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Fair Value of Financial Instruments

9 Months Ended

Mar. 31, 2020

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 Network1 and Intelisys. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to a variable rate using the market approach (Level 2 criteria).

The following table summarizes the valuation of the Company’s remaining assets and liabilities measured at fair value on a recurring basis at March 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	$	23,553	$	23,553	$	—	$	—
Forward foreign currency exchange contracts	209		—		209		—
Total assets at fair value	$	23,762	$	23,553	$	209	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	23,553	$	23,553	$	—	$	—
Forward foreign currency exchange contracts	130		—		130		—
Interest rate swap agreement	8,922		—		8,922		—
Liability for contingent consideration	45,660		—		—		45,660
Total liabilities at fair value	$	78,265	$	23,553	$	9,052	$	45,660

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



	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)
Assets:
Deferred compensation plan investments, current and non-current portion	$	25,787	$	25,787	$	—	$	—
Forward foreign currency exchange contracts	165		—		165		—
Total assets at fair value	$	25,952	$	25,787	$	165	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	25,787	$	25,787	$	—	$	—
Forward foreign currency exchange contracts	168		—		168		—
Interest rate swap agreement	3,504		—		3,504		—
Liability for contingent consideration	77,925		—		—		77,925
Total liabilities at fair value	$	107,384	$	25,787	$	3,672	$	77,925

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

Derivative instruments, such as foreign currency forward contracts, are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers and interest rates quoted by banks (Level 2). Fair values of interest rate swaps are measured using standard valuation models with inputs that can be derived from observable market transactions, including LIBOR spot and forward rates (Level 2). Foreign currency contracts and interest rate swap agreements are classified in the Condensed Consolidated Balance Sheets as prepaid expenses and other non-current assets or accrued expenses and other long-term liabilities, depending on the respective instruments' favorable or unfavorable positions. See Note 8 - Derivatives and Hedging Activities.

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

Network1 and Intelisys are part of the Company's Worldwide Communications & Services segment. The final earnout payment due to former shareholders of Network1 was paid during fiscal year ended June 30, 2019. The table below provides a summary of the changes in fair value of the Company's contingent considerations for the Intelisys earnout, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter and nine months ended March 31, 2020.



	Quarter ended March 31, 2020		Nine months ended March 31, 2020
	Worldwide Communications & Services Segment
	(in thousands)
Fair value at beginning of period	$	45,043	$	77,925
Payments	—		(38,531		)
Change in fair value of contingent consideration	617		6,266
Fair value at end of period	$	45,660	$	45,660

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.



	Quarter ended March 31, 2019			Nine months ended March 31, 2019
	Worldwide Communications & Services Segment
	(in thousands)
Fair value at beginning of period	$	71,886		$	108,233
Payments	(2,736		)	(45,796		)
Change in fair value of contingent consideration	5,101			11,535
Foreign currency translation adjustment	8			287
Fair value at end of period	$	74,259		$	74,259

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


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


•	the probability of achieving these results; and


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

A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Valuation techniques and significant observable inputs used in recurring Level 3 fair value measurements for our contingent consideration liability related to Intelisys at March 31, 2020 and June 30, 2019 were as follows.



Reporting Period	Valuation Technique	Significant Unobservable Inputs	Weighted Average Rates^(a)
March 31, 2020	Discounted cash flow	Weighted average cost of capital	12.3	%
		Adjusted EBITDA growth rate	24.9	%

June 30, 2019	Discounted cash flow	Weighted average cost of capital	14.2	%
		Adjusted EBITDA growth rate	21.5	%

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

Intelisys

The fair value of the liability for the contingent consideration related to Intelisys recognized at March 31, 2020 was $45.7 million, all of which is classified as current. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $0.6 million and $6.3 million for the quarter and nine months ended March 31, 2020, respectively. The change in fair value for the quarter is primarily driven by the recurring amortization of the unrecognized fair value discount and a reduction in the discount rate, partially offset by lower than expected actual results. The change in fair value for the nine month period is primarily driven by the recurring amortization of the unrecognized fair value discount and better than expected actual results. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $48.1 million, based on the Company’s best estimate of the earnout calculated on a multiple of adjusted earnings.

The fair value of the liability for the contingent consideration related to Intelisys recognized at March 31, 2019 was $74.3 million, of which $39.4 million was classified as current. The expense from the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statement totaled $2.6 million and $9.0 million for the quarter and nine months ended March 31, 2019, respectively. The change in fair value for the prior-year quarter is primarily driven by the recurring amortization of the unrecognized fair value discount. The change in fair value for the prior-year nine month period is primarily the result of recurring amortization of the unrecognized fair value discount as well as improved financial results.

Network1

The final earnout payments were paid to the former shareholders of Network1 during the fiscal year ended June 30, 2019. The change in fair value of the contingent consideration for the quarter and nine months ended March 31, 2019 recognized in the Condensed Consolidated Income Statements contributed a loss of $2.5 million for agreed upon adjustments in the final payments.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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