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Fair Value of Financial Instruments | 3 Months Ended
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Sep. 30, 2014
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | 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 is required to classify certain assets and liabilities based on the fair value hierarchy, which groups 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 at fair value on a recurring basis include the Company’s various debt instruments, deferred compensation plan investments, outstanding foreign exchange forward contracts and contingent consideration owed to the previous owners of Brasil Distribuidora de Tecnologias Especiais LTDA ("CDC" or "ScanSource Brasil") and to the previous owners of Imago ScanSource. The carrying value of debt is considered to approximate fair value, as the Company’s debt instruments are indexed to LIBOR or the alternate base 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 September 30, 2014:
| 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 | $ | 14,776 |  |  | $ | 14,776 |  |  | $ | — |  |  | $ | — |
Forward foreign currency exchange contracts | 74 |  |  | — |  |  | 74 |  |  | — |
Total assets at fair value | $ | 14,850 |  |  | $ | 14,776 |  |  | $ | 74 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Deferred compensation plan investments, current and non-current portion | $ | 14,776 |  |  | $ | 14,776 |  |  | $ | — |  |  | $ | — |
Forward foreign currency exchange contracts | 53 |  |  | — |  |  | 53 |  |  | — |
Liability for contingent consideration, current and non-current portion | 10,162 |  |  | — |  |  | — |  |  | 10,162 |
Total liabilities at fair value | $ | 24,991 |  |  | $ | 14,776 |  |  | $ | 53 |  |  | $ | 10,162 |
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, 2014:
| 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 | $ | 14,044 |  |  | $ | 14,044 |  |  | $ | — |  |  | $ | — |
Forward foreign currency exchange contracts | 65 |  |  | — |  |  | 65 |  |  | — |
Total assets at fair value | $ | 14,109 |  |  | $ | 14,044 |  |  | $ | 65 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Deferred compensation plan investments, current and non-current portion | $ | 14,044 |  |  | $ | 14,044 |  |  | $ | — |  |  | $ | — |
Forward foreign currency exchange contracts | 119 |  |  | — |  |  | 119 |  |  | — |
Liability for contingent consideration, current and non-current portion | 11,107 |  |  | — |  |  | — |  |  | 11,107 |
Total liabilities at fair value | $ | 25,270 |  |  | $ | 14,044 |  |  | $ | 119 |  |  | $ | 11,107 |
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 or active employees. These investments are recorded to prepaid expenses and other current assets or other non-current assets depending on their corresponding, anticipated distributions to recipients, which are reported in accrued expenses and other current liabilities or other long-term non-current liabilities, respectively. 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 (Level 2). See Note 7 - Derivatives and Hedging Activities. Foreign currency contracts are classified in the consolidated balance sheet as prepaid expenses and other current assets or accrued expenses and other current liabilities, depending on the respective contracts' favorable or unfavorable positions. The Company recorded contingent consideration liabilities at the acquisition date of CDC and Imago ScanSource representing the amounts payable to former shareholders, as outlined under the terms of the Share Purchase Agreements, based upon the achievement of projected earnings, 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 consideration for CDC (Level 3) is determined using a discounted cash flow model. The fair value of the contingent consideration for Imago ScanSource (Level 3) is determined using 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 3 - Accumulated Other Comprehensive Income. CDC is part of the Company's Worldwide Barcode and Security Segment, and Imago ScanSource is part of the Company's Worldwide Communications and Services segment. The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the CDC and Imago ScanSource earnouts for the quarter ended September 30, 2014:
| Contingent consideration for the quarter ended
| September 30, 2014
| Barcode & Security Segment |  | Communications & Services Segment |  | Total
| (in thousands)
Fair value at beginning of period | $ | 11,107 |  |  | $ | — |  |  | $ | 11,107 |
Issuance of contingent consideration | — |  |  | 4,983 |  |  | 4,983 |
Payments | (5,529 | ) |  | — |  |  | (5,529 | )
Change in fair value of contingent consideration | 498 |  |  | 15 |  |  | 513 |
Foreign currency translation adjustment | (882 | ) |  | (30 | ) |  | (912 | )
Fair value at end of period | $ | 5,194 |  |  | $ | 4,968 |  |  | $ | 10,162 |
The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the CDC earnout for the quarter ended September 30, 2013:
| Contingent consideration for the quarter ended
| September 30, 2013
| Barcode & Security Segment |  | Communications & Services Segment |  | Total
| (in thousands)
Fair value at beginning of period | $ | 12,545 |  |  | $ | — |  |  | $ | 12,545 |
Payments | (3,644 | ) |  | — |  |  | (3,644 | )
Change in fair value of contingent consideration | 738 |  |  | — |  |  | 738 |
Foreign currency translation adjustment | (133 | ) |  | — |  |  | (133 | )
Fair value at end of period | $ | 9,506 |  |  | $ | — |  |  | $ | 9,506 |
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 U.S. dollar amounts of actual disbursements made in connection with future earnout payments are subject to change as the liability is denominated in currencies other than the U.S. dollar and subject to foreign exchange fluctuation risk. 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 Share 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 Brazilian and European markets.
A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Barcode and Security Segment The fair value of the liability for the contingent consideration related to CDC recognized at September 30, 2014 was $5.2 million, all of which is classified as current. The change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a loss of $0.5 million for the quarter ended September 30, 2014. The change this quarter is largely driven by the recurring amortization of the unrecognized fair value discount and changes in actual results. 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. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $5.8 million, based on the Company’s best estimate of the earnout calculated on a multiple of adjusted earnings. Communications and Services Segment The fair value of the liability for the contingent consideration related to Imago ScanSource recognized at September 30, 2014 was $5.0 million of which $2.6 million is classified as current. 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 for the quarter ended September 30, 2014. The change this quarter is largely driven by volatility in the foreign exchange between the British pound and the U.S. dollar of this British pound denominated liability. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $5.8 million, based on the Company’s best estimate of the earnout calculated on a multiple of adjusted earnings, before interest expense, income taxes, depreciation and amortization.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 + Details
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