Acquisitions

Algol Europe,GmbH

On November 30, 2009, the Company acquired substantially all of the assets and certain liabilities of Algol Europe, GmbH (“Algol”). Algol, now a part of ScanSource Communications in the international distribution segment, is a value-added distributor of specialty technologies, including voice, data, and video communication products located in Cologne, Germany. This acquisition significantly expanded the footprint of the ScanSource Communications sales unit outside of the United Kingdom and is part of the Company’s strategy to become a pan-European distributor of communication products. The purchase price of this acquisition was allocated to the assets acquired and the liabilities assumed based on their estimated fair values on the transaction date, resulting in goodwill and identifiable intangible assets related to non-compete agreements, distributor agreements and customer relationships as of November 30, 2009. These amounts were recorded in the international segment. All professional fees and other costs associated with the acquisition of Algol’s assets were expensed as incurred. The purchase price, identified intangibles and goodwill as of the acquisition date were as follows:



	Purchase Price		Goodwill		Identifiable Intangible Assets
	(in thousands)
Algol Europe, GmbH	$	9,965	$	712	$	2,287

CDC Brasil S.A.

On April 15, 2011, the Company completed its acquisition of 100% of the shares of CDC, formerly known as CDC Brasil Distribuidora LTDA, Brazil’s leading distributor of AIDC and POS solutions. This acquisition gives the Company an established presence in Latin America’s largest specialty technology market and allows the Company to more easily scale its Latin American operations.

Under the Share Purchase and Sale Agreement, the Company structured the purchase transaction as an all cash share purchase with an initial payment of $36.2 million, net of cash acquired, and assumed working capital payables and debt at closing. The remaining purchase price will be paid in annual cash installments based upon the financial performance of CDC for the twelve month periods ended on June 30 from 2011 through 2015. As of June 30, 2012, there are four remaining earnout payments to be made to the former shareholders. Please see Note 8, Fair Value of Financial Instruments for further information regarding the fair value accounting for this contingent consideration.

In fiscal 2012 and 2011, the Company incurred $0.3 million and $1.1 million, respectively, of acquisition-related costs, primarily for professional fees incurred for due diligence, legal advice and tax planning. These costs are included in selling, general and administrative expenses in the Company's consolidated income statement.

During the third quarter of this fiscal year, the Company finalized the purchase accounting for the CDC acquisition. The Company has elected to record all purchase accounting adjustments in the current year as opposed to the retrospective application set forth in ASC 805. Management has determined that retrospective application is immaterial to the users of the Company's financial statements. The adjustments made during the year pertain to the finalization of the purchase price allocation to the fair value of customer relationships, pre-acquisition contingency liabilities and corresponding indemnification assets and deferred income taxes. These adjustments are summarized in the following table:



	As of April 15, 2011
	Preliminary Purchase Allocation			Purchase Accounting Adjustments			Revised Purchase Allocation
Consideration	(in thousands)
Initial cash payment, net of cash acquired	$	36,228		$	—		$	36,228
Fair value of earnout obligation	23,952			—			23,952
Total consideration	60,180			—			60,180
Recognized amounts of identifiable assets acquired and liabilities assumed
Accounts receivable, net of allowance	21,378			—			21,378
Inventories	30,560			—			30,560
Prepaid expenses and other assets	3,575			—			3,575
Current deferred income taxes, net	1,409			(3,225		)	(1,816		)
Property and equipment, net	1,741			—			1,741
Intangible assets	18,327			4,278			22,605
Escrowed pre-acquisition contingencies receivable	16,013			7,977			23,990
Short-term borrowings	(1,277		)	—			(1,277		)
Accounts payable	(34,006		)	—			(34,006		)
Accrued expenses and other liabilities	(3,896		)	—			(3,896		)
Income taxes payable	(2,097		)	1,174			(923		)
Escrowed pre-acquisition contingencies payable	(16,013		)	(7,977		)	(23,990		)
Long-term deferred income taxes, net	—			(3,141		)	(3,141		)
Other long-term liabilities	(177		)	—			(177		)
Total identifiable net assets	35,537			(914		)	34,623
Goodwill	$	24,643		$	914		$	25,557

All measurement period adjustments are presented as of the acquisition date. The Company used a combination of the market, cost and income approaches to estimate the fair values of the CDC’s assets acquired and liabilities assumed.

The revised purchase price allocated to the fair value of identified intangible assets associated with the acquisition of CDC after the finalization of purchase accounting is as follows:



	Amount
Identified intangible assets	(in thousands)
Trade names (2 year useful life)	$	2,746
Customer relationships (6 year useful life)	18,965
Non-compete agreements (5 year useful life)	894
Total identified intangible assets	$	22,605

In the current year, the Company recorded incremental amortization expense to catch up accumulated amortization for the additional purchase price allocated to customer relationships as of March 31, 2012, when purchase accounting was finalized. The weighted average amortization period for these identified intangible assets after purchase accounting adjustments, other than goodwill, is 5 years. Additionally, the Company adjusted the useful life for CDC customer relationships from 7 years to 6 years. The impact of the incremental amortization and related income tax effect recorded in the third quarter of this fiscal year is summarized in the following table:



	June 30, 2012
	(in thousands)
Consolidated income statement
Amortization expense	$	441
Provision for income taxes	$	(150	)

During the Company's due diligence for the CDC acquisition, several pre-acquisition contingencies were identified regarding various Brazilian federal and state tax exposures. The Company is able to record indemnification receivables that are reported gross of the pre-acquisition contingency liabilities as they were escrowed in the Share Purchase and Sale Agreement. As part of the initial payment, the sellers placed $25.5 million into a special and exclusive bank account to be released according to the specifications of the Share Purchase and Sale Agreement to provide for potential indemnification liabilities. However, indemnity claims can be made up to the entire purchase price, which includes the initial payment and all future earnout payments. During fiscal 2012, the Company and former shareholders released $5.3 million from the escrow account for the settlement of a pre-acquisition contingency and $2.5 million was released to the sellers, leaving $12.9 million, after the impact of foreign currency translation, available for future pre-acquisition contingency settlements or to be released to the sellers. The table below summarizes the balances and line item presentation of these pre-acquisition contingencies and corresponding indemnification receivables in the Company's consolidated balance sheet:



	June 30, 2012		June 30, 2011		April 15, 2011
	(in thousands)
Assets
Prepaid expenses and other assets (current)	$	3,886	$	—	$	—
Other assets (noncurrent)	$	5,112	$	16,250	$	16,013
Liabilities
Other current liabilities	$	3,886	$	—	$	—
Other long-term liabilities	$	5,112	$	16,250	$	16,013

The change in classification and amounts of the pre-acquisition contingencies is due to the finalization of purchase accounting in the third quarter of the current fiscal year, foreign currency translation on a weaker Brazilian real against the U.S. dollar and the expiration of the statute of limitations for one of the identified pre-acquisition contingencies. The Company finalized its quantitative assessments for various state and federal tax exposures and identified the statute of limitations for these exposures in determining the appropriate classification. The amount of reasonably possible undiscounted pre-acquisition contingencies as of June 30, 2012 is estimated to range as high as $12.4 million at this time, of which all exposures are indemnifiable under the Share Purchase and Sale Agreement.

In fiscal year 2011, CDC contributed net sales of approximately $29.6 million and net income of $0.7 million for the period of April 15, 2011 to June 30, 2011. CDC net income for the period included approximately $0.1 million of acquisition-related costs as well as $0.7 million of incremental amortization expense related to identified intangible assets.

The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on July 1, 2009, based on the final purchase price allocation as adjusted in fiscal 2012 for the additional purchase price allocated to CDC's customer relationships:



	June 30,
	2011		2010
Unaudited, Supplemental Pro Forma Information	(in thousand, except per share information)
Net sales	$	2,786,905	$	2,247,721
Net income	$	75,328	$	52,450
Diluted earnings per share	$	2.76	$	1.95

These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting CDC’s results to reflect the additional amortization that would have been recorded assuming the fair value of the identified intangibles had been recorded as of July 1, 2009, adjusted for purchase accounting adjustments made during the measurement period. Also, the pro forma amounts reflect the acquisition-related costs incurred by the Company of approximately $0.3 million and $1.1 million in fiscal years 2012 and 2011, respectively, as if incurred in fiscal year 2010.