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Fair Value of Financial Instruments

3 Months Ended

Sep. 30, 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 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 September 30, 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	$	28,687	$	28,687	$	—	$	—


Total assets at fair value	$	28,687	$	28,687	$	—	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	28,687	$	28,687	$	—	$	—
Forward foreign currency exchange contracts	41		—		41		—
Interest rate swap agreement	9,232		—		9,232		—
Liability for contingent consideration	46,850		—		—		46,850
Total liabilities at fair value	$	84,810	$	28,687	$	9,273	$	46,850

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:


	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	$	27,159	$	27,159	$	—	$	—


Total assets at fair value	$	27,159	$	27,159	$	—	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	27,159	$	27,159	$	—	$	—
Forward foreign currency exchange contracts	26		—		26		—
Interest rate swap agreement	9,433		—		9,433		—
Liability for contingent consideration	46,334		—		—		46,334
Total liabilities at fair value	$	82,952	$	27,159	$	9,459	$	46,334

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. 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 5 - Accumulated Other Comprehensive Loss.

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 ended September 30, 2020. The final earnout payment due to former owners of Intelisys was paid in October 2020.


	Quarter ended September 30, 2020
	Worldwide Communications & Services Segment
	(in thousands)
Fair value at beginning of period	$	46,334


Change in fair value of contingent consideration	516

Fair value at end of period	$	46,850

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 ended September 30, 2019.


	Quarter ended September 30, 2019
	Worldwide Communications & Services Segment
	(in thousands)
Fair value at beginning of period	$	77,925


Change in fair value of contingent consideration	2,472

Fair value at end of period	$	80,397

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 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

3.0

(a) Weighted average rates identified for each 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 fair value of the liability for the contingent consideration related to Intelisys recognized at September 30, 2020 was $46.9 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 $0.5 million for the quarter ended September 30, 2020. The change in fair value for the quarter is due to the recurring amortization of the unrecognized fair value discount. The liability recognized at September 30, 2020 is undiscounted and expected to be paid in full during the quarter ended December 31, 2020.

The fair value of the liability for the contingent consideration related to Intelisys recognized at September 30, 2019 was $80.4 million, of which $38.5 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 $2.5 million for the quarter ended September 30, 2019. The change in fair value for the prior-year quarter is primarily driven by the recurring amortization of the unrecognized fair value discount and better than expected actual results.

- 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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