Fair Value of Financial Instruments

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


•	Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;


•	Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;


•	Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

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

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



	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)
Assets:
Deferred compensation plan investments, current and non-current portion	$	24,574	$	24,574	$	—	$	—
Forward foreign currency exchange contracts	581		—		581		—
Interest rate swap agreement	524		—		524		—
Total assets at fair value	$	25,679	$	24,574	$	1,105	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	24,574	$	24,574	$	—	$	—
Forward foreign currency exchange contracts	112		—		112		—
Liability for contingent consideration, current and non-current portion	74,259		—		—		74,259
Total liabilities at fair value	$	98,945	$	24,574	$	112	$	74,259

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis as of June 30, 2018:



	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)
Assets:
Deferred compensation plan investments, current and non-current portion	$	23,352	$	23,352	$	—	$	—
Forward foreign currency exchange contracts	157		—		157		—
Interest rate swap agreement	1,604		—		1,604		—
Total assets at fair value	$	25,113	$	23,352	$	1,761	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	23,352	$	23,352	$	—	$	—
Forward foreign currency exchange contracts	156		—		156		—
Liability for contingent consideration, current and non-current portion	108,233		—		—		108,233
Total liabilities at fair value	$	131,741	$	23,352	$	156	$	108,233

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 non-current liabilities, respectively.

Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). See Note 8 - Derivatives and Hedging Activities. 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 current assets or accrued expenses and other current liabilities, depending on the respective instruments' favorable or unfavorable positions.

The Company recorded contingent consideration liabilities at the acquisition date of Network1, Intelisys and POS Portal representing the amounts payable to former shareholders, as outlined under the terms of the purchase agreements, based upon the achievement of a projected earnings measure, net of specific pro forma adjustments. A final contingent consideration payment was paid to the former shareholders of Network1 during the quarter ended March 31, 2019. The contingent consideration for POS Portal was paid in full during the quarter ended December 31, 2017. The current and non-current portions of these obligations are reported separately on the Condensed Consolidated Balance Sheets. The fair value of the contingent considerations (Level 3) are determined using a form of a probability weighted discounted cash flow model. Subsequent changes in the fair value of the contingent consideration liabilities are recorded to the change in fair value of contingent consideration line item in the Condensed Consolidated Income Statements. Fluctuations due to foreign currency translation are captured in other comprehensive income through the changes in foreign currency translation adjustments line item as seen in Note 4 - Accumulated Other Comprehensive Income (Loss).

POS Portal is part of the Company's Worldwide Barcode, Networking & Security Segment. Network1 and Intelisys are part of the Company's Worldwide Communications & Services segment.

The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the Network1 and Intelisys earnouts for the quarter and nine months ended March 31, 2019.



	Contingent consideration for the quarter ended								Contingent consideration for the nine months ended
	March 31, 2019								March 31, 2019
	Barcode, Networking & Security Segment		Communications & Services Segment			Total			Barcode, Networking & Security Segment		Communications & Services Segment			Total
	(in thousands)
Fair value at beginning of period	$	—	$	71,886		$	71,886		$	—	$	108,233		$	108,233
Issuance of contingent consideration	—		—			—			—		—			—
Payments	—		(2,736		)	(2,736		)	—		(45,796		)	(45,796		)
Change in fair value of contingent consideration	—		5,101			5,101			—		11,535			11,535
Foreign currency translation adjustment	—		8			8			—		287			287
Fair value at end of period	$	—	$	74,259		$	74,259		$	—	$	74,259		$	74,259

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



	Contingent consideration for the quarter ended								Contingent consideration for the nine months ended
	March 31, 2018								March 31, 2018
	Barcode, Networking & Security Segment		Communications & Services Segment			Total			Barcode, Networking & Security Segment			Communications & Services Segment			Total
	(in thousands)
Fair value at beginning of period	$	—	$	97,031		$	97,031		$	—		$	114,036		$	114,036
Issuance of contingent consideration	—		—			—			13,098			—			13,098
Payments	—		—			—			(13,167		)	(40,858		)	(54,025		)
Change in fair value of contingent consideration	—		4,801			4,801			69			28,526			28,595
Foreign currency translation adjustment	—		(54		)	(54		)	—			74			74
Fair value at end of period	$	—	$	101,778		$	101,778		$	—		$	101,778		$	101,778

The fair values of amounts owed are recorded in current portion of contingent consideration and long-term portion of contingent consideration in the Company’s Condensed Consolidated Balance Sheets. The Company will revalue the contingent consideration liabilities 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 liabilities associated with future earnout payments is based on several factors, including:


•	estimated future results, net of pro forma adjustments set forth in the purchase agreements;


•	the probability of achieving these results; and


•	a discount rate reflective of the Company’s creditworthiness and market risk premium associated with the United States markets.

A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Valuation techniques and significant observable inputs used in recurring Level 3 fair value measurements for our contingent consideration liability related to Intelisys as of March 31, 2019 and June 30, 2018 were as follows.



Reporting Period	Valuation Technique	Significant Unobservable Inputs	Weighted Average Rates
March 31, 2019	Discounted cash flow	Weighted average cost of capital	14.9	%
		Adjusted EBITDA growth rate	15.3	%

June 30, 2018	Discounted cash flow	Weighted average cost of capital	14.8	%
		Adjusted EBITDA growth rate	18.2	%

The weighted average cost of capital ("WACC") as of June 30, 2018 has been adjusted to exclude Network1 as the earnout period ended as of June 30, 2018.

Worldwide Barcode, Networking & Security

POS Portal

The contingent consideration due to the former shareholders of POS Portal was paid in full during the quarter ended December 31, 2017. For the quarter ended March 31, 2018, the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a loss of less than $0.1 million.

Worldwide Communications & Services Segment

Intelisys

The discounted fair value of the liability for the contingent consideration due to the former shareholders of Intelisys recognized at March 31, 2019 was $74.3 million, of which $39.4 million is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement contributed a loss of $2.6 million and $9.0 million for the quarter and nine months ended March 31, 2019. The change in fair value for the quarter is primarily driven by the recurring amortization of the unrecognized fair value discount. The change in the fair value for the nine month period is primarily the result of recurring amortization of the unrecognized fair value discount as well as improved financial results. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $85.0 million, based on the Company’s best estimate of the earnout calculated on a multiple of earnings, before interest expense, income taxes, depreciation and amortization.

The discounted fair value of the liability for the contingent consideration related to Intelisys recognized at March 31, 2018 was $93.7 million, of which $32.7 million is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement contributed a loss of $3.0 million and $12.2 million for the quarter and nine months ended March 31, 2018, respectively. The change in fair value for the quarter is primarily driven by the recurring amortization of the unrecognized fair value discount. The change in fair value for the nine month period is largely driven by the recurring amortization of the unrecognized fair value discount and an adjustment to the probability weights in the discounted cash flow model.

Network1

Two final payments were made the former shareholders of Network1 during the quarter and nine months ended March 31, 2019. The change in the fair value of the contingent consideration for the quarter and nine months ended March 31, 2019 recognized in the Condensed Consolidated Income Statements contributed to a loss of $2.5 million for agreed upon adjustments in the final payments.

The discounted fair value of the liability for the contingent consideration related to Network1 recognized at March 31, 2018 was $8.1 million, all of which is classified as current. For the quarter and nine months ended March 31, 2018, the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a loss of $1.8 million and $16.3 million, respectively. The change in fair value for the quarter is primarily due to improved actual results. The change in fair value for the nine month period is primarily driven by a change in estimate of the current year payment to the former shareholders of Network1, additional agreed upon adjustments to the projected final settlement and improved actual results for the nine month period. In addition, volatility in the foreign exchange between the Brazilian real and the U.S. dollar has driven changes in the translation of this Brazilian real denominated liability.