NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Company
PCM,
Inc. is a leading multi-vendor provider of technology solutions, including hardware products, software and services, offered through
our dedicated sales force, ecommerce channels and technology services teams. Since our founding in 1987, we have served our customers
by offering products and services from vendors such as Adobe, Apple, Cisco, Dell, Hewlett Packard Enterprise, HP Inc., Lenovo,
Microsoft, Oracle, Symantec and VMware. We provide our customers with comprehensive solutions incorporating leading products and
services across a variety of technology practices and platforms such as cloud, security, data center, networking, collaboration
and mobility. Our sales and marketing efforts allow our vendor partners to reach multiple customer segments including small, medium
and enterprise businesses, state, local and federal governments and educational institutions.
In
connection with our entrance into the UK market in the first quarter of 2017 with the formation of PCM Technology Solutions UK,
Ltd (“PCM UK”), we formed a new operating segment called United Kingdom. In February 2016, we transitioned out nearly
the entire management overhead of our MacMall business, thinned out its cost structure and brought it under the management and
supervision of our Commercial segment. Also, in connection with our acquisitions of Acrodex and certain assets of Systemax’s
North American Technology Group in the fourth quarter of 2015, which are both described more fully below in Note 3, and our resulting
entrance into selling technology solutions in the Canadian market, we formed a new operating segment called Canada, which includes
our operations related to these Canadian market activities. As a result, we operate in four reportable segments: Commercial, Public
Sector, Canada and United Kingdom. Our reportable operating segments are primarily aligned based upon our reporting of results
as used by our chief operating decision maker in evaluating the operating results and performance of our company. We include corporate
related expenses such as legal, accounting, information technology, product management and other administrative costs that are
not otherwise included in our reportable operating segments in Corporate & Other. All historical segment financial information
provided herein has been revised to reflect our revised reportable operating segments.
We
sell primarily to customers in the United States, Canada and the UK, and maintain offices in the United States, Canada and the
UK, as well as in the Philippines. In 2018, we generated approximately 76% of our revenue in our Commercial segment, 12% of our
revenue in our Public Sector segment, 9% of our revenue in our Canada segment and 3% of our revenue in our United Kingdom segment.
Our
Commercial segment sells complex technology solutions to commercial businesses in the United States, using multiple sales channels,
including a field relationship-based selling model, an outbound phone based sales force, a field services organization and online
extranets.
Our
Public Sector segment consists of sales made primarily to federal, state and local governments, as well as educational institutions.
The Public Sector segment utilizes an outbound phone and field relationship-based selling model, as well as contract and bid business
development teams and an online extranet.
Our
Canada segment consists of sales made to customers in the Canadian market beginning as of the respective dates of our acquisition
of Acrodex and certain assets of Systemax in October and December 2015, respectively, as well as the acquisition of Stratiform
in December 2016.
Our
United Kingdom segment consists of results of our UK subsidiary, PCM UK, and its wholly-owned subsidiaries, which serve as our
hub for the UK and the rest of Europe.
2.
Basis of Presentation and Summary of Significant Accounting Policies
B
eginning
in the first quarter of 2017, our financial results do not consolidate the financial results of sales made under some customer
contracts we purchased in the En Pointe acquisition, which are now held by a partner which qualifies for certification as a minority
and women owned business in accordance with customer supplier diversity policies. We hold a 49% passive equity interest in this
partner and we have accounted for our investment in this partner using the equity method of accounting beginning in the first
quarter of 2017. We refer to this entity as the non-controlled entity or NCE.
We record our results from our 49% equity
interest in the NCE’s operations as “Equity income from unconsolidated affiliate” in our consolidated statement
of operations.
Principles
of Consolidation
The
accompanying financial statements included herein are presented on a consolidated basis and include our accounts and the accounts
of all of our wholly-owned subsidiaries after elimination of intercompany accounts and transactions.
Use
of Estimates in the Preparation of the Consolidated Financial Statements
We
prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America, which requires management to make estimates, judgments and assumptions that affect the amounts reported herein. Management
bases its estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable
under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods
could differ from those estimates.
Revenue
Recognition
We
adhere to the guidelines and principles of revenue recognition described in ASU 2014-09, “Revenue from Contracts with Customers
(Topic 606)” (“ASU 2014-09” or “ASC 606”), which we adopted on January 1, 2018 using the full retrospective
method. See below under “
Adoption of New Revenue Recognition Standard
” for more information relating to the
adoption of this standard. Under ASC 606, we identify and account for a contract with a customer when it has written approval
and commitment of the parties, the rights of the parties including payment terms are identified, the contract has commercial substance,
and consideration is probable of collection. We recognize revenue upon delivery to the customer when control, title and risk of
loss of a promised product or service transfers to a customer, as per our contractual agreement with customers, in an amount that
reflects the consideration to which we expect to be entitled in exchange for transferring those products or services. In certain
types of arrangements, as discussed more fully below, revenue from sales of third-party vendor products or services is recorded
on a net basis when we act as an agent between the customer and the vendor, and on a gross basis when we act as the principal
for the transaction. To determine whether the company is an agent or principal, we consider whether we obtain control of the products
or services before they are transferred to the customer, as well as whether we have primary responsibility for fulfillment to
the customer, inventory risk and pricing discretion.
Product
and service revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects
the consideration we expect to receive in exchange for those products or services. The following indicators are evaluated in determining
when control has transferred to the customer: (i) the Company has a right to payment, (ii) the customer has legal title to the
product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant
risk and rewards of ownership, and (v) the customer has accepted the product.
Products
Revenue
from sales of product (hardware and software) is recognized at a point in time when the product has been delivered to the customer.
The Company’s shipping terms are FOB destination and it is upon delivery that the Company has right to payment, the customer
obtains legal title to the product, and physical possession of the product has transferred to the customer. We act as the principal
in these transactions and, as such, record product revenue at gross sales amounts. For all product sales shipped directly from
suppliers to customers, we take title to the products sold upon shipment, bear credit risk, and bear inventory risk for returned
products that are not successfully returned to suppliers. Therefore, these revenues are also recognized at gross sales amounts.
When
product sales incorporate a bill and hold arrangement, whereby the customer agrees to purchase product but requests delivery at
a later date, we have determined that control transfers when the product is ready for delivery, which occurs when the product
has been set aside or obtained specifically to fulfill the contract with the customer. It is at this point that we have right
to payment, the customer obtains legal title, and the customer has the significant risks and rewards of ownership.
We
recognize certain products on a net basis, as an agent. Products in this category include the sale of third-party services, warranties,
software assurance (“SA”), and subscriptions.
Warranties
represent third-party product warranties. Warranties not sold separately are assurance-type warranties that only provide assurance
that products will conform to the manufacturer’s specifications and are not considered separate performance obligations.
Warranties that are sold separately, such as extended warranties, provide the customer with a service in addition to assurance
that the product will function as expected. We consider these service-type warranties to be separate performance obligations from
the underlying product. We arrange for a third-party to provide those services and therefore we act as an agent in the transaction
and record revenue on a net basis at the point of sale.
SA
is a product that allows customers to upgrade their software, at no additional cost, to the latest technology if new applications
are introduced during the period that the SA is in effect. Most software licenses are sold with accompanying third-party delivered
SA. The Company evaluates whether the SA is a separate performance obligation by assessing if the third-party delivered SA is
critical to the core functionality of the software. This involves considering if the software provides its original intended functionality
to the customer without the updates, if the customer would ascribe a higher value to the upgrades versus the initial software
delivered, and if the customer would expect updates to the software to maintain the functionality. When the SA for a software
product is deemed critical to maintaining the core functionality of the underlying software, the software license and SA are considered
a single performance obligation and the value of the product is primarily the SA service delivered by a third-party. Therefore,
the Company is acting as an agent in these transactions and the revenue is recognized on a net basis when the underlying software
is delivered to the customer. Under net sales recognition, the cost paid to the vendor or third-party service provider is recorded
as a reduction to sales, resulting in net sales being equal to the gross profit on the transaction. When the SA for a software
product is deemed not critical to the core functionality of the underlying software, the SA is recognized as a separate performance
obligation and the revenue is recognized on a net basis when the underlying software license is delivered to the customer.
Some
of our larger customers are offered the opportunity by certain of our vendors to purchase software licenses and SA under enterprise
agreements (“EAs”). Under EAs, customers are considered to be compliant with applicable license requirements for the
ensuing year, regardless of changes to their employee base. Customers are charged an annual true-up fee for changes in the number
of users over the year. With most EAs, our vendors will transfer the license and invoice the customer directly, and we act as
a sales agent in the transaction. In addition to the vendor being primarily responsible for fulfilling the promise to the customer,
they also assume the inventory risk as they are responsible for providing remedy or refund if the customer is not satisfied with
the delivered services. At the time of sale, our obligation as an agent is fulfilled and we recognize revenue in the amount of
an agency fee or commission. We record these fees as a component of net sales and there is no corresponding cost of sales amount.
In certain instances, we invoice the customer directly under an EA and account for the individual items sold based on the nature
of the item. Our vendors typically dictate how the EA will be sold to the customer.
Services
Service
revenues are recognized over time since customers simultaneously receive and consume the benefits of the Company’s services
as they are provided. The Company is the principal in service transactions and therefore recognizes revenue on a gross basis.
Revenue for data center services, including internet connectivity, web hosting, server co-location and managed services, is recognized
over the period the service is performed in the amount to which the Company has the right to invoice in accordance with the practical
expedient in paragraph 606-10-55-18. Revenue for fixed fee services are recognized using an input method based on the total number
of hours incurred for the period as a proportion of the total expected hours for the project. Total expected hours to complete
the project is updated for each period and best represents the transfer of control of the service to the customer.
Bundled
Arrangements
Bundled
arrangements are contracts that can include various combinations of products and services. When a contract includes multiple performance
obligations delivered at varying times, we determine whether the delivered items are distinct under ASC 606. For arrangements
with multiple performance obligations, the transaction price is allocated among the performance obligations based on their relative
standalone selling prices (“SSP”). When observable evidence from recent transactions exists, it is used to confirm
that prices are representative of SSP. When evidence from recent transactions is not available, an expected cost plus a margin
approach is used.
Sales
In Transit
In
order to recognize revenues in accordance with our revenue recognition policy under ASC 606, we perform an analysis to estimate
the number of days that products we have shipped are in transit to our customers using data from our third party carriers and
other factors. We record an adjustment to reverse the impact of sale transactions that are initially recorded in our accounting
records based on the estimated value of products that have shipped, but have not yet been delivered to our customers, and we recognize
such amounts in the subsequent period when delivery has occurred. Changes in delivery patterns or unforeseen shipping delays beyond
our control could have a material impact on the timing of revenue recognized in future periods.
Freight
Costs
The
Company records freight billed to its customers on a gross basis to net sales and related freight costs to cost of sales when
the product is delivered to the customer. For freight not billed to its customers, the Company records the freight costs as cost
of sales. The Company’s shipping terms are FOB destination, which results in shipping being performed before the customer
obtains control of the product, thus shipping activities are not a promised service to the customer. Rather, shipping is an activity
to fulfill the promise to deliver the products.
Other
The
Company’s contracts give rise to variable consideration in the form of sales returns and allowances which we estimate at
the most likely amount to which we are expected to be entitled. This estimate is included in the transaction price to the extent
it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with
the variable consideration is resolved. The most likely estimated amount of variable consideration and determination of whether
to include estimated amounts in the transaction price are based on an assessment of the Company’s anticipated performance
and historical experience and are recorded at the time of sale.
Sales
are reported net of estimated returns and allowances, discounts, mail-in rebate redemptions, credit card chargebacks, and taxes
collected from customers. If the actual sales returns, allowances, discounts, mail-in rebate redemptions or credit card chargebacks
are greater than estimated by management, additional reductions to revenue may be required.
Generally,
the period between when control of the promised products or services transfer to the customer and when the customer pays for the
product or service is one year or less. As such, we elected the practical expedient allowed in paragraph 606-10-32-18 and we do
not adjust product and service consideration for the effects of a significant financing component.
The
amortization period of any asset resulting from incremental costs of obtaining a contract would generally be one year or less.
As such, we elected the practical expedient allowed in paragraph 340-40-25-4 and we expense these costs as incurred.
Cost
of Goods Sold
Cost
of goods sold includes product costs, outbound and inbound shipping costs and costs of delivered services, offset by certain market
development funds, volume incentive rebates and other consideration from vendors.
We
receive consideration from our vendors in the form of cooperative marketing allowances, volume incentive rebates and other programs
to support our marketing of their products. Most of our vendor consideration is accrued, when performance required for recognition
is completed, as an offset to cost of sales since such funds are not a reimbursement of specific, incremental, identifiable costs
incurred by us in selling the vendors’ products. For costs that are considered to be a reimbursement of specific, incremental,
identifiable costs incurred by us in selling the vendors’ products, we accrue the vendor consideration as an offset to such
costs in selling, general and administrative expenses. At the end of any given period, unbilled receivables related to our vendor
consideration are included in “Accounts receivable, net of allowances” in our Consolidated Balance Sheets.
Cash
and Cash Equivalents
All
highly liquid investments with initial maturities of three months or less and credit card receivables with settlement terms less
than 5 days are considered cash equivalents. Amounts due from credit card processors classified as cash totaled $1.0 million and
$4.0 million at December 31, 2018 and 2017, respectively. Checks issued but not presented for payment to the bank, net of available
cash subject to a right of offset, totaling $10.0 million and $8.6 million as of December 31, 2018 and 2017, respectively, were
included in “Accounts payable” in our Consolidated Balance Sheets. Our cash management programs result in utilizing
available cash to pay down our line of credit.
Accounts
Receivable
We
generate the majority of our accounts receivable through the sale of products and services to certain customers on account. In
addition, we record vendor receivables at such time as all conditions have been met that would entitle us to receive such vendor
funding, and is thereby considered fully earned.
The
following table presents the gross amounts of our accounts receivable (in thousands):
|
|
At
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade
receivables
|
|
$
|
418,328
|
|
|
$
|
380,990
|
|
Vendor
receivables
|
|
|
33,704
|
|
|
|
41,185
|
|
Other
receivables
|
|
|
13,169
|
|
|
|
19,664
|
|
Total
gross accounts receivable
|
|
|
465,201
|
|
|
|
441,839
|
|
Less:
Allowance for doubtful accounts receivable
|
|
|
(1,714
|
)
|
|
|
(2,181
|
)
|
Accounts
receivable, net
|
|
$
|
463,487
|
|
|
$
|
439,658
|
|
As
of December 31, 2018 and 2017, “Vendor receivables” presented above included $21.6 million and $23.6 million, respectively,
of unbilled receivables relating to vendor consideration, which is described above under “Cost of Goods Sold.”
Accounts
receivable potentially subject us to credit risk. We extend credit to our customers based upon an evaluation of each customer’s
financial condition and credit history, and generally do not require collateral. No customer accounted for more than 10% of trade
accounts receivable at December 31, 2018 and 2017. We maintain an allowance for doubtful accounts receivable based upon estimates
of future collection. We regularly evaluate our customers’ financial condition and credit history in determining the adequacy
of our allowance for doubtful accounts. We have historically incurred credit losses within management’s expectations. We
also maintain an allowance for uncollectible vendor receivables, which arise from vendor rebate programs, price protections and
other promotions. We determine the sufficiency of the vendor receivable allowance based upon various factors, including payment
history. Amounts received from vendors may vary from amounts recorded because of potential non-compliance with certain elements
of vendor programs. If the estimated allowance for uncollectible accounts or vendor receivables subsequently proves to be insufficient,
additional allowance may be required.
Inventories
Inventories
consist primarily of finished goods, and are stated at the lower of cost (determined under the first-in, first-out method) or
market. We record revenue and related cost of goods sold as described above under “Revenue Recognition.” As
such, inventories include goods-in-transit to customers at December 31, 2018 and 2017.
A
substantial portion of our business is dependent on sales of Cisco, HP Inc. and Microsoft products as well as products purchased
from other vendors including Apple, Dell, Hewlett Packard Enterprise, Ingram Micro, Lenovo, Synnex and Tech Data. Our top sales
of products by manufacturer as a percent of our gross billed sales were as follows for the periods presented:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Microsoft
|
|
|
15
|
%
|
|
|
15
|
%
|
|
|
15
|
%
|
HP
Inc.
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Advertising
Costs
Our
advertising expenditures are expensed in the period incurred. Total net advertising expenses, which were included in “Selling,
general and administrative expenses” in our Consolidated Statements of Operations, were $4.0 million, $5.3 million and $4.2
million in the years ended December 31, 2018, 2017 and 2016, respectively.
Property
and Equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets,
as noted below. Leasehold improvements are amortized over the shorter of their useful lives or the remaining lease term. We also
capitalize computer software costs that meet both the definition of internal-use software and defined criteria for capitalization
in accordance with ASC 350-40,
Internal-Use Software
.
Autos
|
|
|
3
– 5 years
|
|
Computers,
software, machinery and equipment
|
|
|
1
– 7 years
|
|
Leasehold
improvements
|
|
|
1
– 10 years
|
|
Furniture
and fixtures
|
|
|
3
– 15 years
|
|
Building
and improvements
|
|
|
5
– 31 years
|
|
We
had $5.7 million and $4.5 million of remaining unamortized internally developed software at December 31, 2018 and 2017, respectively.
Disclosures
About Fair Value of Financial Instruments
The
carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current
liabilities approximate their fair values because of the short-term maturity of these instruments. The carrying amounts of our
line of credit borrowings and notes payable approximate their fair values based upon the current rates offered to us for obligations
of similar terms and remaining maturities.
Goodwill
and Intangible Assets
Goodwill
and indefinite-lived intangible assets are carried at historical cost, subject to write-down, as needed, based upon an impairment
analysis that we perform annually, or sooner if an event occurs or circumstances change that would more likely than not result
in an impairment loss. We perform our annual impairment test for goodwill and indefinite-lived intangible assets as of October
1 of each year.
Goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Events that may create
an impairment include, but are not limited to, significant and sustained decline in our stock price or market capitalization,
significant underperformance of operating units and significant changes in market conditions. Changes in estimates of future cash
flows or changes in market values could result in a write-down of our goodwill in a future period. If an impairment loss results
from any impairment analysis as described above, such loss will be recorded as a pre-tax charge to our operating income. Goodwill
is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. At
October 1, 2018, our goodwill resided in our Abreon, Commercial Technology, Public Sector, Canada and United Kingdom reporting
units.
Goodwill
impairment testing is a two-step process. Step one involves comparing the fair value of our reporting units to their carrying
amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment and no further testing
is required. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to
measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of
all tangible and intangible assets, excluding goodwill, net of any assumed liabilities, of the reporting unit from the fair value
of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the
carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss
is recognized equal to the difference.
We
performed our annual impairment analysis of goodwill and indefinite-lived intangible assets for possible impairment as of October
1, 2018. Our management, with the assistance of an independent third-party valuation firm, determined the fair values of our reporting
units and their underlying assets, and compared them to their respective carrying values. Goodwill represents the excess of the
purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
The carrying value of goodwill was allocated to our reporting units pursuant to ASC 350. As a result of our annual impairment
analysis as of October 1, 2018, we have determined that no impairment of goodwill and other indefinite-lived intangible assets
existed.
Fair
value was determined by using a weighted combination of a market-based approach and an income approach, as this combination was
deemed to be the most indicative of fair value in an orderly transaction between market participants. Under the market-based approach,
we utilized information regarding our company and publicly available comparable company and industry information to determine
cash flow multiples and revenue multiples that are used to value our reporting units. Under the income approach, we determined
fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital,
which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect
to earn.
In
addition, the fair value of our indefinite-lived trademark was determined using the relief from royalty method under the income
approach to value. This method applies a market based royalty rate to projected revenues that are associated with the trademarks.
Applying the royalty rate to projected revenues resulted in an indication of the pre-tax royalty savings associated with ownership
of the trademarks. Projected after-tax royalty savings were discounted to present value at the reporting unit’s weighted
average cost of capital, and a tax amortization benefit (calculated based on a 15-year life for tax purposes) was added.
In
conjunction with our annual assessment of goodwill, our valuation techniques did not indicate any impairment as of October 1,
2018. All reporting units with goodwill passed the first step of the goodwill evaluation, with the fair values of our Abreon,
Commercial Technology, Public Sector, Canada and United Kingdom reporting units exceeding their respective carrying values by
37%, 126%, 31%, 195% and 152% and, accordingly, we were not required to perform the second step of the goodwill evaluation. We
had $7.2 million, $62.5 million, $8.3 million, $4.9 million and $4.6 million of goodwill as of October 1, 2018 residing in our
Abreon, Commercial Technology, Public Sector, Canada and United Kingdom reporting units, respectively. In applying the market
and income approaches to determining fair value of our reporting units, we rely on a number of significant assumptions and estimates
including revenue growth rates and operating margins, discount rates and future market conditions, among others. Our estimates
are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Changes in one or
more of these significant estimates or assumptions could affect the results of these impairment reviews.
As
part of our annual review for impairment, we assessed the total fair values of the reporting units and compared total fair value
to our market capitalization at October 1, 2018, including the implied control premium, to determine if the fair values are reasonable
compared to external market indicators. When comparing our market capitalization to the discounted cash flow models for each reporting
unit summed together, the implied control premium was approximately 39% as of October 1, 2018. We believe several factors are
contributing to our low market capitalization, including the lack of trading volume in our stock and the recent significant investments
made in various parts of our business and their effects on analyst earnings models.
Given
continuing economic uncertainties and related risks to our business, there can be no assurance that our estimates and assumptions
made for purposes of our goodwill and indefinite-lived intangible assets impairment testing as of October 1, 2018 will prove to
be accurate predictions of the future. We may be required to record additional goodwill impairment charges in future periods,
whether in connection with our next annual impairment testing as of October 1, 2019 or prior to that, if any change constitutes
a triggering event outside of the quarter from when the annual goodwill and indefinite-lived intangible assets impairment test
is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether
such charge would be material.
We
amortize other intangible assets with definite lives generally on a straight-line basis over their estimated useful lives, or
in the case of customer relationships, based on a relative percentage of annual discounted cash flows expected to be delivered
by the asset over its estimated useful life.
Valuation
of Long-Lived Assets
We
review long-lived assets and certain intangible assets for impairment when events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. In the event the undiscounted future cash flow attributable to the asset is less than
the carrying amount of the asset, an impairment loss is recognized based on the amount by which the carrying value exceeds the
fair value of the long-lived asset. Changes in estimates of future cash flows attributable to the long-lived assets could result
in a write-down of the asset in a future period.
Debt
Issuance Costs
We
defer costs incurred to obtain our credit facility as an asset and amortize these deferred costs to interest expense using the
straight-line method over the term of the respective obligation.
Income
Taxes
We
account for income taxes under the assets and liability method as prescribed in accordance with ASC 740 -
Income Taxes
.
Under this method, deferred tax assets and liabilities are recognized by applying enacted statutory tax rates applicable to future
years to differences between the tax basis and financial reporting amounts of existing assets and liabilities. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We make certain estimates and judgments in determining income tax provisions and benefits, in assessing the likelihood of recovering
our deferred tax assets and in evaluating our tax positions. A valuation allowance is provided when it is more likely than not
that all or some portion of deferred tax assets will not be realized. In making such a determination, all available positive and
negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable
income, tax-planning strategies, and results of recent operations.
On
December 22, 2017, U.S. tax legislation was enacted, known as the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”),
containing a broad range of tax reform provisions including, among other items, changes in the U.S. taxation of non-U.S. earnings.
The 2017 Tax Act introduced a provision, effective for years beginning on or after January 1, 2018, which taxes global intangible
low-taxed income (GILTI) in excess of a deemed return on the tangible assets of foreign corporations. Interpretive guidance on
the accounting for GILTI states that an entity may make an accounting policy election to either recognize deferred taxes for temporary
basis differences expected to reverse as GILTI in future years, or provide for the tax expense related to GILTI as a period expense
in the year the tax is incurred. We have elected to recognize the current tax on GILTI as a period expense. We include the current
tax impact of GILTI in our effective tax rate.
We
account for uncertainty in income taxes recognized in financial statements in accordance with ASC 740, which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. Only tax positions that meet the more-likely-than-not recognition threshold may
be recognized. We have elected to classify interest and penalties related to income tax liabilities, when applicable, as part
of “Interest expense, net” in our Consolidated Statements of Operations.
Sales
Taxes
We
present sales tax we collect from our customers on a net basis (excluded from our revenues).
Stock-Based
Compensation
We
account for stock-based compensation in accordance with ASC 718 -
Compensation - Stock Compensation
. ASC 718 addresses
the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity
instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or
that may be settled by the issuance of such equity instruments. We record compensation expense related to stock-based compensation
over the award’s requisite service period on a straight-line basis.
We
estimate the grant date fair value of each stock option grant awarded using the Black-Scholes option pricing model and management
assumptions made regarding various factors, including expected volatility of our common stock, expected life of options granted
and estimated forfeiture rates, which require use of accounting judgment and financial estimates. We compute the expected term
based upon an analysis of historical exercises of stock options by our employees. We compute our expected volatility using historical
prices of our common stock for a period equal to the expected term of the options. The risk-free interest rate is determined using
the implied yield on U.S. Treasury issues with a remaining term within the contractual life of the award. We account for forfeitures
as they occur. Any material change in the estimates used in calculating the stock-based compensation expense could result in a
material impact on our results of operations.
Foreign
Currency Translation
The
local currency of our foreign operations is their functional currency. The financial statements of our foreign subsidiaries are
translated into U.S. dollars in accordance with ASC 830-30. Accordingly, the assets and liabilities of our Canadian and Philippine
subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet dates. Income and expense items
are translated at the average exchange rate for each month within the year. The resulting translation adjustments are recorded
in “Accumulated other comprehensive income (loss),” a separate component of stockholders’ equity on our Consolidated
Balance Sheets. All transaction gains or losses are recorded in “Selling, general and administrative expenses” on
our Consolidated Statements of Operations, and we recorded a loss of $0.5 million for the year ended December 31, 2018, and gains
of $25,000 and $0.2 million for the years ended December 31, 2017 and 2016, respectively.
Recent
Accounting Pronouncements
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,”
amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the
amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements.
Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must
be provided in a note or separate statement and present a reconciliation of the beginning balance to the ending balance of each
period for which a statement of comprehensive income is required to be filed. We anticipate that the first presentation of changes
in stockholders’ equity required by these amendments will be included in our Form 10-Q for the quarter ending March 31,
2019.
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, “Intangibles –
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplified the testing of goodwill
for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing
the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective
for public companies for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
We are currently evaluating the effects that the adoption of ASU 2017-04 will have on our consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,”
which provides a more robust framework to use in determining when a set of assets and activities is a business. ASU 2017-01 provides
a more narrow definition of what is referred to as outputs and align it with how outputs are described in Topic 606 in order to
narrow the broad interpretations of the definition of a business. ASU 2017-01 is effective for public companies in their annual
periods beginning after December 15, 2017, including interim periods within those periods. We adopted ASU 2017-01 effective January
1, 2018 and it did not have a material effect on our consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash
Receipts and Cash Payments,” which aims to eliminate the diversity in practice related to classification of eight types
of cash flows. ASU 2016-15 is effective for public companies for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. We adopted ASU 2016-15 effective January 1, 2018 and it did not have a material effect on our
consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718) - Improvements to Employee
Share-Based Accounting,” which simplifies several aspects of accounting for employee share-based payment transactions, including
the accounting for income taxes, the calculation of diluted earnings per share, forfeitures, and statutory state tax withholding
requirements, as wells as classification in statement of cash flows. We adopted ASU 2016-09 effective January 1, 2017 using the
prospective method to recognize excess tax benefits and deficits in our consolidated statements of operations, and using the retrospective
method relating to classification of excess tax benefits on our consolidated statements of cash flows. Also, we made an accounting
policy election, on a modified prospective basis, to recognize forfeitures as they occur and cease estimating expected forfeitures.
As a result of adopting ASU 2016-09, in 2017 we recorded a credit to income tax expense of approximately $2.7 million related
to the excess tax benefits associated with the exercise of stock options and vesting of restricted stock units on our consolidated
statement of operations, and we reclassified $0.9 million from cash flows from financing activities to cash flows from operating
activities for 2016 to conform to our current period presentation. Also, we recorded a $94,000 cumulative effect adjustment to
retained earnings as of January 1, 2017 as a result of our accounting policy election relating to forfeitures. We anticipate ongoing
income tax expense volatility as a result of the adoption of this standard.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” which requires lessees to recognize right-of-use
assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms
longer than 12 months and classified as either financing or operating leases. ASU 2016-02 requires a modified retrospective transition
approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, and provides certain practical expedients that companies may elect. In July 2018, the FASB
issued ASU No. 2018-11, “Targeted Improvements” which provides entities with an additional transition method to adopt
Topic 842. Under the new transition method, an entity initially applies the new leases standard at the adoption date and recognizes
a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The new lease standard is
effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. We plan to adopt the new lease standard effective January 1, 2019 using a modified retrospective method and will not restate
comparative periods. We will elect the package of practical expedients permitted under the transition guidance, which allows us
to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease and our initial
direct costs for any leases that exist prior to adoption of the new standard. We expect that the primary effect of adopting the
new lease standard on January 1, 2019 will be recording right-of-use assets and corresponding lease obligations for current operating
leases on our consolidated balance sheet, which is expected to be in the range of $45 million to $55 million. See
Note 10 for more information regarding future lease payment obligation under leases that will be subject to this new lease accounting
standard.
Adoption
of New Revenue Recognition Standard
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”
or “ASC 606”), which, along with amendments issued in 2015 and 2016, replaced most existing revenue recognition guidance
under GAAP and eliminated industry specific guidance. The core principle of the new guidance is that an entity should recognize
revenue for the transfer of goods and services equal to an amount it expects to be entitled to receive for those goods and services.
The new guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective
method), or retrospectively by recognizing the cumulative effect of initially applying the guidance to all contracts existing
at the date of initial application (the modified retrospective method). The ASU, as amended, was effective beginning in the first
quarter of 2018. We adopted the guidance on January 1, 2018 using the full retrospective method and we have retrospectively adjusted
our prior period financial information presented herein. See below for more information.
We
have updated our accounting policies to conform with the new guidance, the adoption of which impacted two of our revenue streams
as follows:
|
●
|
Timing
of revenue recognition of product in transit to customers
- different businesses
within PCM have had varying terms of sale related to when title and risk of loss transfer
to the customer, either upon shipment or delivery. Historically, regardless of the terms
of sale, we have recorded revenue upon delivery to the customer. The adoption of ASU
2014-09 changes the way we recognize revenue for sales with terms where title and risk
of loss transfer at shipping point, such that they are now to be recorded at shipment,
which is when we transfer control, rather than upon delivery, to our customers. Given
that we are migrating to a common ERP, and to ensure consistent application of the new
revenue standard across all of our businesses, we changed the terms of sale in the fourth
quarter of 2017 such that all of our businesses have terms where title and risk of loss
transfer upon delivery to the customer. As a result, following our adoption of ASC 606
on January 1, 2018, we record all sales similar to how we have historically recorded
them in 2017 and prior by recording them upon delivery to our customers. Since we have
elected the retrospective method of adoption, the 2016 and 2017 results will reflect
the impact of recording revenue at its historical stated terms and conditions. See below
for more information.
|
|
|
|
|
●
|
Gross
vs. net treatment of certain security software revenues
– in certain security
software transactions when accompanying third-party delivered software assurance is deemed
to be critical or essential to the core functionality of the software license, we have
determined that the software license and the accompanying third-party delivered software
assurance are a single performance obligation. The value of the product is primarily
the accompanying support delivered by a third-party and therefore we act as an agent
in these transactions, which are recognized on a net basis. Following our adoption of
ASC 606 on January 1, 2018, we recognize revenue from the software license on a gross
basis (i.e., acting as a principal) and accompanying third-party delivered software assurance
on a net basis. This change reduces both net sales and cost of sales with no impact on
reported gross profit.
|
|
|
|
|
●
|
The
accounting for revenue related to hardware, software (excluding the above) and services remains unchanged.
|
The
adoption of ASU 2014-09 impacted our financial results as follows (in millions, except per share amounts):
|
|
Year
Ended December 31, 2017
|
|
|
Year
Ended December 31, 2016
|
|
|
|
As
Reported
|
|
|
New
Revenue Recognition Standard Adjustment
|
|
|
As
Adjusted
|
|
|
As
Reported
|
|
|
New
Revenue Recognition Standard Adjustment
|
|
|
As
Adjusted
|
|
Net
sales
|
|
$
|
2,193,436
|
|
|
$
|
(26,549
|
)
|
|
$
|
2,166,887
|
|
|
$
|
2,250,587
|
|
|
$
|
(11,030
|
)
|
|
$
|
2,239,557
|
|
Gross
profit
|
|
|
325,722
|
|
|
|
(994
|
)
|
|
|
324,728
|
|
|
|
318,801
|
|
|
|
126
|
|
|
|
318,927
|
|
Gross
profit margin
|
|
|
14.85
|
%
|
|
|
14bps
|
|
|
|
14.99
|
%
|
|
|
14.17
|
%
|
|
|
8bps
|
|
|
|
14.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
$
|
11,441
|
|
|
$
|
(813
|
)
|
|
$
|
10,628
|
|
|
$
|
34,791
|
|
|
$
|
110
|
|
|
$
|
34,901
|
|
Income
tax expense
|
|
|
984
|
|
|
|
(317
|
)
|
|
|
667
|
|
|
|
11,115
|
|
|
|
43
|
|
|
|
11,158
|
|
Net
income
|
|
|
3,091
|
|
|
|
(496
|
)
|
|
|
2,595
|
|
|
|
17,593
|
|
|
|
67
|
|
|
|
17,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.21
|
|
|
$
|
1.49
|
|
|
$
|
0.01
|
|
|
$
|
1.49
|
(1)
|
Diluted
|
|
|
0.24
|
|
|
|
(0.04
|
)
|
|
|
0.20
|
|
|
|
1.40
|
|
|
|
0.01
|
|
|
|
1.41
|
|
(1)
Amount does not foot across due to rounding.
|
|
At
December 31, 2016
|
|
|
|
As
Reported
|
|
|
New
Revenue Recognition Standard Adjustment
|
|
|
As
Adjusted
|
|
Accounts
receivable, net
|
|
$
|
358,949
|
|
|
$
|
9,647
|
|
|
$
|
368,596
|
|
Inventories
|
|
|
80,872
|
|
|
|
(8,653
|
)
|
|
|
72,219
|
|
Total
current assets
|
|
|
469,055
|
|
|
|
994
|
|
|
|
470,049
|
|
Total
assets
|
|
|
629,810
|
|
|
|
994
|
|
|
|
630,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
276,524
|
|
|
|
180
|
|
|
|
276,704
|
|
Total
current liabilities
|
|
|
474,052
|
|
|
|
180
|
|
|
|
474,232
|
|
Deferred
income tax liabilities
|
|
|
1,498
|
|
|
|
317
|
|
|
|
1,815
|
|
Total
liabilities
|
|
|
501,339
|
|
|
|
498
|
|
|
|
501,837
|
|
Retained
earnings
|
|
|
28,251
|
|
|
|
496
|
|
|
|
28,747
|
|
Total
stockholders’ equity
|
|
|
128,471
|
|
|
|
496
|
|
|
|
128,967
|
|
Total
liabilities and stockholders’ equity
|
|
|
629,810
|
|
|
|
994
|
|
|
|
630,804
|
|
The
adoption of ASU 2014-09 did not impact our consolidated balance sheet as of December 31, 2017. We have recast our consolidated
statements of cash flows for the years ended December 31, 2017 and 2016 to conform to the adjusted consolidated balance sheet
as described above.
3.
Revenue
The
following table presents our total net sales disaggregated by our major product line and our reportable segments (in thousands):
|
|
Commercial
|
|
|
Public
Sector
|
|
|
Canada
|
|
|
United
Kingdom
|
|
|
Corporate
&
Other
|
|
|
Consolidated
|
|
Year
Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
& Software Products
|
|
$
|
1,522,440
|
|
|
$
|
241,148
|
|
|
$
|
165,286
|
|
|
$
|
57,514
|
|
|
$
|
(621
|
)
|
|
$
|
1,985,767
|
|
Services
|
|
|
124,991
|
|
|
|
17,797
|
|
|
|
30,560
|
|
|
|
4,845
|
|
|
|
—
|
|
|
|
178,193
|
|
Total
|
|
$
|
1,647,431
|
|
|
$
|
258,945
|
|
|
$
|
195,846
|
|
|
$
|
62,359
|
|
|
$
|
(621
|
)
|
|
$
|
2,163,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
& Software Products
|
|
$
|
1,592,920
|
|
|
$
|
260,740
|
|
|
$
|
141,126
|
|
|
$
|
11,718
|
|
|
$
|
(455
|
)
|
|
$
|
2,006,049
|
|
Services
|
|
|
116,329
|
|
|
|
13,910
|
|
|
|
30,082
|
|
|
|
517
|
|
|
|
—
|
|
|
|
160,838
|
|
Total
|
|
$
|
1,709,249
|
|
|
$
|
274,650
|
|
|
$
|
171,208
|
|
|
$
|
12,235
|
|
|
$
|
(455
|
)
|
|
$
|
2,166,887
|
|
The
change in our deferred revenue related to contracts with customers was as follows (in thousands):
|
|
Current
|
|
|
Long-Term
|
|
|
Total
|
|
Balance
at December 31, 2017
|
|
$
|
7,913
|
(1)
|
|
$
|
463
|
(2)
|
|
$
|
8,376
|
|
Deferral
of revenue
|
|
|
32,060
|
|
|
|
1,132
|
|
|
|
33,192
|
|
Recognition
of deferred revenue
|
|
|
(31,928
|
)
|
|
|
(837
|
)
|
|
|
(32,765
|
)
|
Foreign
currency translation
|
|
|
(79
|
)
|
|
|
—
|
|
|
|
(79
|
)
|
Balance
at December 31, 2018
|
|
$
|
7,966
|
(1)
|
|
$
|
758
|
(2)
|
|
$
|
8,724
|
|
(1)
|
Presented
as “Deferred revenue” on our consolidated balance sheets.
|
(2)
|
Presented
as part of “Other long-term liabilities” on our consolidated balance sheets.
|
At
December 31, 2018, we had an immaterial amount of contract assets resulting from revenue being recognized in excess of the amount
that we have the right to invoice the customer.
Revenue
allocated to remaining performance obligations represents non-cancellable contracted revenue that has not yet been recognized,
which includes unearned revenue and amounts that will be delivered and recognized as revenue in future periods. Contracted, but
not recognized, revenue was $31.6 million as of December 31, 2018, of which we expect to recognize approximately 55%
over the next 12 months and the remainder thereafter. We applied the practical expedient provided under ASC 606-10-50-14(a)
and have not included information about remaining performance obligations that have original expected duration of one year or
less.
4.
Acquisitions
Provista
Technology
On
December 22, 2017, PCM UK, our UK based subsidiary, completed the acquisition of Provista Technology for an initial purchase price
of £3.4 million, net of cash acquired and including £1.1 million of accrued earn-out liability (or $4.5 million, net
of cash acquired and including $1.4 million of accrued earn-out liability). Provista Technology has
expertise
across a range of technologies and manufacturers including Cisco, Avaya, Cisco Meraki, Huawei, Checkpoint, and other leading vendors,
with offerings encompassing all aspects of Cloud Networking, Cloud Video, Hyperconvergence, Security, Collaboration, Secure Wireless
and IP LAN, WAN & Data Center Networks. We believe this acquisition further enhanced PCM UK’s expertise and vendor accreditations
in the United Kingdom as a Cisco Gold Partner, allowing PCM UK and its subsidiaries to offer further consultancy, integration
and supply of services and solutions across the UK marketplace while replicating many existing offerings from our North American
organization.
As part of the Provista acquisition, we agreed to pay certain contingent earn-out consideration related to
years ending December 31, 2018, 2019 and 2020 (each year the “measurement period”), estimated to be approximately
$1.4 million as of December 31, 2017, and payable 90 days in arrears following each measurement period. The accounting for the
acquisition of Provista Technology has been finalized as of December 31, 2018 and we have determined that the estimated fair value
of contingent consideration to be paid throughout the earn-out periods to be approximately $0.3 million, which has been included
in “Other long-term liabilities” on our consolidated balance sheet as of December 31, 2018. During the year ended
December 31, 2018, we adjusted the estimate of the earn-out liability and reducted it by $1.1 million, which was included as part
of “Selling, general and administrative expenses” on our consolidated statement of operations.
Stack
Technology
On
September 22, 2017, PCM UK completed the acquisition of Stack Technology for an initial purchase price of £1.2 million,
net of cash acquired (or $1.7 million, net of cash acquired). Stack Technology, headquartered in Liverpool, United Kingdom, specializes
in the selection, implementation and management of leading IT solutions, with offerings encompassing all aspects of cloud-based
solutions, security, virtualization, data services, unified communications, and infrastructure. We agreed to pay certain contingent
consideration as part of our acquisition of Stack Technology. However, we do not believe any earn-out consideration will be earned
by the seller pursuant to the terms of the acquisition agreement. As such, as of December 31, 2017 and 2018, we had no accrued
earn-out liability related to the Stack Technology acquisition. The accounting for the acquisition of Stack Technology has been
finalized in September 2017.
En
Pointe
On
April 1, 2015, we completed the acquisition of certain assets of En Pointe, one of the nation’s largest independent IT solutions
providers, headquartered in Southern California. En Pointe
is the largest acquisition by
PCM to date based on revenues, and is expected to significantly enhance PCM’s relationships with several key vendor partners,
provide incremental advanced technical certifications and operational expertise in key practice areas, and bring the consolidated
business significantly increased scale.
We acquired the assets of En Pointe’s IT solutions provider business, excluding
cash and other current tangible assets such as accounts receivable. The assets were acquired by an indirect wholly-owned subsidiary
of PCM, which subsidiary now operates under the En Pointe brand. Under the terms of the agreement, we paid an initial purchase
price of $15 million in cash and an additional $2.3 million for inventory. We agreed to pay certain contingent earn-out consideration,
including 22.5% of the future adjusted gross profit of the business and 10% of certain service revenues over the three years following
the closing of the acquisition. Through December 31, 2018, we have made a total of $37.6 million of earn-out payments to the sellers
of En Pointe, of which we made $2.2 million, $13.4 million and $13.1 million, respectively, during 2018, 2017 and 2016. The payments
made to date have been reasonably consistent with the historical fair value analysis.
Real
Estate Transaction
In
January 2017, we completed the purchase of real property in Woodridge, Illinois for approximately $3.1 million in cash. The real
property includes approximately 29,344 square feet of office space. For more information on the financing arrangement of this
real estate transaction, see Note 8 below.
5.
Stock-Based Compensation
Stock-Based
Benefit Plan
PCM,
Inc. 2012 Equity Incentive Plan
In
April 2012, the Compensation Committee of our Board of Directors approved and adopted our 2012 Equity Incentive Plan (the “2012
Plan”). In June 2012, the Plan was approved by our stockholders at our 2012 annual stockholders meeting. Upon the adoption
of the 2012 Plan, our 1994 Stock Incentive Plan (the “1994 Plan”) was terminated, canceling the shares that remained
available for grant under the 1994 Plan. Outstanding awards granted under the 1994 Plan continue unaffected following the termination
of the 1994 Plan.
The
2012 Plan authorizes our Board and the Compensation Committee to grant equity-based compensation awards in the form of stock options,
SARs, restricted stock, RSUs, performance shares, performance units, and other awards for the purpose of providing our directors,
officers and other employees incentives and rewards for performance. The 2012 Plan does not contain an evergreen provision. The
2012 Plan is administered by the Compensation Committee under delegated authority from the Board. The Board or Compensation Committee
may delegate its authority under the 2012 Plan to a subcommittee. The Compensation Committee or the subcommittee may delegate
to one or more of its members or to one or more of our officers, or to one or more agents or advisors, administrative duties,
and the Compensation Committee may also delegate powers to one or more of our officers to designate employees to receive awards
under the 2012 Plan and determine the size of any such awards (subject to certain limitations described in the 2012 Plan).
At
December 31, 2018, a total of 1,429,867 shares of authorized and unissued shares were available for future grants. All options
granted through December 31, 2018 have been Nonstatutory Stock Options. We satisfy stock option exercises and vesting of RSUs
with newly issued shares.
Stock-Based
Compensation
For
the years ended December 31, 2018, 2017 and 2016, we recognized stock-based compensation expense of $3.1 million, $2.6 million
and $2.0 million, respectively, in “Selling, general and administrative expenses” in our Consolidated Statements of
Operations, and related deferred income tax benefits of $0.9 million, $0.7 million and $0.8 million, respectively.
Valuation
Assumptions
We
estimated the grant date fair value of each stock option grant awarded during the years ended December 31, 2018, 2017 and 2016
using the Black-Scholes option pricing model and management assumptions made regarding various factors which require extensive
use of accounting judgment and financial estimates. We compute the expected term based upon an analysis of historical exercises
of stock options by our employees. We computed our expected volatility using historical prices of our common stock for a period
equal to the expected term of the options. The risk free interest rate was determined using the implied yield on U.S. Treasury
issues with a remaining term within the contractual life of the award. Each year, we estimated an annual forfeiture rate based
on our historical forfeiture data, which rate is revised, if necessary, in future periods if actual forfeitures differ from those
estimates.
The
following table presents the weighted average assumptions we used in each of the following years:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Risk
free interest rate
|
|
|
2.82
|
%
|
|
|
1.99
|
%
|
|
|
1.45
|
%
|
Expected
volatility
|
|
|
52
|
%
|
|
|
47
|
%
|
|
|
44
|
%
|
Expected
term (in years)
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Expected
dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Stock-Based
Payment Award Activity
Stock
Options
The
following table summarizes our stock option activity during the year ended December 31, 2018 and stock options outstanding and
exercisable at December 31, 2018 for the above plans:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Number
|
|
|
Price
|
|
|
Term
(in years)
|
|
|
(in
thousands)
|
|
Outstanding
at December 31, 2017
|
|
|
1,297,932
|
|
|
$
|
10.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
482,500
|
|
|
|
11.26
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(255,581
|
)
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(85,773
|
)
|
|
|
17.50
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2018
|
|
|
1,439,078
|
|
|
|
10.83
|
|
|
|
4.36
|
|
|
$
|
10,116
|
|
Exercisable
at December 31, 2018
|
|
|
716,351
|
|
|
|
9.44
|
|
|
|
3.10
|
|
|
|
5,964
|
|
The
aggregate intrinsic value is calculated for in-the-money options based on the difference between the exercise price of the underlying
awards and the closing price of our common stock on December 31, 2018, which was $17.61.
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Weighted
average grant-date fair value of options granted during the period
|
|
$
|
5.86
|
|
|
$
|
8.94
|
|
|
$
|
4.74
|
|
Total
intrinsic value of options exercised during the period (in thousands)
|
|
|
3,556
|
|
|
|
9,763
|
|
|
|
3,391
|
|
Total
fair value of shares vested during the period (in thousands)
|
|
|
1,212
|
|
|
|
990
|
|
|
|
767
|
|
As
of December 31, 2018, there was $4.1 million of unrecognized compensation cost related to unvested outstanding stock options.
We expect to recognize these costs over a weighted average period of 3.6 years.
Restricted
Stock Units
We
estimate the fair value of RSU awards based on the closing stock price of our common shares on the date of grant. The following
table summarizes our RSU activity during the year ended December 31, 2018 issued under the above plans:
|
|
Restricted
Stock
Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested
at December 31, 2017
|
|
|
445,000
|
|
|
$
|
13.71
|
|
Granted
|
|
|
91,000
|
|
|
|
12.35
|
|
Vested
and distributed
|
|
|
(139,880
|
)
|
|
|
12.31
|
|
Non-vested
at December 31, 2018
|
|
|
396,120
|
|
|
|
13.89
|
|
The
weighted average grant-date fair value of RSUs granted during the year ended December 31, 2017 and 2016 was $18.97 and $10.05,
respectively.
As
of December 31, 2018, there was $4.4 million of unrecognized compensation cost related to unvested outstanding RSUs. We expect
to recognize these costs over a weighted average period of 3.13 years.
6.
Property and Equipment
Property
and equipment consisted of the following (in thousands):
|
|
At
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Computers,
software, machinery and equipment
|
|
$
|
80,132
|
|
|
$
|
79,671
|
|
Leasehold
improvements
|
|
|
12,579
|
|
|
|
11,886
|
|
Furniture
and fixtures
|
|
|
8,501
|
|
|
|
8,498
|
|
Building
and improvements
|
|
|
28,310
|
|
|
|
28,272
|
|
Land
|
|
|
17,959
|
|
|
|
17,959
|
|
Software
development and other equipment in progress
|
|
|
6,092
|
|
|
|
4,369
|
|
Subtotal
|
|
|
153,573
|
|
|
|
150,655
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(84,287
|
)
|
|
|
(79,104
|
)
|
Property
and equipment, net
|
|
$
|
69,286
|
|
|
$
|
71,551
|
|
We
capitalized interest costs of approximately $175,000 and $86,000 in 2018 and 2017, respectively, relating to internally developed
software costs during development. Depreciation and amortization expense for property and equipment, including fixed assets under
capital leases, for the years ended December 31, 2018, 2017 and 2016 totaled $10.4 million, $10.1 million and $9.9 million.
In
January 2017, we completed the purchase of real property in Woodridge, Illinois for approximately $3.1 million in cash. The real
property includes approximately 29,344 square feet of office space.
Throughout
2018 and 2017, we entered into capital lease schedules with a bank totaling approximately $2.5 million and $1.3 million, respectively.
The capital leases are primarily related to the buildout of the data center in Roswell, Georgia, the data center we constructed
in New Albany, Ohio, various network equipment and the addition of SAP software licenses. The capital lease schedules entered
into in 2018 and 2017 have terms ranging from one to five years. See Note 10 below for information related to capital lease obligations.
At December 31, 2018, we had a total of $3.4 million under our capital lease obligations, of which $1.3 million was included as
part of “Accrued expenses and other current liabilities” and $2.1 million was included as part of “Other long-term
liabilities” on our Consolidated Balance Sheets. At December 31, 2017, we had a total of $1.9 million under our capital
lease obligations, of which $0.6 million was included as part of “Accrued expenses and other current liabilities”
and $1.3 million was included as part of “Other long-term liabilities” on our Consolidated Balance Sheets.
We
have been in the process of upgrading our ERP systems due to the discontinued third party support of certain of our aged legacy
systems, our changing IT needs when considering the transitioning state of our business from our origins towards becoming a leading
IT solution provider and the ongoing desire to integrate multiple systems upon which we currently operate as a result of multiple
acquisitions. In October 2015, our management selected, and our board of directors approved, the adoption of the SAP platform
(that came with the acquisition of En Pointe) to be the platform to which we would migrate all legacy systems. We have made significant
progress in the configuration, implementation and successful migration of a large number of our customers to our new ERP platform.
We will continue to make progress throughout the remainder of 2019. We currently expect to have the vast majority of our business
transitioned to the new platform by mid-2019 with a total expected capitalized cost of under $5 million.
7.
Goodwill and Intangible Assets
Goodwill
The
change in the carrying amounts of goodwill was as follows by segment (in thousands):
|
|
Commercial
|
|
|
Public
Sector
|
|
|
Canada
|
|
|
United
Kingdom
|
|
|
Total
|
|
Balance
at December 31, 2017
|
|
$
|
69,735
|
|
|
$
|
8,322
|
|
|
$
|
4,997
|
|
|
$
|
4,714
|
|
|
$
|
87,768
|
|
Acquisition
of Stack Technology
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
|
|
35
|
|
Acquisition
of Provista
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
78
|
|
|
|
78
|
|
Foreign
currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
(388
|
)
|
|
|
(267
|
)
|
|
|
(655
|
)
|
Balance
at December 31, 2018
|
|
$
|
69,735
|
|
|
$
|
8,322
|
|
|
$
|
4,609
|
|
|
$
|
4,560
|
|
|
$
|
87,226
|
|
Intangible
Assets
The
following table sets forth the amounts recorded for intangible assets (in thousands):
|
|
Weighted
Average
Estimated
|
|
|
At
December 31, 2018
|
|
|
At
December 31, 2017
|
|
|
|
Useful
Lives
(years)
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Patent,
trademarks, trade names & URLs
|
|
|
5
|
|
|
$
|
5,304
|
(1)
|
|
$
|
1,502
|
|
|
$
|
3,802
|
|
|
$
|
7,739
|
(1)
|
|
$
|
3,186
|
|
|
$
|
4,553
|
|
Customer
relationships
|
|
|
14
|
|
|
|
13,460
|
|
|
|
9,358
|
|
|
|
4,102
|
|
|
|
13,533
|
|
|
|
7,799
|
|
|
|
5,734
|
|
Non-compete
agreements
|
|
|
4
|
|
|
|
2,087
|
|
|
|
1,888
|
|
|
|
199
|
|
|
|
2,377
|
|
|
|
1,574
|
|
|
|
803
|
|
Total
intangible assets
|
|
|
|
|
|
$
|
20,851
|
|
|
$
|
12,748
|
|
|
$
|
8,103
|
|
|
$
|
23,649
|
|
|
$
|
12,559
|
|
|
$
|
11,090
|
|
(1)
|
Included
in the total amount for “Patent, trademarks & URLs” are $2.9 million of trademarks with indefinite useful
lives that are not amortized.
|
Amortization
expense for intangible assets was $3.0 million, $4.1 million and $5.8 million for the years ended December 31, 2018, 2017 and
2016, respectively.
Estimated
amortization expense for intangible assets in each of the next five years and thereafter, as applicable, as of December 31, 2018
was as follows: $1.9 million in 2019, $1.3 million in 2020, $0.5 million in 2021, $0.4 million in 2022, $0.3 million in 2023 and
$0.8 million thereafter.
8.
Debt
The
following table sets forth our outstanding debt as of the periods presented (in thousands):
|
|
At
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revolving
credit facility, LIBOR plus 1.50%, maturing in March 2021
|
|
$
|
88,399
|
|
|
$
|
213,778
|
|
Note
payable, LIBOR plus 1.50%, maturing in March 2021(1)
|
|
|
9,243
|
|
|
|
11,032
|
|
Note
payable, LIBOR plus 1.50%, maturing in March 2021(2)
|
|
|
1,628
|
|
|
|
1,943
|
|
Note
payable, greater of 2% or LIBOR plus 2.15%, maturing in April 2022(3)
|
|
|
4,207
|
|
|
|
4,404
|
|
Note
payable, LIBOR plus 2.25%, maturing in January 2022(4)
|
|
|
3,679
|
|
|
|
3,908
|
|
Note
payable, LIBOR plus 2.25%, maturing in January 2020(5)
|
|
|
6,489
|
|
|
|
6,798
|
|
Note
payable, Prime plus 0.375% or LIBOR plus 2.375%, maturing in January 2020(6)
|
|
|
7,308
|
|
|
|
7,710
|
|
Note
payable, LIBOR plus 3.2%, maturing in May 2025
|
|
|
236
|
|
|
|
284
|
|
Other
notes payable, matured in August and September 2018
|
|
|
—
|
|
|
|
175
|
|
Total
|
|
|
121,189
|
|
|
|
250,032
|
|
Less:
Total current debt
|
|
|
91,682
|
|
|
|
217,140
|
|
Total
non-current debt
|
|
$
|
29,507
|
|
|
$
|
32,892
|
|
|
(1)
|
Refer
to discussion below regarding the sub-line secured by the building in Santa Monica, California.
|
|
(2)
|
Refer
to discussion below regarding the sub-line secured by the building in Woodridge, Illinois
|
|
(3)
|
Relates
to a seven-year note, with a 25 year straight-line monthly principal amortization, secured by real property in Irvine, California.
|
|
(4)
|
Relates
to a seven-year note, with a 25 year straight-line monthly principal amortization, secured by real property in Lewis Center,
Ohio.
|
|
(5)
|
Relates
to a five-year note, with a 25 year straight-line monthly principal amortization, secured by real property in New Albany,
Ohio.
|
|
(6)
|
Relates
to a five-year note, with a 25 year straight-line monthly principal amortization, secured by real property in El Segundo,
California.
|
Line
of Credit and Related Notes
We
maintain a credit facility, which functions as a working capital line of credit with a borrowing base of inventory and accounts
receivable, including certain credit card receivables, and a portion of the value of certain real estate. On January 19, 2016,
we entered into a Fourth Amended and Restated Loan and Security Agreement (the “Fourth Amended Loan Agreement”) with
certain lenders and Wells Fargo Capital Finance, LLC as administrative and collateral agent (the “Lenders”). On July
7, 2016, we entered into a First Amendment to the Fourth Amended Loan Agreement with the Lenders and on February 24, 2017, we
entered into a Second Amendment to the Fourth Amended Loan Agreement with the Lenders. On October 24, 2017, PCM, all of its wholly-owned
domestic subsidiaries (collectively with PCM, the “US Borrowers”), all of its Canadian subsidiaries (collectively,
the “Canadian Borrowers”) and its PCM UK subsidiary (together with the US Borrowers and the Canadian Borrowers, the
“Borrowers”), entered into a Fifth Amended and Restated Loan and Security Agreement (the “Fifth Amended Loan
Agreement”) with the Lenders. The Fifth Amended Loan Agreement amends and restates the Fourth Amended Loan Agreement.
As
amended through December 31, 2018, the terms of our credit facility provide for (i) a Maximum Credit, as defined in the credit
facility, of $345,000,000; (ii) a sub-line of up to C$40,000,000 as the Canadian Maximum Credit and a sub-line of up to £25,000,000
as the UK Maximum Credit ((i) and (ii) collectively the “Revolving Line”); (iii) a Maturity Date of March 19, 2021;
(iv) interest on outstanding balance under the Canadian Maximum Credit based on the Canadian Base Rate (calculated as the greater
of CDOR plus one percentage point and the “prime rate” for Canadian Dollar commercial loans, as further defined in
the Fifth Amended Loan Agreement) or at the election of the Borrowers, based on the CDOR Rate, plus a margin, depending on average
excess availability under the Revolving Line, ranging from 1.50% to 1.75%; (v) interest on outstanding UK balances based on LIBOR
plus a margin
, depending on average excess availability under the Revolving Line, ranging from 1.50%
to 1.75%
; (vi) interest on outstanding balance under the Maximum Credit based on the Eurodollar Rate
plus
a margin, depending on average excess availability under the revolving line, ranging from 1.50% to 1.75%; and (vii)
a monthly
unused line fee of 0.25% per year on the amount, if any, by which the Maximum Credit, then in effect, exceeds the average daily
principal balance of outstanding borrowings during the immediately preceding month. The terms of our credit facility are more
fully described in the Fifth Amended Loan Agreement.
The
credit facility is collateralized by substantially all of our assets. In addition to the security interest required by the credit
facility, certain of our vendors have security interests in some of our assets related to their products. The credit facility
has as its single financial covenant a minimum fixed charge coverage ratio (FCCR) requirement in the event an FCCR triggering
event has occurred. An FCCR triggering event is comprised of maintaining certain specified daily and average excess availability
thresholds. In the event the FCCR covenant applies, the fixed charge coverage ratio is 1.0 to 1.0 calculated on a trailing four-quarter
basis as of the end of the last quarter immediately preceding such FCCR triggering event date. At December 31, 2018, we were in
compliance with our financial covenant under the credit facility.
Loan
availability under the line of credit fluctuates daily and is affected by many factors, including eligible assets on-hand, opportunistic
purchases of inventory and availability and our utilization of early-pay discounts. At December 31, 2018, we had $207.0 million
available to borrow for working capital advances under the line of credit.
In
connection with, and as part of, our revolving credit facility, we maintain a sub-line with a limit of $12.5 million secured by
our properties located in Santa Monica, California, with a monthly principal amortization of $149,083 and a sub-line with a limit
of $2.2 million secured by our property in Woodridge, Illinois, with a monthly principal amortization of $26,250.
Also
on July 7, 2016, we entered into a Credit Agreement with Castle Pines Capital LLC (“Castle Pines”), which provides
for a credit facility (“Channel Finance Facility”) to finance the purchase of inventory from a list of approved vendors.
The aggregate availability under the Channel Finance Facility is variable and discretionary, but has initially been set at $35
million. Each advance under the Channel Finance Facility will be made directly to an approved vendor and must be repaid on the
earlier of (i) the payment due date as set by Castle Pines or (ii) the date (if any) when the inventory is lost, stolen or damaged.
No interest accrues on advances paid on or prior to payment due date. The Channel Finance Facility is secured by a lien on certain
of our assets, subject to an intercreditor arrangement with the Lenders. The Channel Finance Facility has an initial term of one
year, but shall be automatically renewed for one year periods from year to year thereafter unless terminated earlier by either
party within reasonable notice periods. As of December 31, 2108, we had no outstanding balance under the Channel Finance Facility.
At
December 31, 2018, the effective weighted average annual interest rate on our outstanding amounts under the credit facility, term
note and variable interest rate notes payable was 4.07%.
The
carrying amounts of our line of credit borrowings and notes payable approximate their fair value based upon the current rates
offered to us for obligations of similar terms and remaining maturities.
9.
Income Taxes
“Income
before income taxes” in the Consolidated Statements of Operations included the following components for the periods presented
(in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
U.S.
|
|
$
|
28,840
|
|
|
$
|
7,115
|
|
|
$
|
23,928
|
|
Foreign
|
|
|
3,190
|
|
|
|
(3,853
|
)
|
|
|
4,890
|
|
Income
before income taxes
|
|
$
|
32,030
|
|
|
$
|
3,262
|
|
|
$
|
28,818
|
|
“Income
tax expense” in the Consolidated Statements of Operations consisted of the following for the periods presented (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,710
|
|
|
$
|
(1,941
|
)
|
|
$
|
7,008
|
|
State
|
|
|
1,772
|
|
|
|
323
|
|
|
|
950
|
|
Foreign
|
|
|
1,734
|
|
|
|
2,002
|
|
|
|
1,909
|
|
Total
— Current
|
|
|
10,216
|
|
|
|
384
|
|
|
|
9,867
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,253
|
)
|
|
|
1,478
|
|
|
|
1,385
|
|
State
|
|
|
230
|
|
|
|
289
|
|
|
|
272
|
|
Foreign
|
|
|
64
|
|
|
|
(1,484
|
)
|
|
|
(367
|
)
|
Total
— Deferred
|
|
|
(959
|
)
|
|
|
283
|
|
|
|
1,291
|
|
Income
tax expense
|
|
$
|
9,257
|
|
|
$
|
667
|
|
|
$
|
11,158
|
|
The
provision for income taxes differed from the amount computed by applying the U.S. federal statutory rate to “Income before
income taxes” due to the effects of the following (dollars in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Expected
taxes at federal statutory tax rate
|
|
$
|
6,727
|
|
|
|
21.0
|
%
|
|
$
|
1,142
|
|
|
|
35.0
|
%
|
|
$
|
10,086
|
|
|
|
35.0
|
%
|
State
income taxes, net of federal income tax benefit
|
|
|
1,441
|
|
|
|
4.5
|
|
|
|
166
|
|
|
|
5.1
|
|
|
|
1,091
|
|
|
|
3.8
|
|
Stock-based
compensation
|
|
|
(532
|
)
|
|
|
(1.7
|
)
|
|
|
(2,476
|
)
|
|
|
(75.9
|
)
|
|
|
—
|
|
|
|
—
|
|
Remeasurement
of deferred taxes
|
|
|
144
|
|
|
|
0.5
|
|
|
|
(1,870
|
)
|
|
|
(57.3
|
)
|
|
|
—
|
|
|
|
—
|
|
Deemed
repatriation of foreign earnings, net of credits
|
|
|
173
|
|
|
|
0.5
|
|
|
|
669
|
|
|
|
20.5
|
|
|
|
—
|
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
745
|
|
|
|
2.3
|
|
|
|
1,049
|
|
|
|
32.2
|
|
|
|
(201
|
)
|
|
|
(0.7
|
)
|
Non-deductible
business expenses
|
|
|
562
|
|
|
|
1.8
|
|
|
|
1,162
|
|
|
|
35.6
|
|
|
|
440
|
|
|
|
1.5
|
|
Foreign
rate differential
|
|
|
356
|
|
|
|
1.1
|
|
|
|
725
|
|
|
|
22.2
|
|
|
|
(392
|
)
|
|
|
(1.4
|
)
|
Research
tax credits
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(57
|
)
|
|
|
(0.2
|
)
|
Change
in unrecognized tax benefits
|
|
|
(120
|
)
|
|
|
(0.4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(239
|
)
|
|
|
(0.7
|
)
|
|
|
100
|
|
|
|
3.0
|
|
|
|
191
|
|
|
|
0.7
|
|
Total
|
|
$
|
9,257
|
|
|
|
28.9
|
%
|
|
$
|
667
|
|
|
|
20.4
|
%
|
|
$
|
11,158
|
|
|
|
38.7
|
%
|
The
significant components of deferred tax assets and liabilities were as follows (in thousands):
|
|
At
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
380
|
|
|
$
|
535
|
|
Inventories
|
|
|
73
|
|
|
|
194
|
|
Deferred
revenue
|
|
|
230
|
|
|
|
279
|
|
Accrued
expenses and reserves
|
|
|
5,942
|
|
|
|
2,642
|
|
Stock-based
compensation
|
|
|
1,061
|
|
|
|
1,034
|
|
Tax
credits and loss carryforwards
|
|
|
3,763
|
|
|
|
4,053
|
|
Other
|
|
|
16
|
|
|
|
6
|
|
Total
gross deferred tax assets
|
|
|
11,465
|
|
|
|
8,743
|
|
Less:
Valuation allowance
|
|
|
(2,981
|
)
|
|
|
(2,274
|
)
|
Total
deferred tax assets
|
|
|
8,484
|
|
|
|
6,469
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
(5,192
|
)
|
|
|
(4,154
|
)
|
Intangibles
|
|
|
(2,582
|
)
|
|
|
(1,659
|
)
|
Foreign
employment tax subsidy
|
|
|
—
|
|
|
|
(517
|
)
|
Prepaid
expenses
|
|
|
(648
|
)
|
|
|
(944
|
)
|
Other
|
|
|
(474
|
)
|
|
|
(538
|
)
|
Total
deferred tax liabilities
|
|
|
(8,896
|
)
|
|
|
(7,812
|
)
|
Net
deferred tax liabilities
|
|
$
|
(412
|
)
|
|
$
|
(1,343
|
)
|
Valuation
allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation
allowance relates to certain foreign and state net operating loss carryforwards and other foreign and state deferred tax assets
generated by subsidiaries in a cumulative loss position. The valuation allowance increased by $0.7 million during the year ended
December 31, 2018 primarily due to foreign and state net operating losses and revaluing of state deferred tax assets.
At
December 31, 2018, we had state net operating loss carryforwards of $24.0 million, of which $1.9 million expiring between 2019
and 2021, and the remainder expiring between 2022 and 2038. Included in these amounts are $0.5 million of state net operating
loss carryforwards which relate to pre-acquisition losses from an acquired subsidiary and, accordingly, are subject to annual
limitations as to their use under the provisions of IRC Section 382. As such, the extent to which these losses may offset future
taxable income may be limited. At December 31, 2018, we also had foreign net operating loss carryforwards of $8.1 million, the
majority of which have no expiration date.
At
December 31, 2018, we had federal tax credits of $0.1 million, which begin to expire at the end of 2033, and state research credits
of $0.6 million, which have no expiration date.
On
December 22, 2017, U.S. tax legislation was enacted, known as the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”),
containing a broad range of tax reform provisions, including a corporate tax rate reduction from 35% to 21% and changes in the
U.S. taxation of non-U.S. earnings. The provisions included a one-time transition tax, payable over eight years, resulting from
the mandatory deemed repatriation of previously-untaxed foreign earnings. Also in December 2017 the SEC issued Staff Accounting
Bulletin No. 118, which provides additional guidance on how to account for the financial statement effects of U.S. tax reform,
and allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.
We
have completed our accounting for the tax effects of the 2017 Tax Act, including the transition tax and the remeasurement of deferred
taxes, and as of December 31, 2018 have recorded a cumulative incremental charge of $0.3 against our provisional net tax benefit
of $1.2 million recorded in December 2017.
The
2017 Tax Act introduced a provision, effective for years beginning on or after January 1, 2018, which taxes global intangible
low-taxed income (GILTI) in excess of a deemed return on the tangible assets of foreign corporations. We have made an accounting
policy election to recognize the current tax on GILTI as an expense in the period the tax is incurred. As of December 31, 2018,
we recognized $0.1 million in net income tax expense related to GILTI.
Due
to the impact of the transition tax and other provisions of tax reform, we have no material taxable temporary differences with
respect to our investment in foreign subsidiaries as of December 31, 2018.
Unrecognized
Tax Benefits
ASC
740 clarifies the accounting for uncertainty in tax positions by subscribing the recognition threshold a tax position is required
to meet before being measured and then recognized in the financial statements. It also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. We elected to classify interest and penalties
related to income tax liabilities, when applicable, as part of our “Interest expense, net” rather than as a component
of income tax expense in our Consolidated Statements of Operations.
Activity
relating to our unrecognized tax benefits were as follows (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Beginning
balance
|
|
$
|
474
|
|
|
$
|
474
|
|
|
$
|
420
|
|
Additions
to tax positions
|
|
|
—
|
|
|
|
—
|
|
|
|
54
|
|
Lapses
in statutes of limitations
|
|
|
(134
|
)
|
|
|
—
|
|
|
|
—
|
|
Ending
balance
|
|
$
|
340
|
|
|
$
|
474
|
|
|
$
|
474
|
|
Although
it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to
tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement
considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant
changes to unrecognized tax benefits over the next 12 months. During the years ended December 31, 2018 and 2017, no interest or
penalties were required to be recognized relating to unrecognized tax benefits.
We
are subject to U.S. and foreign income tax examinations for years subsequent to 2014, and state income tax examinations for years
following 2013. However, to the extent allowable by law, the tax authorities may have a right to examine prior periods when net
operating losses or tax credits were generated and carried forward for subsequent utilization, and make adjustments up to the
amount of the net operating losses or credit carryforwards.
10.
Commitments and Contingencies
Commitments
We
lease office and warehouse space and equipment under various non-cancelable operating leases which provide for minimum annual
rentals and escalations based on increases in real estate taxes and other operating expenses. We also have minimum commitments
under non-cancelable contracts for services relating to telecommunications, IT maintenance, financial services and employment
contracts with certain employees (which consist of severance arrangements that, if exercised, would become payable in less than
one year). In addition, we have obligations under capital leases for computers and related equipment, telecommunications equipment
and software.
As
of December 31, 2018, minimum payments over the terms of applicable contracts were payable as follows (in thousands):
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
Thereafter
|
|
|
Total
|
|
Operating
lease obligations
|
|
$
|
6,765
|
|
|
$
|
6,186
|
|
|
$
|
6,088
|
|
|
$
|
5,180
|
|
|
$
|
4,386
|
|
|
$
|
21,969
|
|
|
$
|
50,574
|
|
Capital
lease obligations
|
|
|
1,325
|
|
|
|
1,041
|
|
|
|
571
|
|
|
|
259
|
|
|
|
224
|
|
|
|
—
|
|
|
|
3,420
|
|
Other
commitments (1)(2)
|
|
|
11,347
|
|
|
|
2,268
|
|
|
|
907
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,522
|
|
Total
minimum payments
|
|
$
|
19,437
|
|
|
$
|
9,495
|
|
|
$
|
7,566
|
|
|
$
|
5,439
|
|
|
$
|
4,610
|
|
|
$
|
21,969
|
|
|
$
|
68,516
|
|
(1)
|
Other
commitments consist of minimum commitments under non-cancelable contracts for services relating to telecommunications, IT
maintenance, financial services and employment contracts with certain employees (which consist of severance arrangements that,
if exercised, would become payable in less than one year).
|
(2)
|
We
had $12.9 million of standby letters of credits (LOCs) under which there were no minimum payment requirements at December
31, 2018. LOCs are commitments issued to third party beneficiaries, underwritten by a third party bank, representing funding
responsibility in the event of third party demands or contingent events. The outstanding balance of our standby LOCs reduces
the amount available to us from our revolving credit facility. There were no claims made against any standby LOCs during the
year ended December 31, 2018.
|
For
the years ended December 31, 2018, 2017 and 2016, total rent expense, net of sublease income, totaled $7.7 million, $6.7 million
and $5.8 million, respectively. Some of the leases contain renewal options and escalation clauses, and require us to pay taxes,
insurance and maintenance costs.
Legal
Proceedings
From
time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other litigation
related to the conduct of our business. Any such litigation could result in a material amount of legal or related expenses and
be time consuming and could divert our management and key personnel from our business operations. In connection with any such
litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business. Any such
litigation may materially harm our business, results of operations and financial condition.
As
described above in Note 4 above, we acquired certain assets of En Pointe Technologies in 2015. The assets were acquired by an
indirect wholly-owned subsidiary of PCM, which subsidiary now operates under the En Pointe brand (“En Pointe”). We
are currently involved in several disputes related to the En Pointe acquisition as described below. Any litigation, arbitration
or other dispute resolution process could be costly and time consuming and could divert our management and key personnel from
our business operations. In connection with any such matters, we may be subject to significant damages or equitable remedies relating
to the operation of our business and could incur significant costs in asserting, defending, or settling any such matters. While
we intend to pursue and/or defend these actions vigorously, we cannot determine with any certainty the costs or outcome of such
pending or future matters, and they may materially harm our business, results of operations or financial condition.
Delaware
Litigation with Collab9.
On December 5, 2016, Collab9, Inc. (formerly, En Pointe Technologies Sales, Inc.) filed an action
against PCM, Inc. and its subsidiary, En Pointe Technologies Sales, LLC, in the Superior Court of Delaware in New Castle County,
Delaware. The action arises out of a March 12, 2015 Asset Purchase Agreement (“APA”) pursuant to which the Company
acquired assets of Collab9’s information technology solutions business. Collab9’s complaint alleged that the Company
breached the APA by failing to pay Collab9 the full amount of the periodic “earn-out” payments to which Collab9 is
entitled under the APA. On March 5, 2018, Collab9 filed a motion for leave to amend its pleadings to add new allegations in support
of its earn-out claim and to advance additional theories of recovery. In its Second Amended Complaint, accepted for filing June
20, 2018, Collab9 advanced four counts, or “causes of action,” in which it alleged that the Company (i) failed to
include in the earn-out payments a portion of internally delivered services revenue calculated across all consolidated Company
businesses rather than the acquired En Pointe business; (ii) transferred accounts and sales persons away from the En Pointe business
for the purpose of reducing the earn-out payment calculation; (iii) had an implied duty to maintain a separate financial accounting
system for the purpose of tracking earn-out payment calculations; (iv) failed to provide Collab9 with a sublicense to certain
SAP software acquired by the Company under the APA; (v) obtained and modified certain data that Collab9 delivered to the Company;
and (vi) failed to cooperate with Collab9 to indemnify it in connection with the foregoing claims. Collab9 further asserted breaches
of the APA and the implied covenant of good faith and fair dealing, and that the Company’s certification of earn-out payments
was fraudulent. On June 27, 2018, the Company answered, asserted tort and contract counterclaims and third-party claims against
the sellers in the Collab9 transaction, and moved to dismiss two of the four counts in the complaint. The counterclaims included
allegations that the sellers intentionally breached their representations and warranties concerning the financial statements of
the business whose assets the Company acquired under the APA, and the need for minority business certifications which were required
for certain acquired contracts under the APA. The counterclaims also include allegations that the sellers failed to disclose related
party interests or retained control over Ovex Technologies (Private) Limited (“Ovex”), a third party operation in
Pakistan that provided support functions for the acquired business. In response to the Company’s motion, Collab9 filed a
Third Amended Complaint on September 10, 2018 for the stated purpose of addressing the Company’s arguments. On October 23,
2018, the Company again moved to dismiss two of the four counts and otherwise answered the complaint, and amended its counterclaims
on November 16, 2018. The parties briefed cross-motions to dismiss, and the court has scheduled oral argument for May 2019. On
February 15, 2019, Collab9 filed a companion action against a PCM employee in the same Delaware court, alleging that the employee
violated certain contractual duties allegedly owed to Collab9. Although Collab9 has designated it as “related,” the
Company is not a party to the companion action but may ultimately indemnify the employee in connection with the defense of this
action. The Company believes the claims brought by Collab9 are speculative and wholly without merit, and intends to vigorously
defend against them. However, the outcome of these matters is uncertain and, as a result, the Company cannot reasonably estimate
the loss or range of loss that could result in the event of an unfavorable outcome. Accordingly, no amounts have been accrued
for any liability that may result from the resolution of these matters.
California
Litigation with Collab9.
On January 13, 2017, Collab9 filed an action against PCM, Inc. and its subsidiary, En Pointe
Technologies Sales, LLC, in the Superior Court of California for the County of Los Angeles. The complaint alleged that, in connection
with the Company’s processing of transactions with certain customers whose contracts the Company purchased the rights to
under the APA following the closing of the APA, the Company, without authorization, accessed and altered electronically stored
data of which Collab9 claims to have retained ownership. It further alleged that, although Collab9 authorized the Company to access
the data in question during a post-closing transition period, the Company continued to access and alter the data Collab9 claims
to own after an alleged termination of such authorization, and, in so doing, violated California’s Computer Data Access
and Fraud Act. On February 21, 2017, the Company moved to dismiss the case on the ground that the APA governs this dispute and
contains a provision designating New Castle County, Delaware as the exclusive forum in which claims arising out of or relating
to the APA may be brought. Following briefing and oral argument on July 12, 2017, the court granted the Company’s motion
to dismiss. Collab9 did not include these claims in its Second or Third Amended Complaints in the Delaware Litigation described
above, and we do not know whether Collab9 will refile the claims in a Delaware court. The Company believes the claims are wholly
without merit, and if pursued by Collab9 in Delaware, the Company intends to vigorously defend against them.
California
Litigation Against Yunus, Ovex, Din and Zones.
On February 22, 2017, En Pointe filed an action against former employee
Imran Yunus in California Superior Court alleging misappropriation of trade secrets, breach of contract, and other claims relating
to Mr. Yunus’s departure from his employment at En Pointe to commence employment at a competitor. After discovering new
facts about an alleged conspiracy to cause Ovex employees to resign and join a competitor, En Pointe amended the complaint on
June 1, 2017 to add Zones, Inc., Ovex and Bob Din as defendants. In its complaint, En Pointe seeks damages against Zones, Yunus,
and Din, and injunctive relief against all defendants. The core allegations relate to an alleged scheme orchestrated by defendant
Din to conspire with Ovex management to cause Ovex employees to leave Ovex, taking En Pointe’s confidential information
and trade secrets, and join competitor Zones. On June 6, 2017, a temporary restraining order was issued by the court in which
defendants were ordered, among other things, to immediately provide En Pointe with access to information in their possession and
to not use or disclose En Pointe’s trade secrets and confidential information. Ovex partially complied with the order. On
July 13, 2017, the court denied En Pointe’s request for a preliminary injunction, without prejudice, and dissolved the temporary
restraining order for periods after July 13, 2017 without relieving defendants of their obligations while the temporary restraining
order was in effect. The court based its decision primarily upon its determination that, at this stage of the litigation, there
lacked sufficient evidence at this time to support the continued need for injunctive relief. In November 2017, En Pointe voluntarily
dismissed the action without prejudice in order to seek resolution of disputes regarding data ownership and use rights in the
pending Delaware Litigation with Collab9 described above. Depending on the outcome of the Delaware case, we may decide to reinstate
this action in California.
Pakistan
Litigation.
On June 3, 2017, Ovex filed an action in Islamabad Pakistan against PCM’s subsidiary En Pointe, and
PCM’s subsidiary in Pakistan, claiming that En Pointe breached a contract pursuant to which Ovex provided En Pointe with
back-office administrative support and customer service support. The complaint sought damages, declaratory relief that En Pointe’s
termination of services contract should be suspended, and other injunctive relief. On the same date, the court in Pakistan issued
a temporary order suspending the termination of the services contract pending a further hearing on the action and indicating that
such order will not affect any other order or proceeding of any other competent judicial authority. En Pointe filed applications
before the court in Pakistan seeking orders dismissing the injunction and staying the case filed by Ovex seeking damages. En Pointe’s
applications were based on its assertion that any matters to be litigated arising out of or in connection with the services contract
is subject to a binding and enforceable exclusive arbitration clause in the services contract. On October 10, 2017, the Civil
Court in Islamabad Pakistan dismissed the case on grounds of the exclusive venue provision of the contract which requires the
case to be litigated in arbitration in California. Ovex appealed the decision of the Civil Court to the High Court in Islamabad.
The High Court heard arguments by Ovex on the appeal in early November 2017. The case was temporarily adjourned by request to
the High Court by Ovex with the consent of En Pointe, was then refixed for a hearing in August 2018 and is currently awaiting
a hearing date to be set by the High Court for further argument on the appealed decision of the Civil Court. The Company believes
the claims by Ovex are speculative and wholly without merit, and continues to vigorously defend the claims on jurisdictional grounds.
However, the outcome of this matter in Pakistan is uncertain and, as a result, the Company cannot reasonably estimate the loss
or range of loss that could result in the event of an unfavorable outcome in the Pakistan courts. Accordingly, no amounts have
been accrued for any liability that may result from the resolution of this matter. In addition to the action by Ovex against En
Pointe in Islamabad, on April 3, 2018, the sole shareholder of Ovex filed an action in Lahore Pakistan purportedly on behalf of
Ovex against certain officers and directors of En Pointe, PCM and PCM’s subsidiary in Pakistan claiming that Ovex was harmed
as a result of an alleged scheme to drive Ovex employees to leave Ovex and join Pakistan-based direct competitors of PCM and affiliates
of PCM. No relief has been sought directly against PCM or any of its subsidiaries in the action. We believe that the claims in
this action lack merit and continue to vigorously defend the claims on jurisdictional grounds. On September 11, 2017, July 5,
2018, and again on August 17, 2018, the U.S. District Court for the Central District of California entered orders confirming that
the pending proceedings in Islamabad and Lahore Pakistan are barred by the arbitration requirements of the applicable service
contract between the parties. Despite the orders by the U.S. District Court for the Central District of California, Ovex and its
shareholder continue to pursue the litigation in Islamabad and Lahore.
Ovex
Arbitration.
On June 6, 2017, En Pointe commenced arbitration against Ovex claiming damages arising from various claimed
breaches by Ovex of the services contract between the parties. On July 7, 2017, an emergency arbitrator granted En Pointe some
interim relief, including (i) a declaration that the arbitration clause in the services contract is valid and not waived, (ii)
that any claim relating to termination of the services contract, or for beach of the contract, or for damages arising out of the
services contract must be conducted within the arbitration, and (iii) that the services contract terminates no later than August
18, 2017. A permanent arbitrator for the action was appointed on August 3, 2017 and the arbitrator held an in-person, live, evidentiary
hearing on November 28, 2017. On March 9, 2018, the arbitrator in the primary arbitration proceeding entered a partial final award
in favor of En Pointe. In the award, the arbitrator found, among other things, that: (1) En Pointe had not breached the service
contract and owes nothing to Ovex; (2) Ovex materially breached the service agreement and owes En Pointe $990,586 in actual damages
plus attorneys’ fees in an amount to be determined later; and (3) the service agreement was properly terminated by En Pointe
with no further obligations to En Pointe. En Pointe has submitted support for the award of attorneys’ fees and is awaiting
the Arbitrator’s ruling on the amount of the award. Additional claims and damages against Ovex will be decided in a later
phase of the arbitration.
Federal
Anti-Suit Injunction Action.
On June 12, 2017, En Pointe filed a petition in the U.S. District Court for the Central District
of California to compel arbitration in California for claims relating to the services contract with Ovex and for an anti-suit
injunction against Ovex. In this action, En Pointe sought an order directing that any claims for damages arising out of the services
contract must occur in arbitration, and any attempt to pursue damages in a foreign jurisdiction will be blocked by an anti-suit
injunction. On September 11, 2017, the U.S. District Court issued an order compelling arbitration in California and granting the
anti-suit injunction as requested in En Pointe’s petition. Ovex and its sole shareholder have continued to litigate in Pakistan
in violation of the U.S. District Court’s order. On July 5, 2018, the U.S. District Court for the Central District of California
entered another order confirming that the pending proceedings in Pakistan are barred by the arbitration requirement and by the
Court’s anti-suit injunction and directing Ovex and its shareholder to appear before the Federal Court to show cause why
they should not be held in contempt for continuing to litigate in Pakistan in violation of this order. On August 17, 2018, the
U.S. District Court for the Central District of California entered another order finding each of Ovex and its shareholder in contempt
for continuing to litigate in Pakistan.
11.
Stockholders’ Equity
We
have a board approved discretionary stock repurchase program under which shares may be repurchased from time to time at prevailing
market prices, through open market or unsolicited negotiated transactions, depending on market conditions. Our Board of Directors
originally adopted the plan in October 2008 with an initial authorized maximum of $10 million. The plan was amended in September
2012 and increased to $20 million, again amended in April 2015 and increased to a total of $30 million, and again amended in August
2017 and increased to a total of $40 million. Under the program, the shares may be repurchased from time to time at prevailing
market prices, through open market or unsolicited negotiated transactions, depending on market conditions. We expect that the
repurchase of our common stock under the program will be financed with existing working capital and amounts available under our
existing credit facility. The repurchased shares are held as treasury stock. No limit was placed on the duration of the repurchase
program. There is no guarantee as to the exact number of shares that we will repurchase. Subject to applicable securities laws,
repurchases may be made at such times and in such amounts as our management deems appropriate. The program can also be discontinued
at any time management feels additional purchases are not warranted.
We
did not repurchase any shares of our common stock under this program during the year ended December 31, 2018. From the inception
of the program in October 2008 through December 31, 2018, we have repurchased an aggregate of 4,973,974 shares of our common stock
for a total cost of $37.5 million. At December 31, 2018, we had $2.5 million available in stock repurchases under the program,
subject to any limitations that may apply from time to time under our existing credit facility.
We
have never paid cash dividends on our capital stock and our credit facility prohibits us from paying any cash dividends on our
capital stock. Therefore, we do not currently anticipate paying dividends; we intend to retain any earnings to finance the growth
and development of our business.
12.
Earnings Per Common Share
Basic
earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding
during the reported periods. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if stock
options and other commitments to issue common stock were exercised, except in periods where the effect would be antidilutive.
Potential common shares of approximately 691,000, 188,000 and 279,000 for the years ended December 31, 2018, 2017 and 2016 have
been excluded from the calculation of diluted EPS because the effect of their inclusion would be antidilutive.
The
reconciliation of the amounts used in the basic and diluted EPS computation was as follows (in thousands, except per share amounts):
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
22,773
|
|
|
$
|
2,595
|
|
|
$
|
17,660
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS - Weighted average number of common shares outstanding
|
|
|
11,993
|
|
|
|
12,269
|
|
|
|
11,847
|
|
Dilutive
effect of stock awards
|
|
|
444
|
|
|
|
825
|
|
|
|
681
|
|
Diluted
EPS - Weighted average number of common shares outstanding
|
|
|
12,437
|
|
|
|
13,094
|
|
|
|
12,528
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.90
|
|
|
$
|
0.21
|
|
|
$
|
1.49
|
|
Diluted
|
|
|
1.83
|
|
|
|
0.20
|
|
|
|
1.41
|
|
13.
Employee & Non-Employee Benefits
Savings
Plan
We
maintain a 401(k) Savings Plan which covers substantially all full-time employees in the U.S. who meet the plan’s eligibility
requirements. Participants are allowed to make tax-deferred contributions up to limitations specified by the Internal Revenue
Code. We make 25% matching contributions for amounts that do not exceed 4% of the participants’ compensation. The matched
contributions to the employees are subject to a five-year vesting provision, with credit given towards vesting for employment
during prior years. We made matching contributions to the plan totaling approximately $936,000, $876,000 and $803,000 in 2018,
2017 and 2016, respectively. In addition, employees outside the U.S. participate in other savings plans. We made contributions
to the non-U.S. savings plans totaling approximately $0.3 million in each of the years 2018, 2017 and 2016.
Stock
Options and Restricted Stock Units Issued to Non-Employees
On
May 20, 2018, our Compensation Committee approved and granted, under our 2012 Plan, the award of options to purchase 11,000 shares
of our common stock to each of our three non-employee members of the board for a total award of 33,000 shares. These options were
issued at an exercise price of $12.60 with a seven-year term and vest annually in equal amounts over a two-year term. On May 20,
2017, our Compensation Committee approved and granted, under our 2012 Plan, the award of 4,000 shares of restricted stock units
to each of our three non-employee members of the board for a total award of 12,000 restricted stock units. The restricted stock
units each vest annually in equal amounts over a two-year period from the dates of grant. On May 20, 2016, our Compensation Committee
approved and granted, under our 2012 Plan, the award of options to purchase 12,750 shares of our common stock to each of our non-employee
members of our board for a total of 38,250 shares. These options were issued at an exercise price of $10.05 with a seven-year
term and vest annually in equal amounts over a two-year term. See Note 4 for more information on our accounting for stock-based
compensation.
14.
Segment Information
Our
four reportable operating segments - Commercial, Public Sector, Canada and United Kingdom - are primarily aligned based upon our
reporting of results as used by our chief operating decision maker in evaluating the operating results and performance of our
company. We include corporate related expenses such as legal, accounting, information technology, product management and certain
other administrative costs that are not otherwise included in our reportable operating segments in Corporate & Other. We allocate
our resources to and evaluate the performance of our segments based on operating income. For more information on our reportable
operating segments, see Note 1 above.
Summarized
segment information for our continuing operations is as follows for the periods presented (in thousands):
|
|
Commercial
|
|
|
Public
Sector
|
|
|
Canada
|
|
|
United
Kingdom
|
|
|
Corporate
&
Other
|
|
|
Consolidated
|
|
Year
Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,647,431
|
|
|
$
|
258,945
|
|
|
$
|
195,846
|
|
|
$
|
62,359
|
|
|
$
|
(621
|
)
|
|
$
|
2,163,960
|
|
Gross
profit
|
|
|
268,554
|
|
|
|
32,749
|
|
|
|
30,835
|
|
|
|
12,419
|
|
|
|
(615
|
)
|
|
|
343,942
|
|
Depreciation
and amortization expense(1)
|
|
|
5,133
|
|
|
|
527
|
|
|
|
1,013
|
|
|
|
297
|
|
|
|
6,470
|
|
|
|
13,440
|
|
Operating
profit (loss)
|
|
|
94,516
|
|
|
|
9,770
|
|
|
|
4,580
|
|
|
|
(1,963
|
)
|
|
|
(66,157
|
)
|
|
|
40,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,709,249
|
|
|
$
|
274,650
|
|
|
$
|
171,208
|
|
|
$
|
12,235
|
|
|
$
|
(455
|
)
|
|
$
|
2,166,887
|
|
Gross
profit
|
|
|
261,376
|
|
|
|
33,676
|
|
|
|
28,060
|
|
|
|
2,064
|
|
|
|
(448
|
)
|
|
|
324,728
|
|
Depreciation
and amortization expense(1)
|
|
|
5,683
|
|
|
|
829
|
|
|
|
1,090
|
|
|
|
48
|
|
|
|
6,531
|
|
|
|
14,181
|
|
Operating
profit (loss)
|
|
|
75,284
|
|
|
|
8,885
|
|
|
|
423
|
|
|
|
(5,205
|
)
|
|
|
(68,759
|
)
|
|
|
10,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,737,830
|
|
|
$
|
351,617
|
|
|
$
|
150,193
|
|
|
$
|
—
|
|
|
$
|
(83
|
)
|
|
$
|
2,239,557
|
|
Gross
profit
|
|
|
259,228
|
|
|
|
35,946
|
|
|
|
23,838
|
|
|
|
—
|
|
|
|
(85
|
)
|
|
|
318,927
|
|
Depreciation
and amortization expense(1)
|
|
|
6,491
|
|
|
|
1,162
|
|
|
|
1,320
|
|
|
|
—
|
|
|
|
6,811
|
|
|
|
15,784
|
|
Operating
profit (loss)
|
|
|
81,429
|
|
|
|
14,064
|
|
|
|
3,994
|
|
|
|
—
|
|
|
|
(64,586
|
)
|
|
|
34,901
|
|
(1)
|
Primary
fixed assets relating to network and servers are managed by the Corporate headquarters. As such, depreciation expense relating
to such assets is included as part of Corporate & Other.
|
As
of December 31, 2018 and 2017, we had total consolidated assets of $721.0 million and $740.3 million, respectively. Our management
does not have available to them and does not use total assets measured at the segment level in allocating resources. Therefore,
such information relating to segment assets is not provided herein.
Sales
of our products and services are made to customers primarily within the U.S. and Canada and other foreign countries. During the
years ended December 31, 2018, 2017 and 2016, approximately 10%, 8% and 6%, respectively, of our gross billed sales were made
to customers outside of the continental U.S. No single customer accounted for more than 10% of our gross billed sales in each
of the years ended December 31, 2018, 2017 and 2016.
Our
property and equipment, net, were located in the following countries as of the periods presented (in thousands):
|
|
At
December 31,
|
|
Location:
|
|
2018
|
|
|
2017
|
|
U.S.
|
|
$
|
65,009
|
|
|
$
|
66,736
|
|
Canada
|
|
|
2,528
|
|
|
|
2,776
|
|
United
Kingdom
|
|
|
1,571
|
|
|
|
1,716
|
|
Philippines
|
|
|
166
|
|
|
|
323
|
|
Other
|
|
|
12
|
|
|
|
—
|
|
Property
and equipment, net
|
|
$
|
69,286
|
|
|
$
|
71,551
|
|
15.
Supplementary Quarterly Financial Information (Unaudited)
The
following tables summarize supplementary quarterly financial information (in thousands, except per share data):
|
|
2018
|
|
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
|
3
rd
Quarter
|
|
|
4
th
Quarter
|
|
Net
sales
|
|
$
|
542,832
|
|
|
$
|
546,430
|
|
|
$
|
510,580
|
|
|
$
|
564,118
|
|
Gross
profit
|
|
|
83,596
|
|
|
|
90,417
|
|
|
|
85,134
|
|
|
|
84,795
|
|
Net
income
|
|
|
2,811
|
|
|
|
7,883
|
|
|
|
5,971
|
|
|
|
6,108
|
|
Basic
and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.66
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
Diluted
|
|
|
0.23
|
|
|
|
0.64
|
|
|
|
0.47
|
|
|
|
0.48
|
|
|
|
2017
|
|
|
|
1
st
Quarter
|
|
|
2
nd
Quarter
|
|
|
3
rd
Quarter
|
|
|
4
th
Quarter
|
|
Net
sales
|
|
$
|
522,760
|
|
|
$
|
556,082
|
|
|
$
|
543,275
|
|
|
$
|
544,770
|
|
Gross
profit
|
|
|
78,498
|
|
|
|
85,145
|
|
|
|
81,457
|
|
|
|
79,628
|
|
Net
income (loss)
|
|
|
4,172
|
|
|
|
2,366
|
|
|
|
(767
|
)
|
|
|
(3,176
|
)
|
Basic
and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
$
|
0.19
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.27
|
)
|
Diluted
|
|
|
0.31
|
|
|
|
0.18
|
|
|
|
(0.06
|
)
|
|
|
(0.27
|
)
|