Scansource, Inc 10-Q for FY2021 Q2
Scansource, Inc. (SCSC)
10-Q
2021-02-02
For: 2020-12-31
View Original
Added on
April 08, 2026
About this 10-Q
Scansource, Inc filed this 10-Q on February 2, 2021, covering the quarter ended December 31, 2020 (FY2021 Q2).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $810.9M
- down 1.6% from $824M a year earlier
- Net loss
- $14.19M
- compared with net income of $11.37M a year earlier
- Diluted EPS
- -$0.56
- compared with $0.45 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Quarterly period ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ____ to ____
Commission File Number: 000-26926
(State of Incorporation)
(I.R.S. Employer Identification No.)
(864 ) 288-2432
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class: | Trading Symbol: | Name of exchange on which registered: | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Smaller reporting company | ||||||||||||||||
| Accelerated filer | ☐ | Emerging growth company | |||||||||||||||
| Non-accelerated filer | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at January 31, 2021 | |||||||
| Common Stock, no par value per share | ||||||||
SCANSOURCE, INC.
INDEX TO FORM 10-Q
December 31, 2020
| Page # | ||||||||
| Item 1. | Financial Statements | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1 | ||||||||
| Item 1A. | ||||||||
| Item 2 | ||||||||
| Item 6. | ||||||||
3
FORWARD-LOOKING STATEMENTS
Forward-looking statements are included in the "Risk Factors," "Legal Proceedings," "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures About Market Risk" sections and elsewhere herein. Words such as "expects," "anticipates," "believes," "intends," "plans," "hopes," "forecasts," "seeks," "estimates," "goals," "projects," "strategy," "future," "likely," "may," "should," and variations of such words and similar expressions generally identify such forward-looking statements. Any forward-looking statement made by us in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q, except as required by law. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the impact of the COVID-19 pandemic on the Company's operations and financial condition and the potential prolonged economic weakness brought on by COVID-19, the failure to manage and implement the Company's organic growth strategy, credit risks involving the Company's larger customers and suppliers, changes in interest and exchange rates and regulatory regimes impacting the Company's international operations, risk to the Company's business from a cyber-security attack, a failure of the Company's IT systems, failure to hire and retain quality employees, loss of the Company's major customers, termination of the Company's relationship with key suppliers or a significant modification of the terms under which it operates with a key supplier, changes in the Company's operating strategy, and other factors set forth in "Risk Factors" contained in our Annual Report on Form 10-K for the year ended June 30, 2020.
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PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements | ||||
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share information)
| December 31, 2020 | June 30, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowance of $ and $ | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Current assets held for sale | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Identifiable intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current portion of contingent consideration | |||||||||||
| Income taxes payable | |||||||||||
| Current portion of long-term debt | |||||||||||
| Current liabilities held for sale | |||||||||||
| Total current liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Borrowings under revolving credit facility | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, no par value; | |||||||||||
Common stock, no par value; | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
June 30, 2020 amounts are derived from audited consolidated financial statements. | |||||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||
5
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(In thousands, except per share data)
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation expense | |||||||||||||||||||||||
| Intangible amortization expense | |||||||||||||||||||||||
| Restructuring and other charges | |||||||||||||||||||||||
| Change in fair value of contingent consideration | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Other expense (income), net | ( | ||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income from continuing operations | |||||||||||||||||||||||
| Net loss from discontinued operations | ( | ( | ( | ( | |||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Per share data: | |||||||||||||||||||||||
| Net income from continuing operations per common share, basic | $ | $ | $ | $ | |||||||||||||||||||
| Net loss from discontinued operations per common share, basic | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| Net (loss) income per common share, basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Weighted-average shares outstanding, basic | |||||||||||||||||||||||
| Net income from continuing operations per common share, diluted | $ | $ | $ | $ | |||||||||||||||||||
| Net loss from discontinued operations per common share, diluted | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| Net (loss) income per common share, diluted | $ | ( | $ | $ | ( | ||||||||||||||||||
| Weighted-average shares outstanding, diluted | |||||||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | ||
6
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Unrealized gain (loss) on hedged transaction, net of tax | ( | ||||||||||||||||||||||
| Unrealized foreign currency translation adjustment | ( | ||||||||||||||||||||||
| Realized foreign currency loss from discontinued operations | |||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | ||
7
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share information)
| Common Stock (Shares) | Common Stock (Amount) | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | ||||||||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | — | — | — | ||||||||||||||||||||||||||
| Unrealized foreign currency translation adjustment | — | — | — | ||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | ||||||||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | — | — | — | ||||||||||||||||||||||||||
| Unrealized foreign currency translation adjustment | — | — | — | ||||||||||||||||||||||||||
| Realized foreign currency loss from discontinued operations | — | — | — | ||||||||||||||||||||||||||
| Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||||||||||||||||||||
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SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share information)
| Common Stock (Shares) | Common Stock (Amount) | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Unrealized loss on hedged transaction, net of tax | — | — | — | ( | ( | ||||||||||||||||||||||||
| Unrealized foreign currency translation adjustment | — | — | — | ( | ( | ||||||||||||||||||||||||
| Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||
| Common stock repurchased | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Unrealized gain on hedged transaction, net of tax | — | — | — | ||||||||||||||||||||||||||
| Unrealized foreign currency translation adjustment | — | — | — | ||||||||||||||||||||||||||
| Exercise of stock options and shares issued under share-based compensation plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||
| Share based compensation | — | — | — | ||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||||||||||||||||||||
9
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| Six months ended | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Net loss from discontinued operations | ( | ( | |||||||||
| Net income from continuing operations | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt issue costs | |||||||||||
| Provision for doubtful accounts | ( | ||||||||||
| Share-based compensation | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Change in fair value of contingent consideration | |||||||||||
| Contingent consideration payments excess | ( | ( | |||||||||
| Finance lease interest | |||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Other non-current assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Income taxes payable | ( | ( | |||||||||
| Net cash provided by operating activities of continuing operations | |||||||||||
| Cash flows from investing activities of continuing operations: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Cash paid for business acquisitions, net of cash acquired | ( | ||||||||||
| Proceeds from the sale of discontinued operations | |||||||||||
| Net cash provided by (used in) investing activities of continuing operations | ( | ||||||||||
| Cash flows from financing activities of continuing operations: | |||||||||||
| Borrowings on revolving credit, net of expenses | |||||||||||
| Repayments on revolving credit, net of expenses | ( | ( | |||||||||
| Borrowings on long-term debt, net | ( | ( | |||||||||
| Repayments of finance lease obligations | ( | ( | |||||||||
| Contingent consideration payments | ( | ( | |||||||||
| Exercise of stock options | |||||||||||
| Taxes paid on settlement of equity awards | ( | ( | |||||||||
| Repurchase of common stock | ( | ||||||||||
| Net cash used in financing activities of continuing operations | ( | ( | |||||||||
| Cash flows from discontinued operations: | |||||||||||
| Net cash flows provided by operating activities of discontinued operations | |||||||||||
| Net cash flows used in by investing activities of discontinued operations | ( | ( | |||||||||
| Net cash flows (used in) provided by financing activities of discontinued operations | ( | ||||||||||
10
| Net cash flows (used in) provided by discontinued operations | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | |||||||||||
| Cash and cash equivalents of discontinued operations | |||||||||||
| Cash and cash equivalents of continuing operations | $ | $ | |||||||||
| See accompanying notes to these condensed consolidated financial statements. | |||||||||||
11
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Business and Summary of Significant Accounting Policies
Business Description
ScanSource, Inc. (together with its subsidiaries referred to as “the Company” or “ScanSource”) is at the center of the solution delivery channel, connecting businesses and providing technology solutions. The Company brings technology solutions and services from the world’s leading suppliers of mobility and barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, and telecom and cloud services to market. The Company operates in the United States, Canada, Brazil and the UK. During the quarter ended December 31, 2020, the Company completed the divestitures of its products distribution business in the UK, Europe and Latin America, outside of Brazil. The Company's two operating segments, Worldwide Barcode, Networking & Security and Worldwide Communications & Services, are based on product, customer and service type.
COVID-19
In early March 2020, the World Health Organization characterized the novel coronavirus ("COVID-19") as a pandemic. The rapid spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The Company moved quickly to transition its employees, where possible, to a fully remote working environment. The Company took steps to deploy teams to monitor the rapidly evolving situation and recommend risk mitigation actions; implement travel restrictions; and have employees follow physical distancing practices. The Company is following guidance from authorities and health officials including, but not limited to, checking the temperature of associates when entering its facilities, requiring associates to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitation routines. All of the Company's distribution facilities have remained open and operational. Most of the Company's office-based employees around the world are working remotely.
The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on businesses around the world, including the Company, and on global, regional and national economies. The Company is unable to predict the ultimate impact that COVID-19 will have on its business due to the inability to predict the duration or magnitude of the virus' impact. In fiscal year 2020, the Company experienced decreased revenue and increased employee-related healthcare and prevention costs as a result of the COVID-19 pandemic. While the Company has made adjustments, including implementing an annualized expense reduction plan for fiscal year 2021, the Company will continue to monitor and make adjustments to the operating practices that it believes to be in the best interests of its employees, customers, suppliers, and shareholders. For further discussion on the potential future impacts of COVID-19, see the Risk Factors presented in Part I, Item 1A in the Company's form 10-K for fiscal year 2020.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company’s management in accordance with United States generally accepted accounting principles ("U.S. GAAP") for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring and non-recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position at December 31, 2020 and June 30, 2020, the results of operations for the quarters and six months ended December 31, 2020 and 2019, the statements of comprehensive income for the quarters and six months ended December 31, 2020 and 2019, the statements of shareholders' equity for the quarters and six months ended December 31, 2020 and 2019 and the statements of cash flows for the six months ended December 31, 2020 and 2019. The results of operations for the quarters and six months ended December 31, 2020 and 2019 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
The Company has reclassified certain prior year amounts for the results of discontinued operations to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only.
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Summary of Significant Accounting Policies
See Note 2 - Trade Accounts and Notes Receivable for a discussion of the current expected credit loss policy established upon adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (ASC Topic 326) in fiscal year 2021.
Restructuring Costs
Cash and Cash Equivalents
Long-lived Assets
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326). In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326: Financial Instruments - Credit Losses, which provides supplemental guidance and clarification to ASU 2016-13 and must be adopted concurrently. The pronouncement revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The Company adopted this standard effective July 1, 2020 and it did not have a material impact on the Company's consolidated financial statements. See Note 2 - Trade Accounts and Notes Receivable for disclosures related to the adoption of ASU 2016-13.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC Topic 820) Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. The Company adopted this standard effective July 1, 2020 and it had no impact on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The new guidance provides optional expedients and
13
exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the potential impact of this guidance on the Company's consolidated financial statements.
The Company has reviewed other newly issued accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on its consolidated financial statements as a result of future adoption.
(2) Trade Accounts and Notes Receivable, Net
The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due to the Company. The Company has notes receivable with certain customers, which are included in “Accounts receivable, less allowance” in the Condensed Consolidated Balance Sheets.
Management determines the estimate of the allowance for doubtful accounts receivable by considering a number of factors, including: (i) historical experience, (ii) aging of the accounts receivable, (iii) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country-specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables over the contractual life are recorded at inception.
The changes in the allowance for doubtful accounts for the six months ended December 31, 2020 are set forth in the table below.
| June 30, 2020 | Amounts Charged to Expense | Write-offs | Other (1) | December 31, 2020 | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Trade accounts and current notes receivable allowance | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||
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(3) Revenue Recognition
The Company provides technology solutions and services from the world's leading suppliers of mobility and barcode, POS, payments, physical security, unified communications and collaboration, and telecom and cloud services. This includes hardware, related accessories and device configuration as well as software licenses, professional services and hardware support programs.
In determining the appropriate amount of revenue to recognize, the Company applies the following five-step model: (i) identify contracts with customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company recognizes revenue as control of products and services are transferred to customers, which is generally at the point of shipment. The Company delivers products to customers in several ways, including: (i) shipment from the Company's warehouse, (ii) drop-shipment directly from the supplier, or (iii) electronic delivery for non-physical products.
Principal versus Agent Considerations
The Company is the principal for sales of all hardware, certain software and services, including self-branded warranty programs. The Company considers itself the principal in these transactions as it has control of the product or service before it is transferred to the customer. When the Company provides self-branded warranty programs, it engages a third party, generally the original equipment manufacturer, to cover the fulfillment of any obligations arising from these contracts. These revenues and associated third-party costs are amortized over the life of the contract on a straight-line basis. The Company recognizes the previously described revenue and cost of goods sold on a gross basis.
The Company is the agent for third-party service contracts, including product warranties and supplier-hosted software. These service contracts are sold separately from the products, and the Company often serves as the agent for the contract on behalf of the original equipment manufacturer. The Company's responsibility is to arrange for the provision of the specified service by the original equipment manufacturer, and the Company does not control the specified service before it is transferred to the customer. Because the Company acts as an agent, revenue is recognized net of cost at the time of sale.
Related to the Company’s Intelisys business, the Company acts as a master agent connecting independent sales partners with service providers or suppliers who offer telecom and cloud services to end-customers. Intelisys’ sales partners earn commission payments from those service providers or suppliers on end-customer sales. Intelisys provides commission processing services to sales partners, earning a percentage of the commission stream. Because the Company acts as an agent, revenue is recognized on a net basis.
Variable Considerations
For certain transactions, products are sold with a right of return and may also provide other rebates or incentives, which are accounted for as variable consideration. The Company estimates returns allowance based on historical experience and reduces revenue accordingly. The Company estimates the amount of variable consideration for rebates and incentives by using the expected value or the most likely amount to be given to the customer and reduces the revenue by those estimated amounts. These estimates are reviewed and updated as necessary at the end of each reporting period.
Contract Balances
The Company records contract assets and liabilities for payments received from customers in advance of services performed. These assets and liabilities are the result of the sales of the Company's self-branded warranty programs and other transactions where control has not yet passed to the customer. These amounts are immaterial to the consolidated financial statements for the periods presented.
Disaggregation of Revenue
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| Quarter ended December 31, 2020 | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security Segment | Worldwide Communications & Services Segment | Total | ||||||||||||||||||||||||||||||
| Revenue by product/service: | ||||||||||||||||||||||||||||||||
| Technology solutions | $ | $ | $ | |||||||||||||||||||||||||||||
| Intelisys | ||||||||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||||||||
| Six months ended December 31, 2020 | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security Segment | Worldwide Communications & Services Segment | Total | ||||||||||||||||||||||||||||||
| Revenue by product/service: | ||||||||||||||||||||||||||||||||
| Technology solutions | $ | $ | $ | |||||||||||||||||||||||||||||
| Intelisys | ||||||||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||||||||
| Quarter ended December 31, 2019 | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security Segment | Worldwide Communications & Services Segment | Total | ||||||||||||||||||||||||||||||
| Revenue by product/service: | ||||||||||||||||||||||||||||||||
| Technology solutions | $ | $ | $ | |||||||||||||||||||||||||||||
| Intelisys | ||||||||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||||||||
| Six months ended December 31, 2019 | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security Segment | Worldwide Communications & Services Segment | Total | ||||||||||||||||||||||||||||||
| Revenue by product/service: | ||||||||||||||||||||||||||||||||
| Technology solutions | $ | $ | $ | |||||||||||||||||||||||||||||
| Intelisys | ||||||||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||||||||
16
(4) Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Net loss from discontinued operations | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares, basic | |||||||||||||||||||||||
| Dilutive effect of share-based payments | |||||||||||||||||||||||
| Weighted-average shares, diluted | |||||||||||||||||||||||
| Net income from continuing operations per common share, basic | $ | $ | $ | $ | |||||||||||||||||||
| Net loss from discontinued operations per common share, basic | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| Net (loss) income per common share, basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Net income from continuing operations per common share, diluted | $ | $ | $ | $ | |||||||||||||||||||
| Net loss from discontinued operations per common share, diluted | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| Net (loss) income per common share, diluted | $ | ( | $ | $ | ( | $ | |||||||||||||||||
For the quarter and six months ended December 31, 2020, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 1,400,999 and 1,191,985 , respectively. For the quarter and six months ended December 31, 2019, weighted-average shares outstanding excluded from the computation of diluted earnings per share because their effect would be anti-dilutive were 975,907 and 961,980 , respectively.
(5) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following:
| December 31, 2020 | June 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Foreign currency translation adjustment | $ | ( | $ | ( | |||||||
| Unrealized loss on hedged transaction, net of tax | ( | ( | |||||||||
| Accumulated other comprehensive loss | $ | ( | $ | ( | |||||||
The tax effect of amounts in comprehensive loss reflect a tax expense or benefit as follows:
| Quarter ended December 31, | Six months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Tax (benefit) expense | $ | ( | $ | $ | $ | ||||||||||||||||||
17
(6) Acquisitions
intY
On July 1, 2019, the Company acquired all of the outstanding shares of intY and its CASCADE cloud services distribution platform. The purchase price of this acquisition, net of cash acquired, was approximately $48.9 million. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the transaction date. Intangible assets acquired include trade names, customer relationships, and developed technology. Goodwill recognized on this acquisition is not deductible for tax purposes. The impact of this acquisition was not material to the consolidated financial statements. The Company recognized $0.4 million for the six months ended December 31, 2019, in acquisition-related costs included in selling, general and administrative expenses on the Condensed Consolidated Income Statements in connection with this acquisition. This acquisition is included in the Worldwide Communications & Services segment.
(7) Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the six months ended December 31, 2020, by reporting segment, are set forth in the table below.
| Worldwide Barcode, Networking & Security Segment | Worldwide Communications & Services Segment | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ||||||||||||||
| Foreign currency translation adjustment | |||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ||||||||||||||
The following table shows changes in the amount recognized for net identifiable intangible assets for the six months ended December 31, 2020.
| Net Identifiable Intangible Assets | |||||
| (in thousands) | |||||
| Balance at June 30, 2020 | $ | ||||
| Amortization expense | ( | ||||
| Foreign currency translation adjustment | |||||
| Balance at December 31, 2020 | $ | ||||
(8) Short-Term Borrowings and Long-Term Debt
The following table presents the Company’s debt for continuing and discontinued operations at December 31, 2020 and June 30, 2020.
| December 31, 2020 | June 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
Short-term borrowings(a) | $ | $ | |||||||||
| Current portion of long-term debt | |||||||||||
| Mississippi revenue bond, net of current portion | |||||||||||
| Senior secured term loan facility, net of current portion | |||||||||||
Borrowings under revolving credit facility(b) | |||||||||||
| Total debt | $ | $ | |||||||||
(a) Short-term borrowings are classified as held for sale in the Consolidated Balance sheets for the Company's discontinued operations at June 30, 2020.
(b) Borrowings under the revolving credit facility classified as held for sale in the Consolidated Balance Sheets for the Company's discontinued operations totaled $24.7 million at June 30, 2020.
18
Short-term Borrowings
The Company had a bank overdraft facility with Bank of America used by its products distribution business in the UK and European recognized as short-term borrowings. The facility was terminated with the sale of the business in November 2020. The facility allowed the Company to disburse checks in excess of bank balances up to $14.0 million U.S. dollar equivalent for up to seven days . Borrowings under the overdraft facility had an interest rate equal to 1 % over the applicable currency's London Interbank Offered Rate ("LIBOR") with a zero percent floor. There were no borrowings outstanding under the overdraft facility at December 31, 2020. At June 30, 2020 there was $3.5 million outstanding under the overdraft facility classified as held for sale in the Consolidated Balance Sheets. The borrowings were denominated in euros, which bore a negative LIBOR rate at June 30, 2020, and as such the interest applicable to the Company was 1.0 %.
Credit Facility
The Company has a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks (the “Amended Credit Agreement”). On April 30, 2019, the Company amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. The Amended Credit Agreement includes (i) a five-year 350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. Pursuant to an “accordion feature,” the Company may increase its borrowings up to an additional $250 million for a total of up to $750 million, subject to obtaining additional credit commitments from the lenders participating in the increase. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit, subject to obtaining additional credit commitments from the lenders participating in the increase. The Company incurred debt issuance costs of $1.1 million in connection with the amendments to the Amended Credit Agreement. These costs were capitalized to other non-current assets on the Condensed Consolidated Balance Sheets and added to the unamortized debt issuance costs from the previous credit facility.
At the Company's option, loans under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the LIBOR or alternate base rate depending upon the Company's net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash ("Credit Facility Net Debt") to trailing four -quarter adjusted earnings before interest expense, taxes, depreciation and amortization ("Credit Facility EBITDA") (the "Leverage Ratio"). This spread ranges from 1.00 % to 1.75 % for LIBOR-based loans and 0.00 % to 0.75 % for alternate base rate loans. Additionally, the Company is charged commitment fees ranging from 0.15 % to 0.30 %, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65 % of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement. Under the terms of the revolving credit facility, the payment of cash dividends is restricted.
The spread in effect as of December 31, 2020 was 1.50 % for LIBOR-based loans and 0.50 % for alternate base rate loans. The commitment fee rate in effect at December 31, 2020 was 0.25 %. The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, the Company’s Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, the Company’s Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. The Company was in compliance with all covenants under the credit facility at December 31, 2020.
Including borrowings for both continuing and discontinued operations, the average daily outstanding balance on the revolving credit facility, excluding the term loan facility, during the six month periods ended December 31, 2020 and 2019 was $70.4 million and $253.1 million, respectively. Taking into consideration outstanding borrowings on the multi-currency revolving credit facility for both continuing and discontinued operations, there was $344.7 million and $257.3 million available for additional borrowings as of December 31, 2020 and June 30, 2020, respectively. At December 31, 2020, based upon the Leverage Ratio calculation, there was $195.1 million available for additional borrowings. There were letters of credit issued under the multi-currency revolving credit facility for the discontinued operations of $0.3
Mississippi Revenue Bond
19
On August 1, 2007, the Company entered into an agreement with the State of Mississippi to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi warehouse, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85 %. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The agreement also provides the bondholder with a put option, exercisable only within 180 days of each fifth anniversary of the agreement, requiring the Company to pay back the bonds at 100 % of the principal amount outstanding. At December 31, 2020, the Company was in compliance with all covenants under this bond. The interest rates at December 31, 2020 and June 30, 2020 were 0.99 % and 1.03 %, respectively.
Debt Issuance Costs
At December 31, 2020, net debt issuance costs associated with the credit facility and bond totaled $1.4 million and are being amortized through the maturity date of each respective debt instrument.
(9) Derivatives and Hedging Activities
The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with U.S. GAAP. The Company records all derivatives on the consolidated balance sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.
Foreign Currency Derivatives – The Company conducts a portion of its business internationally in a variety of foreign currencies and is exposed to market risk for changes in foreign currency exchange rates. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and once these opportunities have been exhausted the Company uses currency options and forward contracts or other hedging instruments with third parties. These contracts will periodically hedge the exchange of various currencies, including the U.S. dollar, Brazilian real, euro, British pound and Canadian dollar for continuing operations.
The Company had contracts outstanding for purposes of managing cash flows with notional amounts of $29.7 million and $16.6 million for the exchange of foreign currencies at December 31, 2020 and June 30, 2020, respectively. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures included in the Condensed Consolidated Income Statements for the quarters and six months ended December 31, 2020 and 2019 are as follows:
| Quarter ended | Six months ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net foreign exchange derivative contract losses (gains) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Net foreign currency transactional and re-measurement (gains) losses | ( | ( | ( | ||||||||||||||||||||
| Net foreign currency exchange losses (gains) | $ | $ | ( | $ | $ | ||||||||||||||||||
Net foreign currency exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses and are included in other income and expense. Foreign currency exchange gains and losses are generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the U.S. dollar versus the euro, British pound versus the euro and other currencies versus the U.S. dollar.
Interest Rates - The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. The Company manages its exposure to changes in interest rates by using interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating rate debt. The Company entered into an interest rate swap agreement, which was subsequently settled, and entered into a new amended agreement on April 30, 2019. The swap agreement has a notional amount of $100.0 million, with a $50.0 million tranche scheduled to mature
20
on April 30, 2024 and a $50.0 million tranche scheduled to mature April 30, 2026. This swap agreement is designated as a cash flow hedge to hedge the variable rate interest payments on the revolving credit facility. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). There was no ineffective portion to be recorded as an adjustment to earnings for the quarters ended December 31, 2020 and 2019.
The components of the cash flow hedge included in the Condensed Consolidated Statement of Comprehensive Income for the quarters and six months ended December 31, 2020 and 2019, are as follows:
| Quarter ended | Six months ended | |||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net interest expense recognized as a result of interest rate swap | $ | $ | $ | $ | ||||||||||||||||||||||
| Unrealized gain (loss) in fair value of interest rate swap | ( | ( | ||||||||||||||||||||||||
| Net increase (decrease) in accumulated other comprehensive income | ( | |||||||||||||||||||||||||
| Income tax effect | ( | |||||||||||||||||||||||||
| Net increase (decrease) in accumulated other comprehensive income, net of tax | $ | $ | $ | $ | ( | |||||||||||||||||||||
The Company used the following derivative instruments at December 31, 2020 and June 30, 2020, reflected in its Condensed Consolidated Balance Sheets, for the risk management purposes detailed above:
| December 31, 2020 | June 30, 2020 | ||||||||||||||||||||||||||||
| Balance Sheet Location | Fair Value of Derivatives Designated as Hedge Instruments | Fair Value of Derivatives Not Designated as Hedge Instruments | Fair Value of Derivatives Designated as Hedge Instruments | Fair Value of Derivatives Not Designated as Hedge Instruments | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||||||||
| Foreign exchange contracts | Accrued expenses and other current liabilities | $ | $ | $ | $ | ||||||||||||||||||||||||
| Interest rate swap agreement | Other long-term liabilities | $ | $ | $ | $ | ||||||||||||||||||||||||
21
(10) Fair Value of Financial Instruments
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company classifies certain assets and liabilities based on the fair value hierarchy, which aggregates fair value measured assets and liabilities based upon the following levels of inputs:
•Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
•Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
The assets and liabilities maintained by the Company that are required to be measured or disclosed at fair value on a recurring basis include the Company’s various debt instruments, deferred compensation plan investments, outstanding forward foreign currency exchange contracts, interest rate swap agreements and contingent consideration owed to the previous owners of Intelisys. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to a variable rate using the market approach (Level 2 criteria).
The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at December 31, 2020:
| Total | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | $ | |||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | $ | |||||||||||||||||||
| Forward foreign currency exchange contracts | |||||||||||||||||||||||
| Interest rate swap agreement | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at June 30, 2020:
22
| Total | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | $ | |||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation plan investments, current and non-current portion | $ | $ | $ | $ | |||||||||||||||||||
| Forward foreign currency exchange contracts | |||||||||||||||||||||||
| Interest rate swap agreement | |||||||||||||||||||||||
| Liability for contingent consideration | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
The investments in the deferred compensation plan are held in a "rabbi trust" and include mutual funds and cash equivalents for payment of non-qualified benefits for certain retired, terminated and active employees. These investments are recorded to prepaid expenses and other current assets or other non-current assets depending on their corresponding, anticipated distribution dates to recipients, which are reported in accrued expenses and other current liabilities or other long-term liabilities, respectively.
Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including LIBOR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Condensed Consolidated Balance Sheets as prepaid expenses and other non-current assets or accrued expenses and other long-term liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 9 - Derivatives and Hedging Activities.
The Company recorded a contingent consideration liability at the acquisition date of Intelisys representing the amounts payable to former shareholders, as outlined under the terms of the purchase agreements, based upon the achievement of a projected earnings measure, net of specific pro forma adjustments. The current and non-current portions of these obligations are reported separately on the Condensed Consolidated Balance Sheets. The fair value of the contingent considerations (Level 3) are determined using a form of a probability weighted discounted cash flow model. Subsequent changes in the fair value of the contingent consideration liabilities are recorded to the change in fair value of contingent consideration line item in the Condensed Consolidated Income Statements.
Intelisys is part of the Company's Worldwide Communications & Services segment. The table below provides a summary of the changes in fair value of the Company's contingent considerations for the Intelisys earnout, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter and six months ended December 31, 2020. The final earnout payment due to the former owners of Intelisys was paid in October 2020.
| Quarter ended December 31, 2020 | Six months ended December 31, 2020 | |||||||||||||||||||||||||||||||
| Worldwide Communications & Services Segment | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Fair value at beginning of period | $ | $ | ||||||||||||||||||||||||||||||
| Payments | ( | ( | ||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | ||||||||||||||||||||||||||||||||
| Fair value at end of period | $ | $ | ||||||||||||||||||||||||||||||
23
The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the Intelisys earnout for the quarter and six months ended December 31, 2019.
| Quarter ended December 31, 2019 | Six months ended December 31, 2019 | ||||||||||||||||||||||||||||
| Worldwide Communications & Services Segment | |||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Fair value at beginning of period | $ | $ | |||||||||||||||||||||||||||
| Payments | ( | ( | |||||||||||||||||||||||||||
| Change in fair value of contingent consideration | |||||||||||||||||||||||||||||
| Fair value at end of period | $ | $ | |||||||||||||||||||||||||||
The fair values of amounts owed are recorded in current portion of contingent consideration in the Company’s Condensed Consolidated Balance Sheets. In accordance with ASC 805, the Company will revalue the contingent consideration liability at each reporting date through the last payment, with changes in the fair value of the contingent consideration reflected in the change in fair value of contingent consideration line item on the Company’s Condensed Consolidated Income Statements that is included in the calculation of operating income. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including:
•estimated future results, net of pro forma adjustments set forth in the purchase agreements;
•the probability of achieving these results; and
•a discount rate reflective of the Company’s creditworthiness and market risk premium associated with the United States markets.
A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Valuation techniques and significant observable inputs used in recurring Level 3 fair value measurements for the Company's contingent consideration liability related to Intelisys at June 30, 2020 were as follows. The measurement period for the Intelisys earnout ended on June 30, 2020.
| Reporting Period | Valuation Technique | Significant Unobservable Inputs | Weighted Average Rates(a) | |||||||||||||||||
| June 30, 2020 | Discounted cash flow | Weighted average cost of capital | % | |||||||||||||||||
(a) Weighted average rates identified for this significant unobservable input relate to the valuation of the Intelisys contingent consideration. Since the earnout period for Intelisys closed on June 30, 2020, the weighted average cost of capital represents the cost of debt. There is no EBITDA growth or weighted average cost of capital to report in the current period.
Intelisys
The final contingent consideration payment related to Intelisys was paid during the quarter ended December 31, 2020. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $0.5 million for the six months ended December 31, 2020. The change in fair value for the current six month period is due to the recurring amortization of the unrecognized fair value discount.
The fair value of the liability for the contingent consideration related to Intelisys recognized at December 31, 2019 was $45.0 million, all of which was classified as current. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $3.2 million and $5.6 million for the quarter and six months ended December 31, 2019, respectively. The change in fair value for the prior-year quarter and six month period is primarily driven by the recurring amortization of the unrecognized fair value discount and better than expected actual results.
(11) Segment Information
The Company is a leading provider of technology solutions and services to customers in specialty technology markets. The Company has two reportable segments, based on product, customer and service type.
Worldwide Barcode, Networking & Security Segment
24
The Worldwide Barcode, Networking & Security segment includes a portfolio of solutions primarily for enterprise mobile computing, data capture, barcode printing, POS, payments, networking, electronic physical security, cyber security and other technologies. The Company has business operations within this segment in the United States, Canada and Brazil. The Company sees adjacencies among these technologies in helping its customers develop solutions. Data capture and POS solutions interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling, warehouse management and health care applications. Electronic physical security products include identification, access control, video surveillance, intrusion-related and wireless and networking infrastructure products.
Worldwide Communications & Services Segment
The Worldwide Communications & Services segment includes a portfolio of solutions primarily for communications technologies and services and includes the Company's most recent acquisition of intY. The Company has business operations within this segment in the United States, Canada, Brazil and the UK. These offerings include voice, video conferencing, wireless, data networking, cable, unified communications and collaboration, cloud and technology services. As these solutions come together on IP networks, new opportunities are created to move into adjacent solutions for all vertical markets, such as education, healthcare and government.
25
Selected financial information for each business segment is presented below:
| Quarter ended | Six months ended | ||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | $ | $ | $ | |||||||||||||||||||||||||
| Worldwide Communications & Services | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | $ | $ | $ | |||||||||||||||||||||||||
| Worldwide Communications & Services | |||||||||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
| Change in fair value of contingent consideration: | |||||||||||||||||||||||||||||
| Worldwide Communications & Services | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
| Operating income: | |||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | $ | $ | $ | |||||||||||||||||||||||||
| Worldwide Communications & Services | |||||||||||||||||||||||||||||
Corporate(1) | ( | ( | ( | ( | |||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
| Capital expenditures: | |||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Worldwide Communications & Services | ( | ( | ( | ( | |||||||||||||||||||||||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||
| Sales by Geography Category: | |||||||||||||||||||||||||||||
| United States and Canada | $ | $ | $ | $ | |||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||
| Less intercompany sales | ( | ( | ( | ( | |||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||
(1) Includes restructuring costs of $ | |||||||||||||||||||||||||||||
| December 31, 2020 | June 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Assets: | |||||||||||
| Worldwide Barcode, Networking & Security | $ | $ | |||||||||
| Worldwide Communications & Services | |||||||||||
| Corporate | |||||||||||
| Assets held for sale | |||||||||||
| $ | $ | ||||||||||
| Property and equipment, net by Geography Category: | |||||||||||
| United States and Canada | $ | $ | |||||||||
| International | |||||||||||
| $ | $ | ||||||||||
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(12) Leases
In accordance with ASC 842, at contract inception the Company determines if a contract contains a lease by assessing whether the contract contains an identified asset and whether the Company has the ability to control the asset. The Company also determines if the lease meets the classification criteria for an operating lease versus a finance lease under ASC 842. Substantially all of the Company's leases are operating leases for real estate, warehouse and office equipment ranging in duration from 1 year to 10 years. The Company has elected not to record short-term operating leases with an initial term of 12 months or less on the Condensed Consolidated Balance Sheets. Operating leases are recorded as other non-current assets, accrued expenses and other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company has finance leases for information technology equipment expiring in fiscal year 2022. Finance leases are recorded as property and equipment, net, and on the Condensed Consolidated Balance Sheets. The gross amount of the balances recorded related to finance leases is immaterial to the financial statements at December 31, 2020 and June 30, 2020.
Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the net present value of future minimum lease payments over the lease term. The Company generally is not able to determine the rate implicit in its leases and has elected to apply an incremental borrowing rate as the discount rate for the present value determination, which is based on the Company's cost of borrowings for the relevant terms of each lease and geographical economic factors. Certain operating lease agreements contain options to extend or terminate the lease. The lease term used is adjusted for these options when the Company is reasonably certain it will exercise the option. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments not based on a rate or index, such as costs for common area maintenance, are expensed as incurred. Further, the Company has elected the practical expedient to recognize all lease and non-lease components as a single lease component, where applicable.
The following table presents amounts recorded on the Condensed Consolidated Balance Sheet related to operating leases at December 31, 2020 and June 30, 2020:
| Operating leases | Balance Sheet location | December 31, 2020 | June 30, 2020 | |||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Operating lease right-of-use assets | Other non-current assets | $ | $ | |||||||||||||||||
| Current operating lease liabilities | ||||||||||||||||||||
| Long-term operating lease liabilities | ||||||||||||||||||||
The following table presents amounts recorded in operating lease expense as part of selling general and administrative expenses on the Condensed Consolidated Income Statements during the quarters and six months ended December 31, 2020 and 2019. Operating lease costs contain immaterial amounts of short-term lease costs for leases with an initial term of 12 months or less.
| Quarter ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Variable lease cost | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
Supplemental cash flow information related to the Company's operating leases for the quarter and six months ended December 31, 2020 and 2019 are presented in the table below:
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| Six months ended | ||||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Cash paid for amounts in the measurement of lease liabilities | $ | $ | ||||||||||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||||||||||||||||||||
The weighted-average remaining lease term and discount rate at December 31, 2020 are presented in the table below:
| December 31, 2020 | ||||||||
| Weighted-average remaining lease term | ||||||||
| Weighted-average discount rate | % | |||||||
The following table presents the maturities of the Company's operating lease liabilities at December 31, 2020:
| Operating leases | ||||||||
| (in thousands) | ||||||||
| Remainder of 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total future payments | ||||||||
| Less: amounts representing interest | ||||||||
| Present value of lease payments | $ | |||||||
(13) Commitments and Contingencies
The Company and its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
In early March 2020, the World Health Organization characterized COVID-19 as a pandemic. The rapid spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on businesses around the world, including the Company’s business, and on global, regional and national economies. The Company is unable at this time to predict the ultimate impact that COVID-19 will have on its business due to the inability to predict the duration or magnitude of the virus' impact.
During the Company's due diligence for the Network1 acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company recorded indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as the funds were escrowed as part of the acquisition. The amount available after the impact of foreign currency translation for future pre-acquisition contingency settlements or to be released to the sellers was $3.8 million and $4.8 million, at December 31, 2020 and June 30, 2020, respectively.
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| December 31, 2020 | June 30, 2020 | ||||||||||
| Network1 | |||||||||||
| (in thousands) | |||||||||||
| Assets | |||||||||||
| Prepaid expenses and other current assets | $ | $ | |||||||||
| Other non-current assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Accrued expenses and other current liabilities | $ | $ | |||||||||
| Other long-term liabilities | $ | $ | |||||||||
The increase in pre-acquisition contingencies and corresponding indemnification receivables is due to a slight increase in the foreign exchange rate of the Brazilian real against the US dollar.
(14) Restructuring
In July 2020, as part of a strategic review of organizational structure and operations, the Company announced a global cost reduction and restructuring program. These actions are designed to better align the cost structure for the wholesale distribution business with lower sales volumes as a result of the COVID-19 pandemic. The Company also initiated the closure of its Canpango business, its salesforce implementation and consulting business. There has been limited adoption by the Company's partner community of the services Canpango offers. These actions include entering into severance and termination agreements with employees, legal fees to execute the reduction in force and costs associated with lease terminations.
The following table presents the restructuring and severance costs incurred for the quarter and six ended December 31, 2020:
| Quarter ended December 31, 2020 | Six months ended December 31, 2020 | |||||||||||||
| (in thousands) | ||||||||||||||
| Severance and benefit costs | $ | $ | ||||||||||||
| Other | ||||||||||||||
| Total restructuring and other charges | $ | $ | ||||||||||||
For the quarter and six months ended December 31, 2020, all restructuring costs are recognized in the Corporate reporting unit and have not been allocated to the Worldwide Communications & Services or Worldwide Barcode, Networking & Security segment. The Company incurred restructuring charges in the prior year that were immaterial to the condensed consolidated financial statements and unrelated to the program described above.
Accrued restructuring and severance costs are included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The following table represents activity for the six months ended December 31, 2020:
| Accrued Expenses | ||||||||
| (in thousands) | ||||||||
| Balance at July 1, 2020 | $ | |||||||
| Charged to expense | ||||||||
| Cash payments | ( | |||||||
| Balance at December 31, 2020 | $ | |||||||
The remaining balance as of December 31, 2020 of $4.5 million, primarily related to Corporate, is expected to be paid through the first quarter of fiscal year 2022.
(15) Income Taxes
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Income taxes for the quarters and six months ended December 31, 2020 and 2019 have been included in the accompanying condensed consolidated financial statements using an estimated annual effective tax rate. In addition to applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall tax provision. There were no material discrete items recognized during the quarter and six months ended December 31, 2020 and 2019.
The Company’s effective tax rate of 29.75 27.5 % and 26.7 % for the quarter and six months ended December 31, 2019, respectively.
The Company has provided for U.S. income taxes for the current earnings of its Canadian subsidiary and will continue to distribute the earnings of its Canadian subsidiary. Earnings from Brazil will continue to be considered retained indefinitely for reinvestment and all other foreign geographies are immaterial. It has been the practice of the Company to reinvest those earnings in the businesses outside the United States. As a result of the sale of the Latin American and European entities, the Company repatriated the proceeds to the United States with minimal tax consequences.
The Tax Act created a provision known as global intangible low-tax income ("GILTI") that imposes a tax on certain earnings of foreign subsidiaries. The GILTI tax became effective for the Company during fiscal year 2019 and an accounting policy election was made to treat the tax as a current period expense.
The Company had approximately $1.2 1 million represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At December 31, 2020 and June 30, 2020, the Company had approximately $1.2 million and $1.1 million, respectively, accrued for interest and penalties.
The Company conducts business globally and one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries and states in which it operates. With certain exceptions, the Company is no longer subject to federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before June 30, 2015.
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(16) Discontinued Operations
On August 20, 2019, the Company announced plans to divest the product distribution businesses in Europe, the UK, Mexico, Colombia, Chile, Peru and the Miami-based export operations ("Divestitures") as these businesses had been performing below management's expectations. The Company will continue to operate its digital business in these countries. Management determined that the Company did not have sufficient scale in these markets to maximize the value-added model for product distribution, leading the Company to focus and invest in its higher-growth, higher-margin businesses. Results from the Divestitures were included within each reportable segment, which includes the Worldwide Barcode, Networking & Security and Worldwide Communications & Services segments.
During the quarter ended June 30, 2020, the Company recorded a pre-tax loss on sale classification of $88.9 million to reduce the carrying value of the Divestitures to its estimate of fair value (the net proceeds received at closing), less estimated costs to sell. As this loss was determined not to be attributable to any individual components in the Divestitures' net assets, it was reflected as a valuation allowance against the total assets of the Divestitures. During the quarter and six months ended December 31, 2020, the Company recorded an additional pre-tax loss on disposal group of $23.1 million and $33.8 million, respectively. This loss includes the realization of cumulative translation adjustments of $11.6
The Company signed an agreement on July 23, 2020 with Intcomex for its businesses located in Latin America, outside of Brazil. The Company finalized the sale of the Latin America businesses on October 30, 2020. The Company also finalized the sale of the Europe and UK business on November 12, 2020. Total cash received during the quarter and six months ended December 31, 2020 for the sale of divestitures was $34.4 million. At December 31, 2020, the Company included $3.0 million in prepaid expenses and other assets on the condensed consolidated balance sheets for a receivable from Intcomex under the stock purchase agreement.
Major components of net loss from discontinued operations for the quarters ended December 31, 2020 and 2019 were as follows:
| Quarter ended December 31, | Six months ended December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation expense | |||||||||||||||||||||||
| Intangible amortization expense | |||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Loss on disposal group | |||||||||||||||||||||||
| Other (income) expense, net | ( | ( | ( | ||||||||||||||||||||
| Loss from discontinued operations before taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Net loss from discontinued operations | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The major classes of assets and liabilities classified as held-for-sale in the accompanying consolidated balance sheets, were as follows as of December 31, 2020 and June 30, 2020:
31
| December 31, 2020 | June 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current assets | |||||||||||
| Total assets, before valuation allowance | |||||||||||
| Less: valuation allowance | ( | ||||||||||
Total assets, net of valuation allowance (1) | $ | $ | |||||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Other taxes payable | |||||||||||
| Short-term borrowings | |||||||||||
| Income tax payable | |||||||||||
| Total current liabilities | |||||||||||
| Borrowings under revolving credit facility | |||||||||||
| Other long-term liabilities | |||||||||||
Total liabilities(1) | $ | $ | |||||||||
(1) Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company's consolidated balance sheet as of June 30, 2020. The discontinued operations were disposed of during the quarter ended December 31, 2020.
Significant non-cash operating items and capital expenditures reflected in the cash flows from discontinued operations for the six months ended December 31, 2020 and 2019 were as follows:
| Six months ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in thousands) | |||||||||||
| Loss on disposal group | $ | $ | |||||||||
| Depreciation and amortization | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Overview
ScanSource is at the center of the technological solution delivery channel, connecting businesses and institutions and providing solutions for their complex needs. We provide technology solutions and services from leading suppliers of mobility and
32
barcode, point-of-sale (POS), payments, physical security, unified communications and collaboration, telecom and cloud services to our customers. We serve approximately 30,000 sales partners located in the United States, Canada, Brazil, the UK and Europe and provide solutions and services from approximately 500 technology suppliers. Unless otherwise indicated, the amounts and analysis provided within Management's Discussion and Analysis of Financial Condition and Results of Operations pertain to our continuing operations only.
We operate our business under a management structure that enhances our technology market focus and growth strategy. We segment our business into two technology-focused areas that each operate in the United States, Canada, Brazil and the UK:
•Worldwide Barcode, Networking & Security
•Worldwide Communications & Services
We sell hardware, software, services and connectivity through channel partners to end-customers. For our hardware distribution, we sell products (i) to the United States and Canada from our facilities located in Mississippi, California and Kentucky and (ii) to Brazil primarily from facilities located in the Brazilian states of Parana, Espirito Santo and Santa Catarina. We also have drop shipment arrangements with some of our suppliers, which allow us to offer products to customers without taking physical delivery at our facilities. We provide some of our digital products, which include Software as a Service (“SaaS”) and subscriptions, through our CASCADE platform.
Our key suppliers include 8x8, ACC Business, AT&T, Aruba/HPE, Axis, AudioCodes, Avaya, Barco, Bematech, Cisco, Comcast Business, Datalogic, Dell, Elo, Epson, Extreme, Fortinet, Hanwha, Honeywell, HID, Ingenico, Jabra, Lumen, March Networks, Masergy, Microsoft, Mitel, NCR, NICE inContact, Oracle, Panasonic, Poly, RingCentral, Samsung, Sony, Spectralink, Spectrum, Toshiba Global Commerce Solutions, TPx, Ubiquiti, Verifone, Verizon, Windstream, Zebra Technologies and Zoom. We also offer customers significant choices in cloud services through our Intelisys business, including offerings in contact center, infrastructure and unified communications.
Recent Developments
Impact of COVID-19 on our Business Environment
In early March 2020, the World Health Organization characterized COVID-19 as a pandemic. The rapid spread of COVID-19 since December 2019 has resulted in the implementation of numerous measures to contain the virus worldwide, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial impact on businesses around the world and on global, regional and national economies.
During the COVID-19 pandemic, our top priority is protecting the health and safety of our employees. We moved quickly to transition our employees, where possible, to a fully remote working environment. We have taken a number of measures to ensure our teams feel secure in their jobs and have the flexibility and resources they need to stay safe and healthy.
We have activated our contingency plans. We have deployed teams to monitor the rapidly evolving situation and recommend risk mitigation actions; we have implemented travel restrictions; and we are following physical distancing guidelines. We are following global guidance from authorities and health officials including, but not limited to, checking the temperature of associates when entering our facilities, requiring associates to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitation routines. All of our distribution facilities have remained open and operational. Most of our office-based employees around the world are working remotely. Our employees have remained productive across all areas of our business, even while working remotely, and are committed to providing the high level of customer service our partners have grown to expect from us in order to achieve positive results.
We continue to monitor and assess the impacts of the COVID-19 pandemic. During the first six months of our fiscal year, GAAP net sales declined 5.9% year-over-year while non-GAAP net sales, which exclude the negative impact of fluctuations in foreign currency translation, decreased 2.7% year-over-year.
In July 2020, we announced actions to address the business impacts of the COVID-19 pandemic and prepare for the next phase of growth. These actions included a $30 million annualized expense reduction plan. During the quarter and six months ended December 31, 2020, we recognized approximately $0.5 million and $8.8 million, respectively for restructuring and other charges, largely for severance and employee benefits for employees who left the Company as part of this plan. These actions are designed to better align the cost structure for our wholesale distribution business with lower sales volumes as a result of the
33
COVID-19 pandemic. As part of the plan, we are continuing to invest in our higher growth agency business, Intelisys. Strong growth for the Intelisys business has continued, even with the COVID-19 pandemic.
Closure of the Canpango Professional Services Business
In July 2020, we initiated actions to close Canpango, our salesforce implementation and consulting business. In August 2018, we acquired Canpango to help partners build out their customer relationship management capabilities as part of a CCaaS solution. There has been limited adoption by our partner community. We completed existing customer contracts and ceased operations during the quarter ended December 31, 2020.
Divestitures
The Company signed an agreement on July 23, 2020 with Intcomex for its products distribution businesses located in Latin America, outside of Brazil. The Company finalized the sale of the Latin America businesses on October 30, 2020. The Company also finalized the sale of the Europe and UK products distribution businesses on November 12, 2020.
Our Strategy
We rely on a channel sales model offering hardware, software, services and connectivity from leading technology suppliers to sales partners that solve end customers' challenges. With our CASCADE platform, we also offer customers SaaS and subscription services from leading technology suppliers. While we do not manufacture products, we provide technology solutions and services from leading technology suppliers. Our solutions may include a combination of offerings from multiple suppliers or give our sales partners access to additional services, such as custom configuration, key injection, integration support, custom development and other services. We also offer the flexibility of on-premise, cloud and hybrid solutions.
As a trusted adviser to our sales partners, we provide more complete solutions through a better understanding of end customer needs. We drive growth through enhancing our sales partners' capabilities to provide hardware, software, services and connectivity solutions. Our teams deliver value-added support programs and services, including education and training, network assessments, implementation, custom development and marketing to help our sales partners extend their capabilities, develop new technology practices or reach new end customers.
Our objective is to grow profitable sales in the technologies we offer and expand in higher margin and adjacent markets to help our sales partners offer more products and services and increase recurring revenue opportunities. As part of our strategic plan, we consider strategic acquisitions and alliances to enhance our technology offerings and service capabilities.
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Results of Operations from Continuing Operations
Net Sales
The following tables summarize our net sales results by technology segment and by geographic location for our continuing operations for the quarters and six months ended December 31, 2020 and 2019:
| Quarter ended December 31, | % Change, Constant Currency, Excluding Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| Net Sales by Segment: | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | 551,394 | $ | 575,001 | $ | (23,607) | (4.1) | % | (2.7) | % | |||||||||||||||||||
| Worldwide Communications & Services | 259,503 | 248,998 | 10,505 | 4.2 | % | 12.2 | % | ||||||||||||||||||||||
| Total net sales | $ | 810,897 | $ | 823,999 | $ | (13,102) | (1.6) | % | 1.8 | % | |||||||||||||||||||
| Six months ended December 31, | % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | 1,074,970 | $ | 1,156,188 | $ | (81,218) | (7.0) | % | (5.7) | % | |||||||||||||||||||
| Worldwide Communications & Services | 493,268 | 510,512 | (17,244) | (3.4) | % | 3.9 | % | ||||||||||||||||||||||
| Total net sales | $ | 1,568,238 | $ | 1,666,700 | $ | (98,462) | (5.9) | % | (2.7) | % | |||||||||||||||||||
(a) A reconciliation of non-GAAP net sales in constant currency, excluding Divestitures and acquisitions is presented at the end of Results of Operations, under Non-GAAP Financial Information.
Worldwide Barcode, Networking & Security
The Worldwide Barcode, Networking & Security segment consists of sales to customers in North America and Brazil. For the quarter ended December 31, 2020, net sales for the Barcode, Networking & Security segment decreased $23.6 million, or 4.1%, compared to the prior-year quarter. Excluding the foreign exchange negative impact, adjusted net sales decreased $15.7 million, or 2.7%, for the quarter ended December 31, 2020 compared to the prior-year quarter. The decrease in net sales is primarily due to lower sales in parts of our business in North America, partially offset by growth in Brazil. During the quarter we saw continued progress in recovering from the sales impacts of the COVID-19 pandemic across key technologies in North America and Brazil.
Net sales decreased $81.2 million, or 7.0% for the six months ended December 31, 2020 compared to the prior six-month period. Excluding the foreign exchange negative impact, adjusted net sales decreased $65.6 million, or 5.7%, compared to the prior six-month period. The decrease in net sales and adjusted net sales is primarily due to lower sales volume across North America, partially offset by growth in Brazil.
Worldwide Communications & Services
The Worldwide Communications & Services segment consists of sales to customers in North America, Brazil, Europe and the UK. For the quarter ended December 31, 2020, net sales increased $10.5 million, or 4.2% compared to the prior-year quarter. Excluding the foreign exchange negative impact, adjusted net sales increased $30.4 million, or 12.2% for the quarter ended December 31, 2020. The increase in net sales and adjusted net sales is primarily due to sales growth in local currency in Brazil and increased sales volumes in North America. During the quarter we saw continued progress in recovering from the sales impacts of the COVID-19 pandemic across key technologies in North America and Brazil.
For the six months ended December 31, 2020, net sales decreased $17.2 million, or 3.4%, primarily from decreases in sales volume in North America and Brazil, partially offset by increases in net sales for Intelisys. Excluding the foreign exchange negative impact, adjusted net sales increased $20.1 million, or 3.9%, primarily due to sales growth in local currency in Brazil.
35
| Quarter ended December 31, | % Change, Constant Currency, Excluding Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| Net Sales by Geography: | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| United States and Canada | $ | 720,004 | $ | 734,832 | $ | (14,828) | (2.0) | % | (2.0) | % | |||||||||||||||||||
| International | 90,893 | 89,167 | 1,726 | 1.9 | % | 33.1 | % | ||||||||||||||||||||||
| Total net sales | $ | 810,897 | $ | 823,999 | $ | (13,102) | (1.6) | % | 1.8 | % | |||||||||||||||||||
| Six months ended December 31, | % Change, Constant Currency, Excluding Planned Divestitures and Acquisitions (a) | ||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| United States and Canada | $ | 1,403,607 | $ | 1,503,343 | $ | (99,736) | (6.6) | % | (6.6) | % | |||||||||||||||||||
| International | 164,631 | 163,357 | 1,274 | 0.8 | % | 33.2 | % | ||||||||||||||||||||||
| Total net sales | $ | 1,568,238 | $ | 1,666,700 | $ | (98,462) | (5.9) | % | (2.7) | % | |||||||||||||||||||
(a) A reconciliation of non-GAAP net sales in constant currency, excluding Divestitures and acquisitions is presented at the end of Results of Operations in the non-GAAP section.
Gross Profit
The following tables summarize our gross profit for our continuing operations for the quarters and six months ended December 31, 2020 and 2019:
| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | 42,685 | $ | 51,133 | $ | (8,448) | (16.5) | % | 7.7 | % | 8.9 | % | |||||||||||||||||||||||
| Worldwide Communications & Services | 43,358 | 47,186 | (3,828) | (8.1) | % | 16.7 | % | 19.0 | % | ||||||||||||||||||||||||||
| Gross profit | $ | 86,043 | $ | 98,319 | $ | (12,276) | (12.5) | % | 10.6 | % | 11.9 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | 83,770 | $ | 101,423 | $ | (17,653) | (17.4) | % | 7.8 | % | 8.8 | % | |||||||||||||||||||||||
| Worldwide Communications & Services | 83,053 | 95,421 | (12,368) | (13.0) | % | 16.8 | % | 18.7 | % | ||||||||||||||||||||||||||
| Gross profit | $ | 166,823 | $ | 196,844 | $ | (30,021) | (15.3) | % | 10.6 | % | 11.8 | % | |||||||||||||||||||||||
Worldwide Barcode, Networking & Security
Gross profit dollars and gross profit margin for the Worldwide Barcode, Networking & Security segment decreased for the quarter and six months ended December 31, 2020 compared to the prior-year quarter primarily from lower vendor program recognition and lower margin sales mix, including large deals, compared to the prior-year quarter and six months.
Worldwide Communications & Services
Gross profit dollars and gross profit margin decreased for the Worldwide Communications & Services segment for the quarter and six months ended December 31, 2020 primarily from lower margin sales mix compared to the prior-year quarter and six month period, partially offset by the results contributed by our Intelisys recurring revenue business.
36
Operating Expenses
The following tables summarize our operating expenses for our continuing operations for the quarters and six months ended December 31, 2020 and 2019:
| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 60,470 | $ | 67,840 | $ | (7,370) | (10.9) | % | 7.5 | % | 8.2 | % | |||||||||||||||||||||||
| Depreciation expense | 3,097 | 3,161 | (64) | (2.0) | % | 0.4 | % | 0.4 | % | ||||||||||||||||||||||||||
| Intangible amortization expense | 4,862 | 5,310 | (448) | (8.4) | % | 0.6 | % | 0.6 | % | ||||||||||||||||||||||||||
| Restructuring and other charges | 484 | 266 | 218 | 82.0 | % | 0.1 | % | 0.0 | % | ||||||||||||||||||||||||||
| Change in fair value of contingent consideration | — | 3,176 | (3,176) | (100.0) | % | 0.0 | % | 0.4 | % | ||||||||||||||||||||||||||
| Operating expenses | $ | 68,913 | $ | 79,753 | $ | (10,840) | (13.6) | % | 8.5 | % | 9.7 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 122,580 | $ | 136,371 | $ | (13,791) | (10.1) | % | 7.8 | % | 8.2 | % | |||||||||||||||||||||||
| Depreciation expense | 6,494 | 6,462 | 32 | 0.5 | % | 0.4 | % | 0.4 | % | ||||||||||||||||||||||||||
| Intangible amortization expense | 9,716 | 9,848 | (132) | (1.3) | % | 0.6 | % | 0.6 | % | ||||||||||||||||||||||||||
| Restructuring and other charges | 8,753 | 435 | 8,318 | 1,912.2 | % | 0.6 | % | 0.0 | % | ||||||||||||||||||||||||||
| Change in fair value of contingent consideration | 516 | 5,649 | (5,133) | (90.9) | % | 0.0 | % | 0.3 | % | ||||||||||||||||||||||||||
| Operating expenses | $ | 148,059 | $ | 158,765 | $ | (10,706) | (6.7) | % | 9.4 | % | 9.5 | % | |||||||||||||||||||||||
*nm - percentages are not meaningful
Selling, general and administrative expenses ("SG&A") decreased $7.4 million and $13.8 million for the quarter and six months ended December 31, 2020, respectively, compared to the prior-year periods due to lower employee costs and a decrease in travel expenses due to the COVID-19 pandemic. The decrease in employee costs for the quarter and six months ended December 31, 2020 is a result of the Company's expense reduction plan, which was implemented at the end of July 2020.
Depreciation expense remained fairly consistent for the quarter and six months ended December 31, 2020 compared to the prior-year periods.
Amortization expense decreased $0.4 million and $0.1 million for the quarter and six months ended December 31, 2020, respectively, compared to the prior-year periods largely due to Canpango intangible write-offs at the end of the prior fiscal year.
Restructuring and other charges incurred of $0.5 million and $8.8 million for the quarter and six months ended December 31, 2020, respectively, primarily relate to employee severance and benefit costs in connection with our expense reduction plan announced in July 2020.
We recorded no expense for the change in fair value of contingent consideration for the quarter ended December 31, 2020 and $0.5 million for the six months ended December 31, 2020, all of which relates to Intelisys. The expense from the change in fair value for the six months ended December 31, 2020 is due to the amortization of the unrecognized fair value discount for the final Intelisys earnout payment, which was paid in October 2020.
Operating Income
The following tables summarize our operating income for our continuing operations for the quarters and six months ended December 31, 2020 and 2019:
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| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | 5,887 | $ | 13,302 | $ | (7,415) | (55.7) | % | 1.1 | % | 2.3 | % | |||||||||||||||||||||||
| Worldwide Communications & Services | 13,087 | 6,415 | 6,672 | 104.0 | % | 5.0 | % | 2.6 | % | ||||||||||||||||||||||||||
| Corporate | (1,844) | (1,151) | (693) | nm* | nm* | nm* | |||||||||||||||||||||||||||||
| Operating income | $ | 17,130 | $ | 18,566 | $ | (1,436) | (7.7) | % | 2.1 | % | 2.3 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security | $ | 8,034 | $ | 24,374 | $ | (16,340) | (67.0) | % | 0.7 | % | 2.1 | % | |||||||||||||||||||||||
| Worldwide Communications & Services | 21,340 | 15,614 | 5,726 | 36.7 | % | 4.3 | % | 3.1 | % | ||||||||||||||||||||||||||
| Corporate | (10,610) | (1,909) | (8,701) | nm* | nm* | nm* | |||||||||||||||||||||||||||||
| Operating income | $ | 18,764 | $ | 38,079 | $ | (19,315) | (50.7) | % | 1.2 | % | 2.3 | % | |||||||||||||||||||||||
*nm - percentages are not meaningful
Worldwide Barcode, Networking & Security
For the Worldwide Barcode, Networking & Security segment, operating income decreased $7.4 million and $16.3 million for the quarter and six months ended December 31, 2020, respectively, compared to prior-year periods. Operating margin decreased to 1.1% and 0.7% for the quarter and six months ended December 31, 2020 compared to the prior-year periods. The decreases are primarily due to lower gross profits.
Worldwide Communications & Services
For the Worldwide Communications & Services segment, operating income increased $6.7 million and $5.7 million for the quarter and six months ended December 31, 2020. Operating margin increased to 5.0% and 4.3% for the quarter and six months ended December 31, 2020, respectively. The increase in operating income is primarily from lower SG&A expense, partially offset by lower gross profits.
Corporate
Corporate incurred $1.8 million and $10.6 million in restructuring and divestiture expenses for the quarter and six months ended December 31, 2020, respectively, compared to $1.2 million and $1.9 million in acquisition and divestiture expenses for the quarter and six months ended December 31, 2019, respectively.
Total Other (Income) Expense
The following tables summarize our total other (income) expense for our continuing operations for the quarters and six months ended December 31, 2020 and 2019:
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| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | 1,796 | $ | 3,312 | $ | (1,516) | (45.8) | % | 0.2 | % | 0.4 | % | |||||||||||||||||||||||
| Interest income | (531) | (740) | 209 | 28.2 | % | (0.1) | % | (0.1) | % | ||||||||||||||||||||||||||
| Net foreign exchange losses (gains) | 381 | (64) | 445 | (695.3) | % | 0.0 | % | (0.0) | % | ||||||||||||||||||||||||||
| Other, net | (260) | 25 | (285) | 1,140.0 | % | (0.0) | % | 0.0 | % | ||||||||||||||||||||||||||
| Total other expense, net | $ | 1,386 | $ | 2,533 | $ | (1,147) | (45.3) | % | 0.2 | % | 0.3 | % | |||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | 3,709 | $ | 6,629 | $ | (2,920) | (44.0) | % | 0.2 | % | 0.4 | % | |||||||||||||||||||||||
| Interest income | (1,011) | (1,548) | 537 | (34.7) | % | (0.1) | % | (0.1) | % | ||||||||||||||||||||||||||
| Net foreign exchange losses | 819 | 182 | 637 | 350.0 | % | 0.1 | % | 0.0 | % | ||||||||||||||||||||||||||
| Other, net | (335) | 154 | (489) | (317.5) | % | (0.0) | % | 0.0 | % | ||||||||||||||||||||||||||
| Total other expense, net | $ | 3,182 | $ | 5,417 | $ | (2,235) | (41.3) | % | 0.2 | % | 0.3 | % | |||||||||||||||||||||||
Interest expense consists primarily of interest incurred on borrowings, non-utilization fees charged on the revolving credit facility and amortization of debt issuance costs. Interest expense decreased for the quarter and six months ended December 31, 2020 compared to the prior-year quarter principally from reduced borrowings on our multi-currency revolving credit facility.
Interest income for the quarter and six months ended December 31, 2020 was generated on interest-bearing customer receivables and interest earned on cash and cash equivalents. Interest income decreased for the quarter and six months ended December 31, 2020 compared to the prior-year principally from lower interest earned on customer receivables in North America.
Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange gains and losses are primarily generated as the result of fluctuations in the value of the U.S. dollar versus the Brazilian real, the British pound versus the euro, and the Canadian dollar versus the U.S. dollar. We partially offset foreign currency exposure with the use of foreign exchange forward contracts to hedge against these exposures. The costs associated with foreign exchange forward contracts are included in the net foreign exchange losses.
Provision for Income Taxes
For the quarter and six months ended December 31, 2020, income tax expense was $4.7 million and $4.6 million, respectively, reflecting an effective tax rate of 29.75%. In comparison, for the quarter and six months ended December 31, 2019 income tax expense totaled $4.4 million and $8.7 million, respectively, reflecting an effective tax rate of 27.5% and 26.7%, respectively. The increase in the effective tax rate is primarily due to the impact of lowered forecasted earnings and changes in the geographical mix of income as compared to the prior-year. We expect the effective tax rate, excluding discrete items, for fiscal year 2021 to be approximately 28.75% to 29.75%. See Note 15 - Income Taxes to the Notes to Consolidated Financial Statements for further discussion.
Non-GAAP Financial Information
Evaluating Financial Condition and Operating Performance
In addition to disclosing results that are determined in accordance with United States generally accepted accounting principles ("US GAAP" or "GAAP"), we also disclose certain non-GAAP financial measures. These measures include non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income, non-GAAP EPS, return on invested capital ("ROIC") and "constant currency." Constant currency is a measure that excludes the translation exchange impact from changes in foreign
39
currency exchange rates between reporting periods. We use non-GAAP financial measures to better understand and evaluate performance, including comparisons from period to period.
These non-GAAP financial measures have limitations as analytical tools, and the non-GAAP financial measures that we report may not be comparable to similarly titled amounts reported by other companies. Analysis of results and outlook on a non-GAAP basis should be considered in addition to, and not in substitution for or as superior to, measurements of financial performance prepared in accordance with US GAAP.
Return on Invested Capital
ROIC assists us in comparing our performance over various reporting periods on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. We believe the calculation of ROIC provides useful information to investors and is an additional relevant comparison of our performance during the year.
We calculate ROIC as earnings before interest expense, income taxes, depreciation and amortization, plus change in fair value of contingent consideration and other non-GAAP adjustments ("adjusted EBITDA"), divided by invested capital. Invested capital is defined as average equity plus average daily funded interest-bearing debt for the period. The following table summarizes annualized ROIC for the quarters ended December 31, 2020 and 2019, respectively:
| Quarter ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
Return on invested capital ratio, annualized(a) | 12.4 | % | 9.9 | % | |||||||||||||||||||
(a)The annualized EBITDA amount is divided by days in the quarter times 365 days per year, or 366 days for leap year. There were 92 days in the current and prior-year quarter.
The components of this calculation and reconciliation to our financial statements are shown on the following schedule:
| Quarter ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Reconciliation of net income to EBITDA: | |||||||||||||||||||||||
| Net income from continuing operations (GAAP) | $ | 11,061 | $ | 11,626 | |||||||||||||||||||
| Plus: Interest expense | 1,796 | 3,312 | |||||||||||||||||||||
| Plus: Income taxes | 4,683 | 4,407 | |||||||||||||||||||||
| Plus: Depreciation and amortization | 8,349 | 9,081 | |||||||||||||||||||||
| EBITDA (non-GAAP) | 25,889 | 28,426 | |||||||||||||||||||||
| Plus: Change in fair value of contingent consideration | — | 3,176 | |||||||||||||||||||||
Plus: Acquisition and divestiture costs (a) | 1,359 | 1,151 | |||||||||||||||||||||
| Plus: Restructuring costs | 484 | 266 | |||||||||||||||||||||
| Adjusted EBITDA (numerator for ROIC) (non-GAAP) | $ | 27,732 | $ | 33,019 | |||||||||||||||||||
40
| Quarter ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Invested capital calculations: | |||||||||||||||||||||||
| Equity – beginning of the quarter | $ | 671,227 | $ | 905,751 | |||||||||||||||||||
| Equity – end of the quarter | 682,139 | 927,580 | |||||||||||||||||||||
| Plus: Change in fair value of contingent consideration, net of tax | — | 2,401 | |||||||||||||||||||||
Plus: Acquisition and divestiture costs (a) | 1,359 | 1,151 | |||||||||||||||||||||
| Plus: Restructuring, net of tax | 366 | 196 | |||||||||||||||||||||
| Plus: Discontinued operations net loss | 25,255 | 260 | |||||||||||||||||||||
| Average equity | 690,173 | 918,670 | |||||||||||||||||||||
Average funded debt (b) | 198,620 | 411,614 | |||||||||||||||||||||
| Invested capital (denominator for ROIC) (non-GAAP) | $ | 888,793 | $ | 1,330,284 | |||||||||||||||||||
(a)Acquisition and divestiture costs are generally nondeductible for tax purposes.
(b)Average funded debt is calculated as the daily average amounts outstanding on our short-term and long-term interest-bearing debt.
Net Sales in Constant Currency, Excluding Acquisitions and Divestitures
We make references to "constant currency," a non-GAAP performance measure that excludes the foreign exchange rate impact from fluctuations in the average foreign exchange rates between reporting periods. Constant currency is calculated by translating current period results from currencies other than the U.S. dollar into U.S. dollars using the comparable average foreign exchange rates from the prior year period. If applicable, we also exclude the impact of acquisitions prior to the first full year of operations from the acquisition date and the impact of Divestitures in order to show net sales results on an organic basis. This information is provided to analyze underlying trends without the translation impact of fluctuations in foreign currency rates and, the impact of Divestitures and acquisitions, if applicable. Below we show organic growth by providing a non-GAAP reconciliation of net sales in constant currency, excluding Divestitures:
41
| Net Sales by Segment: | |||||||||||||||||||||||
| Quarter ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| Worldwide Barcode, Networking & Security: | (in thousands) | ||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 606,760 | $ | 686,237 | $ | (79,477) | (11.6) | % | |||||||||||||||
| Divestitures | (55,366) | (111,236) | |||||||||||||||||||||
| Net sales, reported | 551,394 | 575,001 | (23,607) | (4.1) | % | ||||||||||||||||||
Foreign exchange impact(a) | 7,903 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 559,297 | $ | 575,001 | $ | (15,704) | (2.7) | % | |||||||||||||||
| Worldwide Communications & Services: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 272,460 | $ | 293,673 | $ | (21,213) | (7.2) | % | |||||||||||||||
| Divestitures | (12,957) | (44,675) | |||||||||||||||||||||
| Net sales, reported | 259,503 | 248,998 | 10,505 | 4.2 | % | ||||||||||||||||||
Foreign exchange impact(a) | 19,882 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 279,385 | $ | 248,998 | $ | 30,387 | 12.2 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 879,220 | $ | 979,910 | $ | (100,690) | (10.3) | % | |||||||||||||||
| Divestitures | (68,323) | (155,911) | |||||||||||||||||||||
| Net sales, reported | 810,897 | 823,999 | (13,102) | (1.6) | % | ||||||||||||||||||
Foreign exchange impact(a) | 27,785 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 838,682 | $ | 823,999 | $ | 14,683 | 1.8 | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended December 31, 2020 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2019.
42
| Net Sales by Segment: | |||||||||||||||||||||||
| Six months ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| Worldwide Barcode, Networking & Security: | (in thousands) | ||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 1,245,146 | $ | 1,384,028 | $ | (138,882) | (10.0) | % | |||||||||||||||
| Divestitures | (170,176) | (227,840) | |||||||||||||||||||||
| Net sales, reported | 1,074,970 | 1,156,188 | (81,218) | (7.0) | % | ||||||||||||||||||
Foreign exchange impact(a) | 15,626 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 1,090,596 | $ | 1,156,188 | $ | (65,592) | (5.7) | % | |||||||||||||||
| Worldwide Communications & Services: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 536,466 | $ | 594,300 | $ | (57,834) | (9.7) | % | |||||||||||||||
| Divestitures | (43,198) | (83,788) | |||||||||||||||||||||
| Net sales, reported | 493,268 | 510,512 | (17,244) | (3.4) | % | ||||||||||||||||||
Foreign exchange impact(a) | 37,321 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 530,589 | $ | 510,512 | $ | 20,077 | 3.9 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 1,781,612 | $ | 1,978,328 | $ | (196,716) | (9.9) | % | |||||||||||||||
| Divestitures | (213,374) | (311,628) | |||||||||||||||||||||
| Net sales, reported | 1,568,238 | 1,666,700 | (98,462) | (5.9) | % | ||||||||||||||||||
Foreign exchange impact(a) | 52,947 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 1,621,185 | $ | 1,666,700 | $ | (45,515) | (2.7) | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the six months ended December 31, 2020 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2019.
43
| Net Sales by Geography: | |||||||||||||||||||||||
| Quarter ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| United States and Canada: | (in thousands) | ||||||||||||||||||||||
| Net sales, as reported | $ | 720,004 | $ | 734,832 | $ | (14,828) | (2.0) | % | |||||||||||||||
| International: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 159,216 | $ | 245,078 | $ | (85,862) | (35.0) | % | |||||||||||||||
| Divestitures | (68,323) | (155,911) | |||||||||||||||||||||
| Net sales, reported | 90,893 | 89,167 | 1,726 | 1.9 | % | ||||||||||||||||||
Foreign exchange impact (a) | 27,785 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 118,678 | $ | 89,167 | $ | 29,511 | 33.1 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 879,220 | $ | 979,910 | $ | (100,690) | (10.3) | % | |||||||||||||||
| Divestitures | (68,323) | (155,911) | |||||||||||||||||||||
| Net sales, reported | 810,897 | 823,999 | (13,102) | (1.6) | % | ||||||||||||||||||
Foreign exchange impact(a) | 27,785 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 838,682 | $ | 823,999 | $ | 14,683 | 1.8 | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the quarter ended December 31, 2020 into U.S. dollars using the average foreign exchange rates for the quarter ended December 31, 2019. | |||||||||||||||||||||||
| Six months ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| United States and Canada: | (in thousands) | ||||||||||||||||||||||
| Net sales, as reported | $ | 1,403,607 | $ | 1,503,343 | $ | (99,736) | (6.6) | % | |||||||||||||||
| International: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 378,005 | $ | 474,985 | $ | (96,980) | (20.4) | % | |||||||||||||||
| Divestitures | (213,374) | (311,628) | |||||||||||||||||||||
| Net sales, reported | 164,631 | 163,357 | 1,274 | 0.8 | % | ||||||||||||||||||
Foreign exchange impact(a) | 52,947 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 217,578 | $ | 163,357 | $ | 54,221 | 33.2 | % | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||
| Non-GAAP net sales, including Divestitures | $ | 1,781,612 | $ | 1,978,328 | $ | (196,716) | (9.9) | % | |||||||||||||||
| Divestitures | (213,374) | (311,628) | |||||||||||||||||||||
| Net sales, reported | 1,568,238 | 1,666,700 | (98,462) | (5.9) | % | ||||||||||||||||||
Foreign exchange impact(a) | 52,947 | — | |||||||||||||||||||||
| Non-GAAP net sales, constant currency excluding Divestitures | $ | 1,621,185 | $ | 1,666,700 | $ | (45,515) | (2.7) | % | |||||||||||||||
(a) Year-over-year net sales growth rate excluding the translation impact of changes in foreign currency exchange rates. Calculated by translating the net sales for the six months ended December 31, 2020 into U.S. dollars using the average foreign exchange rates for the six months ended December 31, 2019. | |||||||||||||||||||||||
44
| Operating Income by Segment: | |||||||||||||||||||||||||||||||||||
| Quarter ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security: | (in thousands) | ||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 5,887 | $ | 13,302 | $ | (7,415) | (55.7) | % | 1.1 | % | 2.3 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 1,968 | 1,968 | — | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 7,855 | $ | 15,270 | $ | (7,415) | (48.6) | % | 1.4 | % | 2.7 | % | |||||||||||||||||||||||
| Worldwide Communications & Services: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 13,087 | $ | 6,415 | $ | 6,672 | 104.0 | % | 5.0 | % | 2.6 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 2,894 | 3,342 | (448) | ||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | — | 3,176 | (3,176) | ||||||||||||||||||||||||||||||||
| Restructuring costs | — | 266 | (266) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 15,981 | $ | 13,199 | $ | 2,782 | 21.1 | % | 6.2 | % | 5.3 | % | |||||||||||||||||||||||
| Corporate: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | (1,844) | $ | (1,151) | $ | (693) | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Restructuring costs | 484 | — | |||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | 1,360 | 1,151 | 209 | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | — | $ | — | $ | — | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Consolidated: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 17,130 | $ | 18,566 | $ | (1,436) | (7.7) | % | 2.1 | % | 2.3 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 4,862 | 5,310 | (448) | ||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | — | 3,176 | (3,176) | ||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | 1,360 | 1,151 | 209 | ||||||||||||||||||||||||||||||||
| Restructuring costs | 484 | 266 | 218 | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 23,836 | $ | 28,469 | $ | (4,633) | (16.3) | % | 2.9 | % | 3.5 | % | |||||||||||||||||||||||
45
| Operating Income by Segment: | |||||||||||||||||||||||||||||||||||
| Six months ended December 31, | % of Net Sales December 31, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Worldwide Barcode, Networking & Security: | (in thousands) | ||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 8,034 | $ | 24,374 | $ | (16,340) | (67.0) | % | 0.7 | % | 2.1 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 3,936 | 3,936 | — | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 11,970 | $ | 28,310 | $ | (16,340) | (57.7) | % | 1.1 | % | 2.4 | % | |||||||||||||||||||||||
| Worldwide Communications & Services: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 21,340 | $ | 15,614 | $ | 5,726 | 36.7 | % | 4.3 | % | 3.1 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 5,780 | 5,912 | (132) | ||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | 516 | 5,649 | (5,133) | ||||||||||||||||||||||||||||||||
| Restructuring costs | — | 435 | (435) | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | 27,636 | $ | 27,610 | $ | 26 | 0.1 | % | 5.6 | % | 5.4 | % | |||||||||||||||||||||||
| Corporate: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | (10,610) | $ | (1,909) | $ | (8,701) | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | 1,857 | 1,909 | (52) | ||||||||||||||||||||||||||||||||
| Restructuring costs | 8,753 | — | 8,753 | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | $ | — | $ | — | $ | — | nm* | nm* | nm* | ||||||||||||||||||||||||||
| Consolidated: | |||||||||||||||||||||||||||||||||||
| GAAP operating income | $ | 18,764 | $ | 38,079 | $ | (19,315) | (50.7) | % | 1.2 | % | 2.3 | % | |||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 9,716 | 9,848 | (132) | ||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | 516 | 5,649 | (5,133) | ||||||||||||||||||||||||||||||||
| Acquisition and divestiture costs | 1,857 | 1,909 | (52) | ||||||||||||||||||||||||||||||||
| Restructuring costs | 8,753 | 435 | 8,318 | ||||||||||||||||||||||||||||||||
| Non-GAAP operating income | 39,606 | 55,920 | $ | (16,314) | (29.2) | % | 2.5 | % | 3.4 | % | |||||||||||||||||||||||||
46
Income Statement Non-GAAP Metrics
To evaluate current period performance on a more consistent basis with prior periods, we disclose non-GAAP net sales, non-GAAP gross profit, non-GAAP operating income, non-GAAP net other expense, non-GAAP pre-tax income, non-GAAP net income and non-GAAP diluted earnings per share. Non-GAAP results exclude amortization of intangible assets related to acquisitions, changes in fair value of contingent consideration, acquisition and divestiture costs, restructuring costs, impact of Divestitures and other non-GAAP adjustments. These year-over-year metrics include the translation impact of changes in foreign currency exchange rates. These metrics are useful in assessing and understanding our operating performance, especially when comparing results with previous periods or forecasting performance for future periods. Below we provide a non-GAAP reconciliation of the aforementioned metrics adjusted for the costs and charges mentioned above:
| Quarter ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Change in fair value of contingent consideration | Acquisition and divestiture costs | Restructuring costs | Non-GAAP measure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 810,897 | $ | — | $ | — | $ | — | $ | — | $ | 810,897 | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 86,043 | — | — | — | — | 86,043 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 17,130 | 4,862 | — | 1,360 | 484 | 23,836 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense, net | 1,386 | — | — | — | — | 1,386 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax income | 15,744 | 4,862 | — | 1,360 | 484 | 22,450 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | 11,061 | 3,682 | — | 1,360 | 366 | 16,469 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted EPS from continuing operations | $ | 0.43 | $ | 0.15 | $ | — | $ | 0.06 | $ | 0.01 | $ | 0.65 | |||||||||||||||||||||||||||||||||||||||||||||||
| Quarter ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Change in fair value of contingent consideration | Acquisition and divestiture | Restructuring costs | Non-GAAP measure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 823,999 | $ | — | $ | — | $ | — | $ | — | $ | 823,999 | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 98,319 | — | — | — | — | 98,319 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 18,566 | 5,310 | 3,176 | 1,151 | 266 | 28,469 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense, net | 2,533 | — | — | — | — | 2,533 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax income | 16,033 | 5,310 | 3,176 | 1,151 | 266 | 25,936 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | 11,626 | 4,032 | 2,401 | 1,151 | 196 | 19,406 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted EPS from continuing operations | $ | 0.46 | $ | 0.16 | $ | 0.09 | $ | 0.05 | $ | 0.01 | $ | 0.77 | |||||||||||||||||||||||||||||||||||||||||||||||
47
| Six months ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Change in fair value of contingent consideration | Acquisition and divestiture costs | Restructuring costs | Non-GAAP measure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,568,238 | $ | — | $ | — | $ | — | $ | — | $ | 1,568,238 | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 166,823 | — | — | — | — | 166,823 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 18,764 | 9,716 | 516 | 1,857 | 8,753 | 39,606 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense, net | 3,182 | — | — | — | — | 3,182 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax income | 15,582 | 9,716 | 516 | 1,857 | 8,753 | 36,424 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | 10,946 | 7,357 | 390 | 1,857 | 6,617 | 27,167 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted EPS from continuing operations | $ | 0.43 | $ | 0.29 | $ | 0.02 | $ | 0.07 | $ | 0.26 | $ | 1.07 | |||||||||||||||||||||||||||||||||||||||||||||||
| Six months ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Measure | Intangible amortization expense | Change in fair value of contingent consideration | Acquisition and divestiture | Restructuring costs | Non-GAAP measure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,666,700 | $ | — | $ | — | $ | — | $ | — | $ | 1,666,700 | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 196,844 | — | — | — | — | 196,844 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 38,079 | 9,848 | 5,649 | 1,909 | 435 | 55,920 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expense, net | 5,417 | — | — | — | — | 5,417 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax income | 32,662 | 9,848 | 5,649 | 1,909 | 435 | 50,503 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | 23,917 | 7,438 | 4,270 | 1,909 | 324 | 37,858 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted EPS from continuing operations | $ | 0.94 | $ | 0.29 | $ | 0.17 | $ | 0.07 | $ | 0.01 | $ | 1.48 | |||||||||||||||||||||||||||||||||||||||||||||||
48
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under our $350 million revolving credit facility. Our business requires significant investment in working capital, particularly accounts receivable and inventory, partially financed through our accounts payable to vendors, cash generated from operations and revolving lines of credit. In general, as our sales volumes increase, our net investment in working capital increases, which typically results in decreased cash flow from operating activities. Conversely, when sales volumes decrease, our net investment in working capital typically decreases, which typically results in increased cash flow from operating activities.
Our cash and cash equivalents balance totaled $67.2 million at December 31, 2020, compared to $29.5 million at June 30, 2020, including $48.5 million and $23.6 million held outside of the United States at December 31, 2020 and June 30, 2020, respectively. Checks released but not yet cleared in the amounts of $19.3 million and $17.1 million are included in accounts payable at December 31, 2020 and June 30, 2020, respectively.
We conduct business in many locations throughout the world where we generate and use cash. We provide for U.S. income taxes for the earnings of our Canadian subsidiary, but earnings from Brazil will continue to be considered retained indefinitely for reinvestment. All other foreign geographies are immaterial. It has been our practice to reinvest those earnings in the businesses outside the United States. As a result of the sale of the Latin American and European entities, the Company repatriated the proceeds to the United States with minimal tax consequences.
Our net investment in working capital at December 31, 2020 was $429.5 million compared to $431.3 million at June 30, 2020 and $548.0 million at December 31, 2019. Our net investment in working capital is affected by several factors such as fluctuations in sales volume, net income, timing of collections from customers, increases and decreases to inventory levels and payments to vendors.
| Six months ended | |||||||||||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash provided by (used in): | (in thousands) | ||||||||||
| Operating activities | $ | 115,674 | $ | 82,734 | |||||||
| Investing activities | 32,902 | (51,662) | |||||||||
| Financing activities | (109,883) | (90,004) | |||||||||
| Effect of exchange rate change on cash and cash equivalents | 1,887 | (256) | |||||||||
| Increase in cash and cash equivalents | $ | 32,732 | $ | 18,187 | |||||||
Net cash provided by operating activities was $115.7 million for the six months ended December 31, 2020, compared to $82.7 million provided in the prior-year period. Cash provided by operating activities for the six months ended December 31, 2020 is primarily attributable to cash provided by increased accounts payable, decreased inventory, and earnings from operations adjusted for non-cash items, partially offset by increased accounts receivable. Cash provided by operating activities for the six months ended December 31, 2019 is primarily attributable to earnings from operations adjusted for non-cash items and increased accounts payable, partially offset by increased inventory.
The number of days sales outstanding ("DSO") was 60 days at December 31, 2020, compared to 63 days at June 30, 2020 and 56 days at December 31, 2019. Inventory turned 6.9 times during the quarter ended December 31, 2020 compared to 6.2 times for previous quarter ended September 30, 2020 and 4.8 times in the prior-year quarter ended December 31, 2019.
Cash provided by investing activities for the six months ended December 31, 2020 was $32.9 million, compared to $51.7 million used in the prior-year period. Cash provided by investing activities primarily represents the sale of our discontinued operations in the six months ended December 31, 2020. The prior-year period includes cash of $48.9 million used for the acquisition of intY.
Management expects capital expenditures for fiscal year 2021 to range from $3 million to $6 million, primarily for IT investments and facility improvements.
For the six months ended December 31, 2020, cash used for financing activities totaled $109.9 million, compared to $90.0 million used in the prior-year period. Cash used for financing activities for both periods was primarily for repayments on the revolving credit facility and contingent consideration payments to the former shareholders of Intelisys.
49
Credit Facility
We have a multi-currency senior secured credit facility with JPMorgan Chase Bank N.A., as administrative agent, and a syndicate of banks. On April 30, 2019, we amended this credit facility to expand the borrowing capacity and extend its maturity to April 30, 2024. The Amended Credit Agreement established (i) a five-year $350 million multi-currency senior secured revolving credit facility and (ii) a five-year $150 million senior secured term loan facility. Pursuant to an “accordion feature,” we may increase borrowings up to an additional $250 million. The Amended Credit Agreement allows for the issuance of up to $50 million for letters of credit, subject to obtaining additional credit commitments from the lenders participating in the increase.
At our option, loans under the Amended Credit Agreement, other than swingline loans, bear interest at a rate equal to a spread over the London Interbank Offered Rate ("LIBOR") or alternate base rate depending upon the our net leverage ratio, calculated as total debt less up to $15 million of unrestricted domestic cash to trailing four-quarter adjusted EBITDA.
This spread ranges from 1.00% to 1.75% for LIBOR-based loans and 0.00% to 0.75% for alternate base rate loans. The Amended Credit Agreement provides for the substitution of a new interest rate benchmark upon the transition from LIBOR, subject to agreement between the Company and the administrative agent. The Amended Credit Agreement contains customary yield protection provisions. Additionally, the Company is assessed commitment fees ranging from 0.15% to 0.30%, depending upon the Leverage Ratio, on non-utilized borrowing availability, excluding swingline loans. The secured term loan facility will amortize based on the percentage of original principal amount with 2.5% in Year 1, 5.0% in Year 2, 5.0% in Year 3, 7.5% in Year 4 and 10.0% in Year 5. Borrowings under the Amended Credit Agreement are guaranteed by substantially all of the domestic assets of the Company and a pledge of up to 65% of capital stock or other equity interest in certain foreign subsidiaries determined to be either material or a subsidiary borrower as defined in the Amended Credit Agreement.
The Amended Credit Agreement includes customary representations, warranties, and affirmative and negative covenants, including financial covenants. Specifically, our Leverage Ratio must be less than or equal to 3.50 to 1.00 at all times. In addition, our Interest Coverage Ratio (as such term is defined in the Amended Credit Agreement) must be at least 3.00 to 1.00 at the end of each fiscal quarter. In the event of a default, customary remedies are available to the lenders, including acceleration and increased interest rates. We were in compliance with all covenants under the credit facility at December 31, 2020. Including borrowings for both continuing and discontinued operations, there was $5.0 million and $92.4 million in outstanding borrowings on our revolving credit facility at December 31, 2020 and June 30, 2020, respectively.
Including borrowings for both continuing and discontinued operations, the average daily balance for the revolving credit facility, excluding the term loan facility, was $70.4 million and $253.1 million for the six month periods ended December 31, 2020 and 2019, respectively. There were letters of credit issued under the multi-currency revolving credit facility for the discontinued operations of $0.3 million at December 31, 2020 and June 30, 2020. Taking into consideration outstanding borrowings on the multi-currency revolving credit facility for both continuing and discontinued operations, there was $344.7 million and $257.3 million available for additional borrowings at December 31, 2020 and June 30, 2020, respectively. Availability to use this borrowing capacity depends upon, among other things, the levels of our Leverage Ratio and Interest Coverage Ratio, which, in turn, will depend upon (1) our Credit Facility Net Debt relative to our Credit Facility EBITDA and (2) Credit Facility EBITDA relative to total interest expense, respectively. As a result, our availability will increase if EBITDA increases (subject to the limit of the facility) and decrease if EBITDA decreases. At December 31, 2020, based upon the calculation of our Credit Facility Net Debt relative to our Credit Facility EBITDA, there was $195.1 million available for borrowing. While we were in compliance with the financial covenants contained in the Credit Facility as of December 31, 2020, and currently expect to continue to maintain such compliance, should we encounter difficulties, our historical relationship with our Credit Facility lending group has been strong and we anticipate their continued support of our long-term business.
We had a bank overdraft facility with Bank of America used by our European subsidiaries, which was terminated with the sale of the Europe distribution business in November 2020. The facility allowed us to disburse checks in excess of bank balances up to $14.0 million U.S. dollar equivalent for up to seven days. Borrowings under the overdraft facility had interest at a rate equal to a spread of 1.0% over the applicable currency's LIBOR with a zero percent floor. There was no outstanding balance on the overdraft facility at December 31, 2020 and $3.5 million was outstanding for the discontinued operations at June 30, 2020.
Earnout Payments
Related to the acquisition on August 29, 2016, the final earnout payment for Intelisys, which totaled $46.9 million, was paid in October 2020, funded by borrowings on our revolving credit facility.
50
Summary
We believe that our existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under our credit agreements, will provide sufficient resources to meet the present and future working capital and cash requirements for at least the next twelve months.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect or change on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the company is a party, under which the company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
See Note 10 - Fair Value of Financial Instruments for a discussion on the liabilities recorded. There have been no other material changes in our contractual obligations and commitments disclosed in our Annual Report on Form 10-K filed on August 31, 2020.
Accounting Standards Recently Issued
See Note 1 of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on our consolidated financial position and results of operations.
Critical Accounting Policies and Estimates
Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. See Management's Discussion and Analysis of Financial Condition and Results from Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 for a complete discussion.
Allowances for Trade and Notes Receivable
We adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326) effective July 1, 2020. The adoption did not have a material impact on our consolidated financial statements. Our policy to estimating allowance for doubtful accounts receivable is described below.
We maintain an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for doubtful accounts receivable by considering a number of factors, including: (i) historical experience, (ii) aging of the accounts receivable, (iii) specific information obtained by the Company on the financial condition and the current creditworthiness of its customers, (iv) the current economic and country-specific environment and (v) reasonable and supportable forecasts about collectability. Expected credit losses are estimated on a pool basis when similar risk characteristics exist using an age-based reserve model. Receivables that do not share risk characteristics are evaluated on an individual basis. Estimates of expected credit losses on trade receivables over the contractual life are recorded at inception.
51
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||
For a description of the Company's market risks, see Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. No material changes have occurred to our market risks since June 30, 2020.
52
| Item 4. | Controls and Procedures | ||||
An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the effectiveness of the Company’s disclosure controls and procedures at December 31, 2020. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures are effective at December 31, 2020. During the quarter and six months ended December 31, 2020, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
53
PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings | ||||
The Company and our subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to us, we believe that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on our financial condition or results of operations. For a description of our material legal proceedings, see Note 13 - Commitments and Contingencies in the notes to the condensed consolidated financial statements, which is incorporated herein by reference.
| Item 1A. | Risk Factors | ||||
In addition to the risk factors discussed in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2020, which could materially affect our business, financial condition and/or future operating results.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
On August 29, 2016, we announced a Board of Directors ("BOD") authorization to repurchase shares up to $120 million of our common stock over three years. The share repurchase authorization expired in August 2019. Final share repurchases under this authorization occurred during the quarter ended September 30, 2019, totaling 168,068 shares for $5.4 million.
We have never declared or paid a cash dividend. Under the terms of our credit facility, the payment of cash dividends is restricted.
| Item 6. | Exhibits | ||||
| Exhibit Number | Description | ||||
| 10.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following materials from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at December 31, 2020 and June 30, 2020; (ii) the Condensed Consolidated Income Statements for the quarter and six months ended December 31, 2020 and 2019; (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income for the quarter and six months ended December 31, 2020 and 2019; (iv) the Condensed Consolidated Statements of Shareholder's Equity at December 31, 2020 and 2019; (v) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2020 and 2019; and (vi) the Notes to the Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL | ||||
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ScanSource, Inc. | ||||||||
| /s/ MICHAEL L. BAUR | ||||||||
| Michael L. Baur | ||||||||
| Date: | February 2, 2021 | Chairman and Chief Executive Officer (Principal Executive Officer) | ||||||
| /s/ STEPHEN T. JONES | ||||||||
| Stephen T. Jones | ||||||||
| Date: | February 2, 2021 | Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||
55
Exhibit 10.1
THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO S.C. CODE ANN. § 15-48-10, et seq., THE SOUTH CAROLINA UNIFORM ARBITRATION ACT
SENT VIA E-MAIL
Mr. Stephen T. Jones
2921 Yachtsman Drive
Mount Pleasant, South Carolina 29466
November 16, 2020
Dear Steve:
On behalf of ScanSource, Inc. (the “Company”), I am pleased to confirm our offer of employment (this “Letter”) to you for the position of Senior Executive Vice President and Chief Financial Officer (“CFO”). I believe you will find it to be both challenging and rewarding and we look forward to having you as a critical member of the team.
Please be at the Reception Lobby at 9:00 a.m. on your first day, which shall be on or about December 14, 2020 (the “Effective Date”) and ask for John Harvey. We will send you a Welcome Packet from our Human Resources Team. The packet provides general information on the benefit programs offered by the Company. Your benefits are further discussed below and will be explained in more detail on your first day, but if you have questions in the meantime please call John at 864-286-4379.
1.Certain Employment Terms. You will assume your role as CFO and may serve as an officer and/or director of one or more of the Company’s subsidiaries or other affiliates if and as directed by the Board. Your position is a full-time position and you will be expected to devote your full business time and attention to the performance of your duties and responsibilities in the position(s) described above. You will report to the Chief Executive Officer. As a Named Executive Officer (“NEO”) of the Company, your compensation is determined by the Compensation Committee of our Board of Directors. Your employment will be for no set duration. You will be an at-will employee, which means that either the Company or you may terminate the employment relationship at any time, for any reason or no reason, with or without cause, subject to the severance plan benefit opportunities referenced in Section 6 of this Letter. Although your position will require travel, your principal place of employment will be at the Company’s headquarters in Greenville, South Carolina. You are authorized to join up to a total of two non-competing public and/or private corporation boards of directors, subject to prior notice to and approval by the Board. In addition, as CFO you will be a NEO of ScanSource; acceptance of this position also means acceptance with the public disclosures, filing obligations, and other responsibilities associated with being an NEO.
2.Base Salary. Your annual base salary as of the Effective Date in your role as CFO will be $400,000, paid in accordance with the Company’s payroll practices (every two weeks by direct deposit) pro-rated for any partial year, and less applicable taxes and withholdings. Your salary will be subject to annual review by the Compensation Committee but shall not be subject to decrease without your consent.
3.Bonuses. You will be eligible to participate in the Company’s cash-based variable compensation incentive plan (the “Bonus Plan”). Your target annual bonus opportunity for fiscal 2021 shall be equal to 100% of base salary ($400,000), and your maximum annual bonus opportunity shall not exceed 200% of your base salary ($800,000). Thereafter, your target and maximum short-term incentive opportunities shall be subject to periodic review, provided that you will be eligible to participate in the Bonus Plan at a level commensurate with the level of participation of other senior executive officers of the Company. Bonuses, if any, will be prorated for any partial years (including FY2021), based on actual performance. The performance measures and goals applicable to your annual bonus opportunity (for any year) shall be established by the Compensation Committee, and the Compensation Committee shall have the discretion to determine if, and the extent to which, any such measures and goals have been met and the bonus has been earned. While it is generally anticipated that your annual short-term incentive opportunities will be maintained, your participation in the Bonus Plan does not constitute a promise of payment. Your actual incentive payout, if any, will depend on the Company’s financial and business performance and/or the
Exhibit 10.1
Compensation Committee’s assessment of your individual performance, and will be subject to the terms and conditions of the Bonus Plan. Any bonus payment made to you under the Bonus Plan will be paid to you in accordance with Treasury Reg. Section 1.409A-1(b)(4) or shall otherwise be made in a manner intended to be exempt from, or to comply with, Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).
4.Long-Term Incentive Awards. You will be eligible to participate in and receive awards under any long-term incentive plan or program of the Company that is in place from time to time in which other senior executive officers of the Company participate. The amount, form and vesting and other terms and conditions of such awards will be reviewed and established periodically by the Compensation Committee, but it is expected that starting in fiscal 2022 you will be granted equity awards in the normal course of business at a level commensurate with the level of equity awards granted to other senior executive officers of the Company. Equity awards will be subject to performance and/or service conditions and of type(s) (options, restricted awards, performance awards) determined by the Compensation Committee in its discretion and shall be subject to the terms of the Company’s 2013 Long-Term Incentive Plan (as it may be amended, and any successor plan thereto, the “Stock Plan”), Equity Award Grant Policy, and award agreement(s) in form(s) established by the Compensation Committee.
5.New Hire Grant. Upon hire you will receive a one-time grant of restricted stock units having a value of $800,000 on the date of grant, that will vest over three years (34%, 33%, 33%) at the end of each anniversary of your employment date and shall be subject to the terms of the Stock Plan and award agreement in the form established by the Compensation Committee, as well as the terms of the Company’s Equity Award Grant Policy.
6.Severance Benefits; Restrictive Covenants. The Company intends that you shall be designated to participate in the Company’s Executive Severance Plan (the “Severance Plan”), which Severance Plan shall include such terms and conditions as may be established by the Compensation Committee and/or the Board. Subject to the terms of the Severance Plan, it is currently anticipated that you will be eligible for severance benefits equal to 1.5 times your three-year average annual (a) base salary and (b) variable compensation (as defined in the Severance Plan) upon termination by the Company without cause or by you for good reason (as such terms are defined in the Severance Plan), or 2.0 times your three-year average annual base salary and variable compensation in the event of a non-cause termination by the Company or your termination for good reason within 12 months after or prior to and otherwise in contemplation of a change in control (as defined in the Severance Plan). Without limiting the effect of the foregoing, the treatment of any equity awards upon such a qualifying termination will be subject to the terms of the Stock Plan and related award agreements. In addition, you will be subject to certain non-competition, non-solicitation, confidentiality and other restrictive covenants (collectively, the “Restrictive Covenants”), as provided in the Severance Plan or other applicable plan or arrangement (with such Restrictive Covenants to apply during employment and for such period(s) following termination of employment as may be provided in the Severance Plan or other applicable plan or arrangement), and your entitlement to benefits under the Severance Plan and this Letter shall be subject to your compliance with such Restrictive Covenants. Notwithstanding the foregoing, (i) nothing in this Letter or other agreement prohibits you from reporting possible violations of law or regulation to any federal, state or local governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress and any agency Inspector General (the “Government Agencies”), or communicating with Government Agencies or otherwise participating in any investigation or proceeding that may be conducted by Government Agencies, including providing documents or other information, (ii) you do not need the prior authorization of the Company to take any action described in (i), and you are not required to notify the Company that you have taken any action described in (i); and (iii) this Letter does not limit your right to receive an award for providing information relating to a possible securities law violation to the Securities and Exchange Commission. Further, notwithstanding the foregoing, you will not be held criminally or civilly liable under any federal, state or local trade secret law for the disclosure of a trade secret that (i) is made (A) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, and (B) solely for the purpose of reporting or investigating a suspected violation or law; or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Additionally, an individual suing an employer for retaliation based on the reporting of a suspected violation of law may
Exhibit 10.1
disclose a trade secret to his or her attorney and use the trade secret information in the court proceeding, so long as any document containing the trade secret is filed under seal and the individual does not disclose the trade secret except pursuant to court order.
7.Health and Welfare Benefits. The Company provides a comprehensive package of benefits, including medical and prescription drug coverage, dental coverage, vision coverage, life insurance, short- and long-term disability insurance and other offerings. Provided you are an eligible employee as defined under each of the Company’s health and welfare benefits plan(s), you will be eligible to participate in such plan(s), subject to the applicable terms of such plan(s) and the Company’s right to modify or terminate such plans.
8.401(k) Savings Plan. You will be eligible to participate in the Company-sponsored 401(k) savings plan, subject to the terms of such plan and the Company’s right to modify or terminate such plan. The Company may in its discretion match a portion of your contributions in accordance with the applicable plan provisions. Eligibility requirements and conditions of enrollment and coverage are subject to change and are set forth in the applicable plan documents.
9.Deferred Compensation. You will be eligible to participate in the Company’s Nonqualified Deferred Compensation Plan, subject to the plan’s terms and conditions and the Company’s right to modify or terminate such plan. You shall be eligible to participate by deferring up to 50% of base pay and 100% of incentive pay, with a match of 30% of deferred amounts being made by the Company on the first 15% of pay.
10.Vacation. You will be entitled to no less than twenty-one (21) paid time off (PTO) days per year. The Company also currently offers eight (8) paid holidays.
11.Relocation Benefits. This position is based in Greenville, SC, and the Company expects that you will relocate to the Greenville area within 12 months of hire. In connection with your relocation, the Company will pay you a lump sum of $75,000, which is to be used for temporary housing, packing, moving, and unpacking of your household good, closing costs, and incidentals associated with your move.
12.Business Travel; Reimbursements. You will be expected to travel in connection with your employment. The Company will reimburse you for reasonable business expenses incurred in connection with your employment, upon presentation of documentation in accordance with the Company’s applicable expense reimbursement policies for senior management. All expenses eligible for reimbursement in connection with your employment with the Company must be incurred by you during the term of your employment or service to the Company. The amount of reimbursable expenses incurred in one taxable year shall not affect the expenses eligible for reimbursement in any other taxable year. In no event shall any reimbursement be paid after the last day of your taxable year following the taxable year during which the expense was incurred. No right to reimbursement is subject to liquidation or exchange for other benefits.
13.Withholding and Taxes. All amounts payable or that become payable under this Letter will be subject to any deductions and withholdings previously authorized by you or required by law. You will be responsible for any and all taxes resulting from the benefits provided under this Letter. The Company makes no undertakings regarding, and has no obligation to achieve, any certain tax results for you related to the benefits provided herein.
14.Waiver and Release. You acknowledge and agree that the Company may at any time require, as a condition to receipt of certain benefits payable under this Letter, the Severance Plan or other plan, agreement or arrangement, that you (or a representative of your estate) execute a waiver and release discharging the Company and its subsidiaries, and their respective affiliates, and its and their officers, directors, managers, employees, agents and representatives and the heirs, predecessors, successors and assigns of all of the foregoing, from any and all claims, actions, causes of action or other liability, whether known or unknown, contingent or fixed, arising out of or in any way related to your employment, or the ending of your employment with the Company or the benefits thereunder, including, without limitation, any claims under this Letter or other related instruments. The waiver and release will be in a form determined by the Company.
Exhibit 10.1
15.Amendment and Termination; Entire Agreement; Consideration. This Letter may be amended or terminated by a written agreement between you and the Company, with the Chairman of the Compensation Committee (or another designee of the Compensation Committee) acting on behalf of the Company. Except for the Severance Plan and Stock Plan (and related participation and award agreements), this Letter contains the entire agreement of you and the Company related to the subject matter hereof and supersedes all prior verbal or written discussion, agreements and understandings with respect to such subject matter, and you and the Company have made no agreements, representations or warranties related to the subject matter of this Letter Agreement that are not set forth herein. Your entering into this Letter Agreement does not violate any other agreements or obligations. You further acknowledge that you are receiving valuable consideration in exchange for agreeing to the terms of this Letter.
16.Compliance with Code Section 409A; Recoupment, Ownership and Other Policies or Agreements. You and the Company agree that you both will cooperate in good faith so that no compensation paid to you by the Company under this Letter will violate Code Section 409A and the regulations promulgated thereunder. In case any one or more provisions of this Letter fail to comply with the provisions of Code Section 409A, the remaining provisions of this Letter shall remain in effect, and this Letter shall be administered and applied as if the non-complying provisions were not part of this Letter. The parties in that event shall endeavor to agree upon a reasonable substitute for the non-complying provisions, to the extent that a substituted provision would not cause this Letter to fail to comply with Code Section 409A, and, upon so agreeing, shall incorporate such substituted provisions into this Letter. A termination of your employment hereunder shall not be deemed to have occurred for purposes of any provision of this Letter providing for the payment of any amount or benefit constituting “deferred compensation” under Code Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Code Section 409A and, for purposes of any such provision of this Letter, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” In the event that any payment or benefit made hereunder or under any compensation plan, program or arrangement of the Company would constitute payments or benefits pursuant to a non-qualified deferred compensation plan within the meaning of Code Section 409A and, at the time of your “separation from service” you are a “specified employee” within the meaning of Code Section 409A, then any such payments or benefits that are provided to you on account of your “separation from service” shall be delayed until the six-month anniversary of the date of your “separation from service” (such six month anniversary being the “Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date with interest and, thereafter, any remaining payments shall be paid without delay in accordance with their original schedule. If you die before the Specified Employee Payment Date, any delayed payments shall be paid to your estate in a lump sum within 30 days of your death. Each payment made under this Letter shall be designated as a “separate payment” within the meaning of Code Section 409A. You acknowledge and agree that in the event that this Letter or any benefit described herein shall be deemed not to comply with Code Section 409A, then neither the Company, the Board, the Compensation Committee nor its or their designees or agents shall be liable to you or other persons for actions, decisions or determinations made in good faith. Further, as a condition to entering into this Letter, you agree that you will abide by all provisions of any compensation recovery (“clawback”) policy, stock ownership guidelines, equity retention policy and/or other similar policies maintained by the Company, each as in effect from time to time and to the extent applicable to you from time to time. In addition, you will be subject to such compensation recovery, recoupment, forfeiture or other similar provisions as may apply at any time to you under applicable law.
17.Compensation and Benefit Plans Control. The Company’s benefit offerings and other terms and conditions of employment are subject to change or termination, with or without notice. In the event of differences between any documents relating to compensation and benefits, the terms of the applicable plan or other document will control.
18.Governing Law; Successors and Assigns. This Letter will be governed by and construed in accordance with the laws of the State of South Carolina, without regard to the principles of conflict of laws, and in
Exhibit 10.1
accordance with applicable U.S. federal law. The provisions, obligations and rights of this Letter will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
19.Additional Terms. This offer of employment is made in reliance on your representation that there exists no conflict of interest or contractual or statutory obligation that would prevent you from becoming employed with the Company and performing duties as described in this Letter. You represent that you are legally eligible to work in the United States and you understand that a condition of your employment is that you furnish acceptable proof of such eligibility to the Company. You agree that you will not use trade secret or confidential information of any previous employer on behalf of the Company. You further represent that you will adhere to ethical business practices in performing your duties and there is no third party that has a financial interest or will receive monetary benefit from the performance of your duties.
[Signature page follows]
Exhibit 10.1
[Signature page to Steve Jones Employment Letter]
If the terms of this Letter are acceptable to you, please sign below and return it to the Company’s Senior Executive Vice President, Worldwide Human Resources, at your earliest opportunity.
Sincerely,
Mike Baur
Chairman and CEO
ScanSource, Inc.
******************************************************************************
I acknowledge receipt and acceptance of the offer of employment in this Letter. By my signature below, I accept all terms and conditions set forth above. In addition, I acknowledge and agree that, I will be employed on an at-will basis and that any change to that status may only be made through an agreement in writing signed by the Company.
Accepted: /s/ Stephen T. Jones
Stephen T. Jones
Date: November 16, 2020
Exhibit 31.1
Certification Pursuant to Rule 13a-14(a) or 15d-14(a)
of the Exchange Act, as adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Michael L. Baur, certify that:
1.I have reviewed this quarterly report on Form 10-Q of ScanSource, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Michael L. Baur | |||||
Michael L. Baur, Chairmen, Chief Executive Officer and President (Principal Executive Officer) | |||||
Date: February 2, 2021
Exhibit 31.2
Certification Pursuant to Rule 13a-14(a) or 15d-14(a)
of the Exchange Act, as adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Stephen Jones, certify that:
1.I have reviewed this quarterly report on Form 10-Q of ScanSource, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Stephen T. Jones | |||||
| Stephen T. Jones, Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||
Date: February 2, 2021
Exhibit 32.1
Certification of the Chief Executive Officer of ScanSource, Inc.
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906
of the Sarbanes-Oxley Act of 2002
In connection with the quarterly report of ScanSource, Inc. (the “Company”) on Form 10-Q for the quarter and six months ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1)The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | February 2, 2021 | /s/ Michael L. Baur | ||||||
| Michael L. Baur, | ||||||||
Chairmen, Chief Executive Officer and President (Principal Executive Officer) | ||||||||
This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of the Chief Financial Officer of ScanSource, Inc.
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906
of the Sarbanes-Oxley Act of 2002
In connection with the quarterly report of ScanSource, Inc. (the “Company”) on Form 10-Q for the quarter and six months ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1)The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | February 2, 2021 | /s/ Stephen T. Jones | ||||||
| Stephen T. Jones | ||||||||
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||
This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.