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, Intelisys and POS Portal. 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 September 30, 2017:



	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	$	22,619	$	22,619	$	—	$	—
Forward foreign currency exchange contracts	128		—		128		—
Interest rate swap agreement	67		—		67		—
Total assets at fair value	$	22,814	$	22,619	$	195	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	22,619	$	22,619	$	—	$	—
Forward foreign currency exchange contracts	66		—		66		—
Liability for contingent consideration, current and non-current portion	103,493		—		—		103,493
Total liabilities at fair value	$	126,178	$	22,619	$	66	$	103,493

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, 2017:



	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	$	21,439	$	21,439	$	—	$	—
Forward foreign currency exchange contracts	35		—		35		—
Interest rate swap agreement	21		—		21		—
Total assets at fair value	$	21,495	$	21,439	$	56	$	—
Liabilities:
Deferred compensation plan investments, current and non-current portion	$	21,074	$	21,074	$	—	$	—
Forward foreign currency exchange contracts	131		—		131		—
Liability for contingent consideration, current and non-current portion	114,036		—		—		114,036
Total liabilities at fair value	$	135,241	$	21,074	$	131	$	114,036

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 7 - 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. 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 3 - Accumulated Other Comprehensive Income (Loss).

POS Portal is part of the Company's Worldwide Barcode, Networking and Security Segment. Network1 and Intelisys are 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 Network1, Intelisys and POS Portal earnouts for the quarter ended September 30, 2017:



	Contingent consideration for the quarter ended
	September 30, 2017
	Barcode, Networking & Security Segment		Communications & Services Segment
	(in thousands)
Fair value at beginning of period	$	—	$	114,036
Issuance of contingent consideration	13,098		—
Payments	—		(40,858		)
Change in fair value of contingent consideration	69		16,812
Foreign currency translation adjustment	—		336
Fair value at end of period	$	13,167	$	90,326

The table below provides a summary of the changes in fair value of the Company’s contingent considerations (Level 3) for the Imago, Network1 and Intelisys earnouts for the quarter ended September 30, 2016. The contingent consideration due to the former shareholders of Imago was paid in full during the quarter ended December 31, 2016.



	Contingent consideration for the quarter ended
	September 30, 2016
	Barcode, Networking & Security Segment		Communications & Services Segment
	(in thousands)
Fair value at beginning of period	$	—	$	24,652
Issuance of contingent consideration	—		95,000
Payments	—		(8,634		)
Change in fair value of contingent consideration	—		169
Foreign currency translation adjustment	—		(352		)
Fair value at end of period	$	—	$	110,835

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 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, Brazilian and European 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 liabilities as of September 30, 2017 and June 30, 2017 were as follows.



Reporting Period	Valuation Technique	Significant Unobservable Inputs	Weighted Average Rates
September 30, 2017	Discounted cash flow	Weighted average cost of capital	14.3	%
		Adjusted EBITDA growth rate	17.6	%

June 30, 2017	Discounted cash flow	Weighted average cost of capital	14.2	%
		Adjusted EBITDA growth rate	17.0	%

Worldwide Barcode, Networking & Security

POS Portal

The discounted fair value of the liability for the contingent consideration related to POS Portal recognized at September 30, 2017 was $13.2 million, all of which is classified as current. For the quarter ended September 30, 2017, 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. The contingent consideration due to the former shareholders of POS Portal is expected to be paid during the quarter ended December 31, 2017.

Worldwide Communications & Services Segment

Intelisys

The discounted fair value of the liability for the contingent consideration related to Intelisys recognized at September 30, 2017 was $85.6 million, of which $31.0 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 $4.1 million for the quarter ended September 30, 2017. The change for the quarter is primarily driven by the recurring amortization of the unrecognized fair value discount. Although there is no contractual limit, total future undiscounted contingent consideration payments are anticipated to range up to $110.7 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 September 30, 2016 was $95.8 million, of which $22.8 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 $0.8 million for the quarter ended September 30, 2016, driven by the recurring amortization of the unrecognized fair value discount.

Network I

The discounted fair value of the liability for the contingent consideration related to Network1 recognized at September 30, 2017 was $4.7 million, all of which is classified as current. For the quarter ended September 30, 2017, the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a loss of $12.7 million, primarily driven by a change in estimate of the current payment to the former shareholders of Network1, additional agreed upon adjustments to the projected final settlement and the recurring amortization of the unrecognized fair value discount. 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 $5.6 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, plus the effects of foreign exchange.

The discounted fair value of the liability for the contingent consideration related to Network1 recognized at September 30, 2016 was $12.5 million, of which $7.6 million is classified as current. For the quarter ended September 30, 2016, the change in fair value of the contingent consideration recognized in the Condensed Consolidated Income Statements contributed a gain of $0.4 million, primarily driven by less-than-expected actual results, partially offset by the recurring amortization of the unrecognized fair value discount. 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.

Imago

The discounted fair value of the liability for the contingent consideration related to Imago recognized at September 30, 2016 was $2.5 million, all of which is classified as current. The change in fair value of the contingent consideration recognized in the Consolidated Income Statements contributed a gain of $0.3 million for the quarter ended September 30, 2016, which was largely driven by actual results that were less-than-expected. In addition, volatility in the foreign exchange rate between the British pound and the U.S. dollar drove changes in the translation of this British pound-denominated liability. The final payment of the contingent consideration related to Imago was paid during the quarter ended December 31, 2016.