.

Liquidity

We generally fund our short- and long-term liquidity needs through the use of cash flows from operations, utilization of the extended payment terms on our accounts payable-floor plan facility and the available credit on our revolving credit facility, accounts receivable securitization facility and long-term debt.

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Our management regularly monitors certain liquidity measures to monitor performance. We believe that the most important of those measures include net debt, net working capital ratio, available liquidity, and free cash flow.

 

(in millions, except ratio data)		June 30, 2017				December 31, 2017
Net debt		$	724.1			$	680.9
Net working capital ratio		1.00		x		1.02		x
Available liquidity		$	251.5			$	309.8

(in millions)		Six months ended December 31, 2016				Six months ended December 31, 2017
Free cash flow		$	45.5			$	48.6

Net debt – We have a substantial amount of indebtedness, largely related to the capitalization of the Company in connection with our acquisition by funds associated with Apollo in February 2015. We believe net debt provides information about the utilization of our cash flows to de-lever our company. For the three months ended December 31, 2017 , we were able to reduce our debt using cash from operations. We define net debt as the total principal of debt outstanding, excluding discounts and issuance costs less cash and cash equivalents. The following table presents our calculation of net debt as of December 31, 2017 and June 30, 2017 (in millions):

 

		June 30, 2017				December 31, 2017
Total long-term debt, net of debt issuance costs		$	730.7			$	684.3
Unamortized debt issuance costs		20.9				17.3
Cash and cash equivalents		(27.5		)		(20.7		)
Net debt		$	724.1			$	680.9

Net working capital ratio – We experience periodic changes in our net working capital, defined as current assets from our consolidated balance sheet minus current liabilities from our consolidated balance sheet excluding cash and cash equivalents and current maturities of long-term debt. We define our net working capital ratio as our current assets excluding cash and cash equivalents divided by current liabilities excluding current maturities of long-term debt. Our net working capital ratio was 1.02x and 1.00x as of December 31, 2017 and June 30, 2017 , respectively, and was consistent with our expectations.

Available liquidity – As previously discussed, we fund our short-term cash flow requirements through a combination of cash on hand, cash flows generated from operations and revolving credit facilities. We calculate our available liquidity as a sum of cash and cash equivalents from our consolidated balance sheet plus the amount available and unutilized on our revolving and accounts receivable securitization facilities.

The following table presents our calculation of available liquidity as of June 30, 2017 and December 31, 2017 (in millions):

		June 30, 2017				December 31, 2017
Cash and cash equivalents		$	27.5			$	20.7
Availability under the revolving credit facility		48.5				48.5
Availability under the receivables securitization facility		175.5				240.6
Available liquidity		$	251.5			$	309.8

Available liquidity increased from $251.5 million at June 30, 2017 to $309.8 million at December 31, 2017 primarily as a result of increased availability under our receivables securitization facility associated with an increase in the collateral base.

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The following table presents amounts outstanding under our primary sources of liquidity as of December 31, 2017 and June 30, 2017 (in millions):  

		June 30, 2017				December 31, 2017
Cash and cash equivalents		$	27.5			$	20.7
Accounts payable—floor plan facility		$	264.9			$	199.6
Long-term debt:
Revolving credit facility		$	—			$	—
Receivables securitization facility		—				—
Term loan facility, due February 2022		626.6				576.6
Senior Notes, 10.25% due February 2023		125.0				125.0
Total long-term debt		$	751.6			$	701.6

Free cash flow  – We define free cash flow as our net cash provided by operating activities adjusted to include: (i) the impact of net borrowings (repayments) on the floor plan facility, (ii) the aggregate net cash impact of our leasing business and (iii) the purchases of property and equipment.

The following table presents reconciliation of free cash flow from Net cash provided by operating activities for the six months ended December 31, 2016 and 2017 (in millions):

		Six months ended December 31, 2016				Six months ended December 31, 2017
Net cash provided by operating activities		$	83.3			$	124.6
Adjustments to reconcile to free cash flow:
Net change in accounts payable — floor plan		(36.4		)		(65.3		)
Additions of equipment under sales-type and direct financing leases		(63.9		)		(49.7		)
Proceeds from collection of financing receivables		7.7				2.2
Additions to equipment under operating leases		(0.8		)		(1.2		)
Proceeds from disposition of equipment under operating leases		0.5				0.7
Proceeds from the discounting of financing receivables		66.1				47.0
Retirements of discounted financing receivables		(4.3		)		(2.5		)
Purchases of property and equipment		(6.7		)		(7.2		)
Total adjustments		(37.8		)		(76.0		)
Free cash flow		$	45.5			$	48.6

Commitments and Contingencies

See the information set forth in Note 10 (Commitments and Contingencies) to the accompanying consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements

We had $1.5 million of outstanding letters of credit on our revolver facility as of December 31, 2017 and June 30, 2017 , respectively. We have no other off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

Except as described under Note 1 (Recent Accounting Pronouncements Adopted During the Fiscal Year) to the accompanying consolidated financial statements included in Part I, Item 1 of this Form 10-Q, our accounting policies have not changed from those reported in our Management's Discussion and Analysis of Financial Condition and Results of Operations section of the June 30, 2017 Annual Report on Form 10-K.

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Recent Accounting Pronouncements

See the information set forth in Note 1 (Recent Accounting Pronouncements Adopted During the Period and Recent Accounting Pronouncements Not Yet Adopted) to the accompanying consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

Impact of Inflation

Inflation has not had a material impact on our operating results. We generally have been able to pass along price increases to our customers, though certain economic factors and technological advances in recent years have tended to place downward pressure on pricing.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

Our market risks relate primarily to changes in interest rates. The interest rates on borrowings under our term loans are floating and, therefore, are subject to fluctuations. To manage this risk, we may enter into interest rate swaps to add stability to interest expense and to manage our exposure to interest rate fluctuations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the period ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.        Legal Proceedings

We are involved in various claims and legal actions that arise in the ordinary course of business. While it is impossible to determine with certainty the ultimate outcome of these matters, in the opinion of management the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations, or liquidity. The information set forth in Note 10, Commitments and Contingencies, to the consolidated financial statements is incorporated by reference herein.

Item 1A.     Risk Factors

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.

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

None.

Item 3.        Defaults Upon Senior Securities

None.

Item 4.        Mine Safety Disclosures

Not applicable.

Item 5.        Other Information

None.    

Item 6.        Exhibits

See exhibits listed under the Exhibit Index below.

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EXHIBIT INDEX

				Incorporated by Reference
Exhibit Number		Exhibit Description		Form		Exhibit		Filing Date
3.1		Amended and Restated Certificate of Incorporation of Presidio, Inc., effective March 10, 2017.		S-8		3.1		3/13/2017
3.2		Amended and Restated Bylaws of Presidio, Inc., effective March 10, 2017.		S-8		3.2		3/13/2017
*10.1		Amendment No. 2 to Second Amended and Restated Receivables Purchase Agreement and Reaffirmation of Performance Guaranty.
*10.2		Incremental Assumption Agreement and Amendment No. 6, dated January 5, 2018, by and among Presidio LLC and Presidio Networked Solutions LLC, as borrowers, the guarantors party thereto, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent.
*31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
*31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
**32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.
**32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.
*101.INS		XBRL Instance Document.
*101.SCH		XBRL Taxonomy Extension Schema Linkbase Document.
*101.CAL		XBRL Taxonomy Calculation Linkbase Document.
*101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
*101.LAB		XBRL Taxonomy Label Linkbase Document.
*101.PRE		XBRL Taxonomy Presentation Linkbase Document.

*     Filed herewith.

**    Furnished herewith.

SIGNATURE

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.

		PRESIDIO, INC.
Dated: February 8, 2018	By:	/S/ NEIL O. JOHNSTON
		Neil O. Johnston
		Chief Financial Officer
		(Principal Financial Officer)

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