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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2018
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
 
Commission File Number: 001-38028

Presidio, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
47-2398593
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification Number)

One Penn Plaza, Suite 2832
New York, New York 10119
(212) 652-5700
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
 
Large accelerated filer
 
 
  
 
Accelerated filer
 
Non-accelerated filer
 
  
 
Smaller reporting company
 
Emerging growth company
 
 
 
 
    
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of January 31, 2019, there were 82,518,278 shares of common stock, $0.01 par value, outstanding.




PRESIDIO, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I - FINANCIAL INFORMATION

Item 1.         Financial Statements

PRESIDIO, INC.
Consolidated Balance Sheets
(in millions, except share data)
(unaudited)
 
As of
June 30, 2018
 
As of
December 31, 2018
 
(as adjusted)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
37.0

 
$
30.9

Accounts receivable, net
608.7

 
644.5

Unbilled accounts receivable, net
171.5

 
189.0

Financing receivables, current portion
88.3

 
93.0

Inventory
27.7

 
22.8

Prepaid expenses and other current assets
112.5

 
101.3

Total current assets
1,045.7

 
1,081.5

Property and equipment, net
35.9

 
37.1

Financing receivables, less current portion
116.8

 
143.4

Goodwill
803.7

 
803.7

Identifiable intangible assets, net
700.3

 
662.6

Other assets
33.9

 
65.1

Total assets
$
2,736.3

 
$
2,793.4

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities
 
 
 
Current maturities of long-term debt
$

 
$

Accounts payable – trade
457.7

 
476.6

Accounts payable – floor plan
210.6

 
195.9

Accrued expenses and other current liabilities
228.2

 
276.6

Discounted financing receivables, current portion
85.2

 
87.8

Total current liabilities
981.7

 
1,036.9

Long-term debt, net of debt issuance costs and current maturities
671.2

 
781.4

Discounted financing receivables, less current portion
108.6

 
127.8

Deferred income tax liabilities
180.5

 
177.5

Other liabilities
34.0

 
48.1

Total liabilities
1,976.0

 
2,171.7

Commitments and contingencies (Note 11)

 

Stockholders’ Equity
 
 
 
Preferred stock:
 
 
 
$0.01 par value; 100 shares authorized and zero shares issued and outstanding at December 31, 2018 and June 30, 2018

 

Common stock:
 
 
 
$0.01 par value; 250,000,000 shares authorized, 82,338,143 shares issued and outstanding at December 31, 2018 and 92,853,983 shares issued and outstanding at June 30, 2018
0.9

 
0.8

Additional paid-in capital
644.3

 
492.0

Retained earnings
115.1

 
128.9

Total stockholders’ equity
760.3

 
621.7

Total liabilities and stockholders’ equity
$
2,736.3

 
$
2,793.4

See Notes to the Consolidated Financial Statements.

3


PRESIDIO, INC.
Consolidated Statements of Operations
(in millions, except share and per-share data)
(unaudited)


 
Three months ended December 31,
 
Six months ended December 31,
 
2017
 
2018
 
2017
 
2018
 
(as adjusted)
 
 
 
(as adjusted)
 
 
Revenue
 
 
 
 
 
 
 
Product
$
525.0

 
$
647.2

 
$
1,129.7

 
$
1,266.9

Service
124.3

 
120.6

 
250.8

 
250.9

Total revenue
649.3

 
767.8

 
1,380.5

 
1,517.8

Cost of revenue
 
 
 
 
 
 
 
Product
416.3

 
517.1

 
890.5

 
1,002.7

Service
95.4

 
96.1

 
196.1

 
201.4

Total cost of revenue
511.7

 
613.2

 
1,086.6

 
1,204.1

Gross margin
137.6

 
154.6

 
293.9

 
313.7

Operating expenses
 
 
 
 
 
 
 
Selling expenses
65.2

 
75.2

 
130.4

 
146.1

General and administrative expenses
26.0

 
27.4

 
51.7

 
57.2

Transaction costs
1.7

 
9.0

 
2.1

 
14.4

Depreciation and amortization
21.1

 
21.5

 
41.7

 
43.0

Total operating expenses
114.0

 
133.1

 
225.9

 
260.7

Operating income
23.6

 
21.5

 
68.0

 
53.0

Interest and other (income) expense
 
 
 
 
 
 
 
 Interest expense
12.7

 
13.1

 
25.2

 
24.3

 Loss on extinguishment of debt
0.7

 
0.5

 
1.4

 
1.0

 Other (income) expense, net
(0.1
)
 
(0.2
)
 
(0.1
)
 
(0.2
)
Total interest and other (income) expense
13.3

 
13.4

 
26.5

 
25.1

Income before income taxes
10.3

 
8.1

 
41.5

 
27.9

Income tax expense (benefit)
(89.1
)
 
2.5

 
(77.7
)
 
7.5

Net income
$
99.4

 
$
5.6

 
$
119.2

 
$
20.4

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.08

 
$
0.07

 
$
1.30

 
$
0.24

Diluted
$
1.03

 
$
0.07

 
$
1.24

 
$
0.23

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
91,712,178

 
82,333,605

 
91,440,895

 
86,590,211

Diluted
96,678,815

 
85,793,035

 
96,504,207

 
90,174,933

 
 
 
 
 
 
 
 
Cash dividends per common share
$

 
$
0.04

 
$

 
$
0.08










See Notes to the Consolidated Financial Statements.

4


PRESIDIO, INC.
Consolidated Statements of Cash Flows
(in millions)
(unaudited)


 
Six months ended December 31,
 
2017
 
2018
 
(as adjusted)
 
 
Cash flows from operating activities:
 
 
 
Net income
$
119.2

 
$
20.4

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Amortization of intangible assets
37.2

 
37.7

Depreciation of property and equipment in operating expenses
4.5

 
5.3

Depreciation of property and equipment in cost of revenue
2.9

 
2.3

Provision for sales returns and credit losses
0.9

 
0.7

Amortization of debt issuance costs
2.6

 
1.8

Loss on extinguishment of debt
1.4

 
1.0

Noncash lease income
(2.2
)
 
(3.5
)
Share-based compensation expense
2.6

 
4.7

Deferred income tax benefit
(88.7
)
 
(3.0
)
Other
0.1

 

Change in assets and liabilities, net of acquisitions and dispositions:
 
 
 
Unbilled and accounts receivable
(5.9
)
 
(49.4
)
Inventory
(2.2
)
 
4.9

Prepaid expenses and other assets
(7.2
)
 
(23.9
)
Accounts payable – trade
80.7

 
18.9

Accrued expenses and other liabilities
(21.3
)
 
58.1

Net cash provided by operating activities
124.6

 
76.0

Cash flows from investing activities:
 
 
 
Acquisition of businesses, net of cash and cash equivalents acquired
(9.5
)
 

Proceeds from collection of escrow related to acquisition of business
0.2

 

Additions of equipment under sales-type and direct financing leases
(49.7
)
 
(82.9
)
Proceeds from collection of financing receivables
2.2

 
2.7

Additions to equipment under operating leases
(1.2
)
 
(0.1
)
Proceeds from disposition of equipment under operating leases
0.7

 
0.1

Purchases of property and equipment
(7.2
)
 
(8.3
)
Net cash used in investing activities
(64.5
)
 
(88.5
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock under share-based compensation plans
4.5

 
1.5

Common stock repurchased

 
(158.6
)
Dividends paid

 
(3.3
)
Proceeds from the discounting of financing receivables
47.0

 
91.1

Retirements of discounted financing receivables
(2.5
)
 
(17.4
)
Deferred financing costs
(0.6
)
 
(0.3
)
Borrowings of term loans, net of original issue discount

 
158.1

Repayments of term loans
(50.0
)
 
(50.0
)
Net change in accounts payable — floor plan
(65.3
)
 
(14.7
)
Net cash provided by (used in) financing activities
(66.9
)
 
6.4

Net decrease in cash and cash equivalents
(6.8
)
 
(6.1
)
Cash and cash equivalents:
 
 
 
Beginning of the period
27.5

 
37.0

End of the period
$
20.7

 
$
30.9

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
22.6

 
$
20.3

Income taxes, net of refunds
$
22.9

 
$
14.3

Reduction of discounted lease assets and liabilities
$
55.1

 
$
57.3


See Notes to the Consolidated Financial Statements.

5


PRESIDIO, INC.
Consolidated Statements of Stockholders’ Equity
(in millions, except share data)
(unaudited)


 
Three months ended December 31, 2017
 
Preferred stock
 
Common stock
 
Additional
paid-in
capital
 
Retained earnings
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, September 30, 2017 (as adjusted)

 
$

 
91,528,701

 
$
0.9

 
$
629.0

 
$
1.0

 
$
630.9

Common stock issued under share-based compensation plans

 

 
292,943

 

 
1.6

 

 
1.6

Net income

 

 

 

 

 
99.4

 
99.4

Share-based compensation expense

 

 

 

 
1.7

 

 
1.7

Balance, December 31, 2017 (as adjusted)

 
$

 
91,821,644

 
$
0.9

 
$
632.3

 
$
100.4

 
$
733.6


 
Three months ended December 31, 2018
 
Preferred stock
 
Common stock
 
Additional
paid-in
capital
 
Retained earnings
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, September 30, 2018

 
$

 
82,298,312

 
$
0.8

 
$
488.9

 
$
126.6

 
$
616.3

Common stock issued under share-based compensation plans

 

 
39,831

 

 
0.6

 

 
0.6

Common stock cash dividend declared

 

 

 

 

 
(3.3
)
 
(3.3
)
Net income

 

 

 

 

 
5.6

 
5.6

Share-based compensation expense

 

 

 

 
2.5

 

 
2.5

Balance, December 31, 2018

 
$

 
82,338,143

 
$
0.8

 
$
492.0

 
$
128.9

 
$
621.7


 
Six months ended December 31, 2017
 
Preferred stock
 
Common stock
 
Additional
paid-in
capital
 
Retained earnings (deficit)
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, June 30, 2017 (as adjusted)

 
$

 
90,969,919

 
$
0.9

 
$
625.3

 
$
(18.8
)
 
$
607.4

Common stock issued under share-based compensation plans

 

 
851,725

 

 
4.4

 

 
4.4

Net income

 

 

 

 

 
119.2

 
119.2

Share-based compensation expense

 

 

 

 
2.6

 

 
2.6

Balance, December 31, 2017 (as adjusted)

 
$

 
91,821,644

 
$
0.9

 
$
632.3

 
$
100.4

 
$
733.6


 
Six months ended December 31, 2018
 
Preferred stock
 
Common stock
 
Additional
paid-in
capital
 
Retained earnings
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, June 30, 2018 (as adjusted)

 
$

 
92,853,983

 
$
0.9

 
$
644.3

 
$
115.1

 
$
760.3

Common stock issued under share-based compensation plans

 

 
234,160

 

 
1.5

 

 
1.5

Common stock repurchased

 

 
(10,750,000
)
 
(0.1
)
 
(158.5
)
 

 
(158.6
)
Common stock cash dividend declared

 

 

 

 

 
(6.6
)
 
(6.6
)
Net income

 

 

 

 

 
20.4

 
20.4

Share-based compensation expense

 

 

 

 
4.7

 

 
4.7

Balance, December 31, 2018

 
$

 
82,338,143

 
$
0.8

 
$
492.0

 
$
128.9

 
$
621.7


See Notes to the Consolidated Financial Statements.

6


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)



Note 1.         Nature of Business and Significant Accounting Policies

Description of the Company

Presidio, Inc., a Delaware corporation, through its subsidiaries (collectively, the “Company”, “we” and “our”) is a leading provider of information technology (“IT”) solutions to its clients in North America. We enable business transformation through our expertise in IT solutions for agile, secure infrastructure solution sets, with a specific focus on Digital Infrastructure, Cloud and Security solutions. Our solutions are delivered through a broad suite of professional services, including strategy, consulting, design and implementation. We complement our professional services with project management, technology acquisition, managed services, maintenance and support to offer a full lifecycle model. Our services-led, lifecycle model leads to ongoing client engagement.

The Company is headquartered in New York, New York and all of its direct and indirect subsidiaries are located in the United States.

Public Offerings

On September 20, 2018, the Company completed a secondary public offering of 3,000,000 shares of the Company’s common stock by AP VIII Aegis Holdings, L.P. (“Aegis LP”), an affiliate of investment funds managed by affiliates of Apollo Global Management, LLC at a price of $15.24 per share. The Company did not sell any shares and did not receive any proceeds from the offering. In conjunction with this secondary offering, the Company incurred $0.3 million of expenses, which is presented within transaction costs on the consolidated statement of operations for the six months ended December 31, 2018.

Share Repurchase

On September 6, 2018, the Company, entered into a stock repurchase agreement (the “Stock Repurchase Agreement”) with Aegis LP. Pursuant to the Stock Repurchase Agreement, the Company agreed to repurchase 10,750,000 shares of our common stock from Aegis LP for aggregate consideration of $158.6 million, representing a purchase price of $14.75 per share of common stock (the “Repurchase”). The Stock Repurchase Agreement, the Repurchase and the related transactions were approved by the Company’s Board of Directors and a committee of independent directors. On September 13, 2018, the Repurchase was completed using the net proceeds of $160 million of incremental term loans that were issued on terms substantially identical to the existing term loans outstanding under our credit agreement (except with respect to issue price).

Dividend

On February 6, 2019, the Company declared a quarterly cash dividend of $0.04 per share of common stock. The dividend is payable on April 5, 2019 to stockholders of record as of the close of business on March 27, 2019.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Securities and Exchange Commission ("SEC") rules and regulations for interim reporting periods. The consolidated financial statements do not include all disclosures normally made in annual financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included within the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018. All financial information presented in the financial statements and notes herein is presented in millions except for share and per-share information and percentages.

In management’s opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the periods shown have been made. All other adjustments are of a normal recurring nature.

The Company has evaluated subsequent events through the issue date of these consolidated financial statements.


7


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)


Revenue Recognition

The Company’s revenue is generally derived from the sale of IT solutions to customers. The solutions we sell include products manufactured by third-parties including IT hardware equipment, software and support service contracts, as well as, services that are delivered directly by the Company or via third-party providers. The Company’s sales of IT solutions to customers are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which was adopted on July 1, 2018.

Under ASC 606, the Company recognizes revenue when it has a contract with a customer and when, or as, it satisfies the performance obligations in the arrangement. Revenue for each performance obligation is recognized either at a point in time or over a period of time in a manner that depicts the transfer of control of the goods or services to the customer at an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services, net of sales taxes collected from customers, which are subsequently remitted to governmental entities. Such recognition requires the Company to use its judgment in accordance with ASC 606 and other applicable rules.

The Company has a contract with a customer when there is an agreement that creates legally enforceable rights and obligations that includes: the approval of the parties to the contract, the identification of each party’s rights regarding the goods or services to be transferred, the establishment of payment terms for the goods or services to be transferred, the existence of commercial substance of the contract and the determination that it is probable that the Company will collect substantially all of the consideration to which it will be entitled in the arrangement. Generally, the Company determines it has a legally enforceable contract with the customer when it has a valid purchase order from the customer or it has a confirmatory customer approval of a quote, statement of work, or other binding agreement that individually, or in combination with other arrangements with the customer, satisfies the criteria above.

As a provider of third-party products and services, the Company must assess whether it has promised to provide the customer the specific goods or services itself (as a principal) in which case revenue is recognized on a gross basis, or to arrange for those specified goods and services to be provided by another party (as an agent) in which revenue is recognized on a net basis. In applying the principal versus agent accounting guidance, the Company considers several factors and indicators including an assessment of the Company’s role in fulfilling the promise to provide the specific goods or services, the Company’s inventory risk before or after the goods and services are transferred to the customer and the Company’s discretion in establishing prices for the specified goods or services. The Company may be a principal in the fulfillment of some goods and services and an agent for other goods and services within the same contract.

The Company’s solutions may consist of a combination of performance obligations including third-party products along with services delivered by the Company and/or third-parties. Contracts that contain multiple performance obligations may have revenue recognized at different times or over different periods of time as discussed in the policies below. For contracts that contain multiple performance obligations, the total transaction price of the contract is allocated to the separate performance obligations based on each performance obligation’s relative standalone selling price. To determine standalone selling prices of the Company’s performance obligations, the Company generally applies a cost-plus margin approach to determine a range of reasonable prices for each performance obligation.

When a contract includes variable consideration such as usage-based or user-based fees, service level agreements, or volume-based pricing, the Company estimates the amount which the Company believes it will be entitled in exchange for transferring the promised goods or services to the customer. The Company uses either the expected value method or the most likely amount method to estimate variable consideration based on the facts and circumstances in each contract. The Company updates its estimates as facts and circumstances change throughout the contract.

Revenue for each performance obligation is recognized as control of the performance obligation is transferred to the customer. For performance obligations satisfied at a point in time, the Company determines when control has been transferred based on an evaluation of the following indicators: the Company has a present right to payment, the customer has legal title, the Company has transferred physical possession, the customer has the significant risk and rewards of ownership and the customer has accepted the assets. For performance obligations satisfied over a period of time, the Company recognizes revenue using an appropriate method to estimate the progress toward complete satisfaction of the performance obligation.


8


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)


The Company generally does not provide customers with payment terms that would result in the existence of a significant financing component within the transaction price.

Revenue for hardware and general software - Revenue from the sale of third-party hardware and general software products is recognized on a gross basis with the associated transaction price recorded as product revenue and the acquisition cost of the product recorded as cost of product revenue, net of vendor rebates. Hardware and general software can be delivered to customers in a variety of ways including drop-shipped by the vendor or supplier, or shipped through one of the Company’s staging warehouses or via electronic delivery for general software licenses.

Regardless of the delivery method, revenue from the sale of hardware is recognized at a point in time based on the shipping terms specified in the contract which is when title and the risk of loss are passed to the customer. Our standard shipping terms are freight on board (“FOB”) origin and accordingly, we generally recognize revenue when product ships from our vendor or supplier. In transactions where the shipping terms are FOB destination, revenue is recognized when the promised hardware is delivered to the customer’s specified location.

For general software that is pre-installed on hardware products, revenue is recognized at a point in time based on the shipping terms specified in the contract; while general software that is delivered to the customer via electronic download is recognized at a point in time when the information the customer needs to download and install the software has been provided to the customer.

Revenue for software as a service (“SaaS”), enterprise license agreements (“ELAs”) or software sold with critical software assurance - In certain software arrangements, we recognize the related revenue on a net basis, with product revenue being equal to the gross margin on the transaction. Third-party software products that are recognized on a net basis include: SaaS to customers whereby the customer receives the right to access software directly from the vendor; ELAs that provide customers with access to manage their software license needs; and software that is accompanied by third-party delivered software assurance that is deemed to be critical or essential to the core functionality of the software license. As we are under no obligation to perform additional services, such as post-customer support or upgrades, revenue is recognized at a point in time as opposed to over the life of the software license. Revenue from these software products is recognized on a net basis at a point in time when the Company has satisfied its agency obligation which is generally when the Company has arranged for the delivery of the software from the third-party to the customer.

Revenue for third-party support service contracts - Revenue from the sale of third-party support service contracts is recognized on a net basis, with product revenue being equal to the gross margin on the transaction. As we are under no obligation to perform additional services, revenue is recognized at a point in time as opposed to over the life of the third-party support agreement. Revenue is recognized at a point in time when the Company has satisfied its agency obligation which is generally when the Company has arranged for the support service contract on the customer’s behalf with the third-party.

Revenue for professional services - Revenue from professional services is recognized over a period of time as the services are performed and recorded as service revenue with the associated cost recorded as service cost of revenue. For time and material contracts, where the Company has the right to invoice for work performed as completed, the Company recognizes revenue using the “right to invoice” practical expedient as the amount that can be invoiced directly corresponds with satisfaction of the performance obligation. For time and material contracts and fixed priced contracts where invoicing is linked to the achievement of milestones, the Company uses an input based percentage of completion method based on labor hours completed compared to the total estimated hours for the scope of work with revenue accrued or deferred as appropriate. Management bases its estimates on the scope of work being performed, our historical experience performing similar work and the risks and uncertainties surrounding that work. These estimates are adjusted throughout the performance of the contract as work is completed.

Revenue for managed services - Revenue from managed services are recognized over a period of time using a time-lapsed method and recorded as service revenue with the associated cost recorded as service cost of revenue. The Company’s managed services are considered to be a series of distinct services due to the services performed being either repetitive on a recurring basis or for being a stand-ready obligation and accordingly are accounted for as a single performance obligation. Accordingly, the Company believes that using a time-based method for recognition is the most appropriate as the services are satisfied evenly over the stated period of performance.


9


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)


Sales returns and credit losses

A customer’s ability to return goods and services is considered a form of variable consideration. The Company maintains an estimate for sales returns at the most likely amount based on historical experience. The Company also maintains an estimate for credit losses for uncollectible accounts which is based on historical experience.

Warranties

Our vendor partners provide warranties to our customers on equipment sold and, as such, we have not estimated a warranty reserve or deferred revenue for potential warranty work. These manufacturer warranties are assurance-type warranties that ensure that products will conform to manufacturer’s specifications and are not considered separate performance obligations. Extended warranties sold separately by manufacturers are considered to be separate performance obligations and are accounted for as third-party support service contracts described above.

Contract assets and liabilities

Revenue recognized in excess of the amount the Company has invoiced the customer is recorded as unbilled receivables or other assets on the consolidated balance sheet. Unbilled receivables are primarily comprised of professional services with milestone invoicing and contracts with bill in-full invoicing provisions.
Payments received from customers in advance of transferring goods or services to customers is recorded as unearned revenue within accrued and other current liabilities or other liabilities on the consolidated balance sheet. Unearned revenue is primarily comprised of payments for professional and managed services which are being provided over a period of time.
Freight

The Company considers freight billed to its customers as part of the transaction price in the arrangement which is allocated to the product performance obligations in the arrangement. Fright costs are recorded as a cost of product revenue. The Company does not consider shipping to be a separate performance obligation.
Contract costs

Generally, the only incremental costs of obtaining a contract that the Company incurs are sales commissions paid to our employees. The Company’s sales commission structures are complex and a majority of our sales commission are based on substantive operating metrics in addition to obtaining the contract. Sales commissions that are solely associated with obtaining a contract are capitalized when the amortization period would be one-year or greater; which primarily occurs in sales commissions paid on our managed services contracts. Capitalized sales commissions are amortized over the period they are expected to contribute directly or indirectly to future cash flows. Sales commissions paid on new managed services arrangements are amortized over a period that includes anticipated renewals while sales commissions paid on renewal services are amortized over the contract period.

The Company may incur costs to fulfill a contract associated with our professional or managed services, including, but not limited to, turn-up services, purchasing support service contracts and software licenses. These costs are initially deferred as prepaid expenses or other assets and expensed over the period that services are being provided.

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of Presidio, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.


10


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)


Use of Estimates

The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, asset residual values, vendor rebates and consideration, goodwill, identifiable intangibles, measurement of income tax assets and liabilities and provisions for doubtful accounts, credit losses, inventory obsolescence, and other contingencies. Actual results could differ from management’s estimates.

Other Comprehensive Income

The Company did not have any components of other comprehensive income for any of the periods presented.

Recent Accounting Pronouncements Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), along with subsequent clarifying ASUs, which outline a single, comprehensive model for accounting for revenue from contracts with customers. Under the standard, revenue is to be recognized upon the transfer of promised goods or services to a customer, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. See “Revenue Recognition” above for additional information regarding the Company's revenue recognition policies.

On July 1, 2018, the Company adopted ASC 606 utilizing the full retrospective method. The adoption of ASC 606 impacted the Company's results as follows (in millions, except per-share data):

 
Three months ended December 31, 2017
 
Six months ended December 31, 2017
 
As Reported
 
ASU 2014-09 Adjustment
 
As Adjusted
 
As Reported
 
ASU 2014-09 Adjustment
 
As Adjusted
Revenue
 
 
 
 
 
 
 
 
 
 
 
Product
$
540.3

 
$
(15.3
)
 
$
525.0

 
$
1,168.9

 
$
(39.2
)
 
$
1,129.7

Service
121.3

 
3.0

 
124.3

 
257.7

 
(6.9
)
 
250.8

Total revenue
661.6

 
(12.3
)
 
649.3

 
1,426.6

 
(46.1
)
 
1,380.5

Cost of revenue
 
 
 
 
 
 
 
 
 
 
 
Product
431.6

 
(15.3
)
 
416.3

 
929.7

 
(39.2
)
 
890.5

Service
92.6

 
2.8

 
95.4

 
203.2

 
(7.1
)
 
196.1

Total cost of revenue
524.2

 
(12.5
)
 
511.7

 
1,132.9

 
(46.3
)
 
1,086.6

Gross margin
$
137.4

 
$
0.2

 
$
137.6

 
$
293.7

 
$
0.2

 
$
293.9

 
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
$
65.3

 
$
(0.1
)
 
$
65.2

 
$
130.7

 
$
(0.3
)
 
$
130.4

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
23.3

 
$
0.3

 
$
23.6

 
$
67.5

 
$
0.5

 
$
68.0

Income tax benefit
$
(89.2
)
 
$
0.1

 
$
(89.1
)
 
$
(77.9
)
 
$
0.2

 
$
(77.7
)
Net income
$
99.2

 
$
0.2

 
$
99.4

 
$
118.9

 
$
0.3

 
$
119.2

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.08

 
$

 
$
1.08

 
$
1.30

 
$

 
$
1.30

Diluted
$
1.03

 
$

 
$
1.03

 
$
1.23

 
$
0.01

 
$
1.24



11


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)


 
As of June 30, 2018
 
As Reported
 
ASU 2014-09 Adjustment
 
As Adjusted
Accounts receivable, net
$
613.3

 
$
(4.6
)
 
$
608.7

Unbilled accounts receivable, net
$
156.7

 
$
14.8

 
$
171.5

Prepaid expenses and other current assets
$
80.7

 
$
31.8

 
$
112.5

Total assets
$
2,694.3

 
$
42.0

 
$
2,736.3

 
 
 
 
 
 
Accrued expenses and other current liabilities
$
193.2

 
$
35.0

 
$
228.2

Deferred income tax liabilities
$
177.7

 
$
2.8

 
$
180.5

Total liabilities
$
1,938.2

 
$
37.8

 
$
1,976.0

 
 
 
 
 
 
Retained earnings
$
110.9

 
$
4.2

 
$
115.1

Total stockholders’ equity
$
756.1

 
$
4.2

 
$
760.3

Total liabilities and stockholders’ equity
$
2,694.3

 
$
42.0

 
$
2,736.3



The adoption of ASC 606 impacted net income, as noted above, as well as elements of working capital. Total cash flows from operating activities, investing activities and financing activities remained unchanged for the six months ended December 31, 2017.

Recent Accounting Pronouncements Not Yet Adopted

The Company is still evaluating the impact of the following additional accounting pronouncement not yet adopted as of December 31, 2018.
    
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which changes the accounting for leases in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard has an effective date for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the standard will have on the consolidated financial statements. The adoption of the standard is not expected to have a material impact on the Company’s leasing business from a lessor perspective.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which changes the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. This standard requires a modified-retrospective adoption approach and has an effective date for fiscal years beginning after December 15, 2019. The Company does not believe this standard will have a material impact on the consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), which changes the accounting for derivatives and hedging to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The standard has an effective date for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company does not believe this standard will have a material impact on the consolidated financial statements.

Along with ASU 2017-12, in October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815), which provides guidance on the eligible benchmark interest rates. The amendments in this ASU permit the use of the Overnight Index Swap (“OIS”) rate based on the Secured Overnight Financing Rate (“SOFR”) as the benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the Treasury obligations of the U.S. government (“UST”), the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Rate. The amendments in this Update are required to be adopted concurrently with the amendments in ASU 2017-12. The Company does not believe this standard will have a material impact on the consolidated financial statements.

12


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)



Note 2.         Revenue Recognition
Contract Assets and Liabilities – Contract assets consist of revenue recognized in excess of the amount the Company has the right to invoice a customer. Contract assets primarily relate to the Company's current and long-term unbilled receivables. As of December 31, 2018 and June 30, 2018, the current unbilled receivables balance was $189.0 million and $171.5 million, respectively. As of December 31, 2018 and June 30, 2018, the long-term unbilled receivables balance was $45.9 million and $28.3 million, respectively.
    
Contract liabilities consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing services. Contract liabilities primarily relate to the Company's current and long-term unearned revenue. As of December 31, 2018 and June 30, 2018, the current unearned revenue balance was $79.1 million and $73.0 million, respectively. As of December 31, 2018 and June 30, 2018, the long-term unearned revenue balance was $3.2 million and $3.8 million, respectively. During the six months ended December 31, 2018, the Company recognized $48.5 million of revenue related to its contract liabilities.

For contracts greater than one year, the table below discloses the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2018 and when the Company expects to recognize this revenue, by fiscal year. These performance obligations primarily relate to managed service and public cloud contracts.
(in millions)
Years ending June 30,
2019 (remaining six months)
$
63.1

2020
97.9

2021
76.7

2022
19.9

2023
4.6

2024 and thereafter
1.3

Total
$
263.5



Disaggregation of revenue

Refer to Note 16 for additional information detailing disaggregation of revenue for the three and six months ended December 31, 2018 and 2017.

Note 3.         Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in millions):
 
June 30, 2018
 
December 31, 2018
Deferred product costs
$
29.5

 
$
16.9

Partner incentive program receivable
32.7

 
19.7

Prepaid professional services
25.8

 
36.7

Prepaid reserved instances
2.0

 
8.1

Prepaid income taxes
4.9

 
3.5

Other prepaid expenses and current assets
17.6

 
16.4

Total prepaid expenses and other current assets
$
112.5

 
$
101.3



Note 4.         Financing Receivables and Operating Leases

The Company records the lease receivables related to sales-type or direct financing leases as financing receivables, and the related liability resulting from discounting customer payment streams as discounted financing receivables, in the Company’s consolidated balance sheets. Discounted customer payment streams are typically collateralized by a security interest in the underlying assets being leased.

13


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)



Financing receivablesThe assets and related liabilities for discounted and not discounted sales-type and direct financing leases to financial institutions were as follows as of June 30, 2018 (in millions):
 
Discounted to
financial institutions
 
Not discounted to
financial institutions
 
Total
Financing receivables:
 
 
 
 
 
Minimum lease payments
$
207.5

 
$
2.7

 
$
210.2

Estimated net residual values

 
7.6

 
7.6

Unearned income
(11.4
)
 
(0.9
)
 
(12.3
)
Provision for credit losses

 
(0.4
)
 
(0.4
)
Total, net
$
196.1

 
$
9.0

 
$
205.1

Reported as:
 
 
 
 
 
Current
$
85.4

 
$
2.9

 
$
88.3

Long-term
110.7

 
6.1

 
116.8

Total, net
$
196.1

 
$
9.0

 
$
205.1

Discounted financing receivables:
 
 
 
 
 
Nonrecourse
$
192.6

 
$

 
$
192.6

Recourse

 

 

Total
$
192.6

 
$

 
$
192.6

Reported as:
 
 
 
 
 
Current
$
84.5

 
$

 
$
84.5

Long-term
108.1

 

 
108.1

Total
$
192.6

 
$

 
$
192.6


The assets and related liabilities for discounted and not discounted sales-type and direct financing leases to financial institutions were as follows as of December 31, 2018 (in millions):
 
Discounted to
financial institutions
 
Not discounted to
financial institutions
 
Total
Financing receivables:
 
 
 
 
 
Minimum lease payments
$
244.1

 
$
1.8

 
$
245.9

Estimated net residual values

 
6.3

 
6.3

Unearned income
(14.6
)
 
(0.9
)
 
(15.5
)
Provision for credit losses

 
(0.3
)
 
(0.3
)
Total, net
$
229.5

 
$
6.9

 
$
236.4

Reported as:
 
 
 
 
 
Current
$
90.8

 
$
2.2

 
$
93.0

Long-term
138.7

 
4.7

 
143.4

Total, net
$
229.5

 
$
6.9

 
$
236.4

Discounted financing receivables:
 
 
 
 
 
Nonrecourse
$
214.8

 
$

 
$
214.8

Recourse

 

 

Total
$
214.8

 
$

 
$
214.8

Reported as:
 
 
 
 
 
Current
$
87.3

 
$

 
$
87.3

Long-term
127.5

 

 
127.5

Total
$
214.8

 
$

 
$
214.8




14


PRESIDIO, INC.
Notes to the Consolidated Financial Statements
(unaudited)


The discounted financing receivables associated with sales-type and direct financing type leases are presented in the consolidated balance sheets together with the discounted financing receivables associated with operating leases which is discussed below.

Operating leasesEquipment under operating leases and accumulated depreciation are reported as part of other assets in the consolidated balance sheets and were as follows (in millions): 
 
June 30, 2018
 
December 31, 2018
Equipment under operating leases
$
3.4