10-Q 1 pccc-20180630x10q.htm 10-Q pccc_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

02-0513618

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

730 MILFORD ROAD,

 

MERRIMACK, NEW HAMPSHIRE

03054

(Address of principal executive offices)

(Zip Code)

 

 

 

 

 

 

(603) 683-2000

 

 

(Registrant's telephone number, including area code)

 


Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  ☑    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ☑    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☑

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

(Do not check if smaller reporting company)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ☐    NO  ☑

The number of shares outstanding of the issuer’s common stock as of July 31, 2018 was 26,702,507.

 

 


 

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1.

Unaudited Condensed Consolidated Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets–June 30, 2018 and December 31, 2017

1

 

 

 

 

Condensed Consolidated Statements of Income–Three and Six Months Ended June 30, 2018 and 2017

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows–Three and Six Months Ended June 30, 2018 and 2017

3

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

13

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

ITEM 4.

Controls and Procedures

25

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

ITEM 1A.

Risk Factors

26

 

 

 

ITEM 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

ITEM 6.

Exhibits

26

 

 

 

SIGNATURES 

28

 

 

 

 

 


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,680

 

$

49,990

 

Accounts receivable, net

 

 

463,994

 

 

449,682

 

Inventories, net

 

 

107,449

 

 

106,753

 

Prepaid expenses and other current assets

 

 

6,279

 

 

5,737

 

Income taxes receivable

 

 

933

 

 

3,933

 

Total current assets

 

 

647,335

 

 

616,095

 

Property and equipment, net

 

 

46,012

 

 

41,491

 

Goodwill

 

 

73,602

 

 

73,602

 

Intangibles assets, net

 

 

10,284

 

 

11,025

 

Long-term accounts receivable

 

 

1,890

 

 

 —

 

Other assets

 

 

1,831

 

 

5,638

 

Total Assets

 

$

780,954

 

$

747,851

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

200,940

 

$

194,257

 

Accrued expenses and other liabilities

 

 

28,915

 

 

31,096

 

Accrued payroll

 

 

23,458

 

 

22,662

 

Total current liabilities

 

 

253,313

 

 

248,015

 

Deferred income taxes

 

 

16,125

 

 

15,696

 

Other liabilities

 

 

1,855

 

 

1,888

 

Total Liabilities

 

 

271,293

 

 

265,599

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

287

 

 

287

 

Additional paid-in capital

 

 

115,224

 

 

114,154

 

Retained earnings

 

 

414,396

 

 

383,673

 

Treasury stock, at cost

 

 

(20,246)

 

 

(15,862)

 

Total Stockholders’ Equity

 

 

509,661

 

 

482,252

 

Total Liabilities and Stockholders’ Equity

 

$

780,954

 

$

747,851

 

 

 

See notes to unaudited condensed consolidated financial statements.

1


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME  

(Unaudited)

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net sales

 

$

706,570

 

$

749,792

 

$

1,331,465

 

$

1,420,386

 

Cost of sales

 

 

599,102

 

 

650,122

 

 

1,127,625

 

 

1,233,983

 

Gross profit

 

 

107,468

 

 

99,670

 

 

203,840

 

 

186,403

 

Selling, general and administrative expenses

 

 

82,521

 

 

77,230

 

 

163,421

 

 

152,511

 

Income from operations

 

 

24,947

 

 

22,440

 

 

40,419

 

 

33,892

 

Interest income, net

 

 

182

 

 

 9

 

 

298

 

 

28

 

Income before taxes

 

 

25,129

 

 

22,449

 

 

40,717

 

 

33,920

 

Income tax provision

 

 

(6,903)

 

 

(8,864)

 

 

(11,191)

 

 

(12,903)

 

Net income

 

$

18,226

 

$

13,585

 

$

29,526

 

$

21,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

$

0.51

 

$

1.10

 

$

0.79

 

Diluted

 

$

0.68

 

$

0.51

 

$

1.10

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation of earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

26,685

 

 

26,761

 

 

26,760

 

 

26,729

 

Diluted

 

 

26,820

 

 

26,893

 

 

26,868

 

 

26,879

 

 

 

See notes to unaudited condensed consolidated financial statements.

2


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

 

2018

    

2017

 

Cash Flows provided by (used for) Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

29,526

 

$

21,017

 

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,729

 

 

5,710

 

Provision for doubtful accounts

 

 

694

 

 

613

 

Stock-based compensation expense

 

 

465

 

 

385

 

Deferred income taxes

 

 

429

 

 

164

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

1,452

 

 

(15,169)

 

Inventories

 

 

(11,565)

 

 

(27,691)

 

Prepaid expenses, income tax receivables and other current assets

 

 

2,326

 

 

(2,548)

 

Other non-current assets

 

 

(1,997)

 

 

(4,077)

 

Accounts payable

 

 

6,163

 

 

8,930

 

Accrued expenses and other liabilities

 

 

7,296

 

 

2,908

 

Net cash provided by (used for) operating activities

 

 

41,518

 

 

(9,758)

 

Cash Flows used for Investing Activities:

 

 

 

 

 

 

 

Purchases of equipment

 

 

(9,927)

 

 

(4,531)

 

Net cash used for investing activities

 

 

(9,927)

 

 

(4,531)

 

Cash Flows used for Financing Activities:

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

859

 

 

 —

 

Repayment of short-term borrowings

 

 

(859)

 

 

 —

 

Purchase of treasury shares

 

 

(4,384)

 

 

 —

 

Dividend payment

 

 

(9,122)

 

 

(9,041)

 

Exercise of stock options

 

 

 —

 

 

1,678

 

Issuance of stock under Employee Stock Purchase Plan

 

 

605

 

 

603

 

Net cash used for financing activities

 

 

(12,901)

 

 

(6,760)

 

Increase (decrease) in cash and cash equivalents

 

 

18,690

 

 

(21,049)

 

Cash and cash equivalents, beginning of period

 

 

49,990

 

 

49,180

 

Cash and cash equivalents, end of period

 

$

68,680

 

$

28,131

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

1,281

 

$

662

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Income taxes paid

 

$

8,309

 

$

15,705

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

3


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

(amounts in thousands, except per share data)

Note 1–Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America.  Such principles were applied on a basis consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”), other than the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”) under the modified retrospective method as of January 1, 2018, as discussed below.  The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  Subsequent events have been evaluated through the date of issuance of these financial statements.  The operating results for the three and six months ended June 30, 2018 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2018.

 

Revenue Recognition

 

On January 1, 2018, we adopted ASC 606, which replaced existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. See Adoption of Recently Issued Accounting Standards in this footnote for additional information.

 

Revenue is 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. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In most instances, when several performance obligations are aggregated into one single transaction, these performance obligations are fulfilled at the same point of time.  We account for an arrangement when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable. We generally obtain oral or written purchase authorizations from our customers for a specified amount of product at a specified price, which constitutes an arrangement. Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently remitted to governmental authorities.  We generally invoice for our products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.

 

Nature of Products and Services

 

Information technology (“IT”) products typically represent a distinct performance obligation, and revenue is recognized at the point in time when control is transferred to the customer which varies based on terms of the arrangement. We recognize revenue as the principal in the transaction with the customer (i.e., on a gross basis), as we control the product prior to delivery to the customer and derive the economic benefits from the sales transaction given our control over customer pricing.

We do not recognize revenue for goods that remain in our physical possession before the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from the products, the goods are ready for physical transfer to and identified as belonging to the customer, and when we have no ability to use the product or to direct it to another customer.

4


 

 

Licenses for on premise software provide the customer with a right to take possession of the software. Customers may purchase perpetual licenses or enter into subscriptions to the licensed software. We are the principal in these transactions and recognize revenue for the on premise license at the point in time when the software is made available to the customer and upon the commencement of the term of the software or when the renewal term begins, as applicable. 

 

For certain on premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance which provides software updates and other support services.  We do not have control over the delivery of these performance obligations, and accordingly we are the agent in these transactions. We recognize revenue for security software net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement. Cloud products allow customers to use hosted software over the contractual period without taking possession of the software and are provided on a subscription basis. We do not exercise control over these products and therefore are an agent in these transactions. We recognize revenue for cloud products net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements.

 

Certain software sales include on premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk, and other support services transferred over the underlying contract period. On premise licenses are considered distinct performance obligations when sold with the software maintenance, as we sell these separately. We recognize revenue related to the software maintenance as the agent in these transactions because we do not have control over the on-going software maintenance service. Revenue allocated to software maintenance is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements.

 

Certain of our larger customers are offered the opportunity by vendors to purchase software licenses and maintenance 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 bill the customer directly, paying resellers, such as us an agency fee or commission on these sales. We record these agency fees as a component of net sales as earned 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 each item. Our vendors typically dictate how the EA will be sold to the customer.

 

We also offer extended service plans (“ESP”) on IT products, both as part of the initial arrangement and separately from the IT products. We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service. Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.

 

We use our own engineering personnel in projects involving the design and installation of systems and networks, and we also engage third-party service providers to perform warranty maintenance, implementations, asset disposal, and other services. Service revenue is recognized in general over time as we perform the underlying services and satisfy our performance obligations. We evaluate such engagements to determine whether we are the principal or the agent in each transaction. For those transactions in which we do not control the service, we act as an agent and recognize the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement.

 

All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales. Costs related to such shipping and handling billing are classified as cost of sales. Sales are reported net of sales, use, or other transaction taxes that are collected from customers and remitted to taxing authorities.

 

Significant Judgments

 

Our contracts with customers often include promises to transfer multiple products or services to a customer. Determining whether we are the agent or the principal and whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

 

5


 

We estimate SSP for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times. We maximize the use of observable inputs in the determination of the estimate for SSP for the items that we do not sell separately, including on-premises license sold with software maintenance, and IT products sold with ESP. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.

 

We provide our customers with a limited thirty-day right of return which is generally limited to defective merchandise. Revenue is recognized at delivery and a reserve for sales returns is recorded. We make estimates of product returns based on significant historical experience and record our sales return reserves as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses.

 

Description of Revenue

 

We disaggregate revenue from our arrangements with customers by type of products and services, as we believe this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

 

The following table represents a disaggregation of revenue from arrangements with customers for the three months ended June 30, 2018 and 2017, along with the reportable segment for each category.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

 

$

81,999

 

$

68,545

 

$

35,261

 

$

185,805

Software

 

 

38,375

 

 

37,363

 

 

11,043

 

 

86,781

Desktops

 

 

28,399

 

 

30,006

 

 

18,762

 

 

77,167

Servers/Storage

 

 

27,303

 

 

24,295

 

 

16,499

 

 

68,097

Net/Com products

 

 

29,140

 

 

20,124

 

 

11,115

 

 

60,379

Other hardware/services

 

 

64,826

 

 

120,732

 

 

42,783

 

 

228,341

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

270,042

 

$

301,065

 

$

135,463

 

$

706,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

 

$

75,900

 

$

49,964

 

$

34,340

 

$

160,204

Software

 

 

70,075

 

 

80,815

 

 

22,179

 

 

173,069

Desktops

 

 

29,685

 

 

24,171

 

 

21,321

 

 

75,177

Servers/Storage

 

 

30,304

 

 

19,120

 

 

13,994

 

 

63,418

Net/Com products

 

 

24,777

 

 

19,999

 

 

16,186

 

 

60,962

Other hardware/services

 

 

65,679

 

 

108,008

 

 

43,275

 

 

216,962

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

296,420

 

$

302,077

 

$

151,295

 

$

749,792

 

The following table represents a disaggregation of revenue from arrangements with customers for the six months ended June 30, 2018 and 2017, along with the reportable segment for each category.

 

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

 

$

153,728

 

$

131,983

 

$

59,159

 

$

344,870

Software

 

 

72,799

 

 

65,804

 

 

17,906

 

 

156,509

Desktops

 

 

56,690

 

 

61,232

 

 

28,836

 

 

146,758

Servers/Storage

 

 

58,804

 

 

48,838

 

 

33,638

 

 

141,280

Net/Com products

 

 

56,166

 

 

32,492

 

 

23,873

 

 

112,531

Other hardware/services

 

 

135,133

 

 

217,960

 

 

76,424

 

 

429,517

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

533,320

 

$

558,309

 

$

239,836

 

$

1,331,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

 

$

148,778

 

$

99,964

 

$

60,630

 

$

309,372

Software

 

 

129,878

 

 

135,697

 

 

36,805

 

 

302,380

Desktops

 

 

56,145

 

 

50,142

 

 

61,176

 

 

167,463

Servers/Storage

 

 

56,807

 

 

40,774

 

 

26,180

 

 

123,761

Net/Com products

 

 

47,746

 

 

36,470

 

 

33,710

 

 

117,926

Other hardware/services

 

 

130,699

 

 

191,948

 

 

76,837

 

 

399,484

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

570,053

 

$

554,995

 

$

295,338

 

$

1,420,386

 

Contract Balances

 

The following table provides information about contract liability from arrangements with customers as of June 30, 2018 and January 1, 2018:

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

January 1, 2018

Contract liability, which are included in "Accrued expenses and other liabilities"

 

$

8,433

 

$

2,914

 

Significant changes in the contract liability balances during the three and six months ended June 30, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

Three Months Ended

 

    

June 30, 

Balances at April 1, 2018

 

$

3,087

Reclassification of the beginning contract liability to revenue, as the result of performance obligations satisfied

 

 

(1,830)

Cash received in advance and not recognized as revenue

 

 

7,176

Balances at June 30, 2018

 

$

8,433

 

 

 

 

 

 

Six Months Ended

 

    

June 30, 

Balances at January 1, 2018

 

$

2,914

Reclassification of the beginning contract liability to revenue, as the result of performance obligations satisfied

 

 

(2,976)

Cash received in advance and not recognized as revenue

 

 

8,495

Balances at June 30, 2018

 

$

8,433

 

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions.  These estimates and assumptions affect the amounts reported in the accompanying condensed consolidated financial statements.  Actual results could differ from those estimates.

7


 

 

Comprehensive Income

 

We had no items of comprehensive income, other than our net income for each of the periods presented.

 

Adoption of Recently Issued Accounting Standards

 

On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASC 606, which amends the existing accounting standards for revenue recognition and expanded our disclosure requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

On January 1, 2018 we adopted ASC 606 using the modified retrospective transition method which resulted in an adjustment at January 1, 2018, to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date.  Upon adoption we recorded $1,197 as an increase to retained earnings.  The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

The adoption resulted in an acceleration of the timing of revenue recognized for certain transactions where product that remained in our possession has been recognized as of the transaction date when all revenue recognition criteria have been met.

 

 

The following table presents the effect of the adoption of ASC 606 on our condensed consolidated balance sheet as of January 1, 2018:

 

 

 

 

 

 

 

 

 

    

 

    

Adjustments

    

 

 

 

Balance at

 

Due to ASU

 

Balance at

 

 

December 31, 2017

 

2014-09

 

January 1, 2018

Balance Sheet

 

  

 

  

 

  

Assets

 

  

 

  

 

  

Accounts receivable, net

$

449,682

$

14,568

$

464,250

Inventories

 

106,753

 

(10,869)

 

95,884

Prepaid expenses and other current assets

 

5,737

 

(132)

 

5,605

Long-term accounts receivable

 

 —

 

1,890

 

1,890

Other assets

 

5,638

 

(3,914)

 

1,724

 

 

 

 

 

 

 

Liabilities

 

  

 

  

 

  

Accounts payable

 

194,257

 

(62)

 

194,195

Accrued expenses and other liabilities

 

31,096

 

(312)

 

30,784

Accrued payroll

 

22,662

 

291

 

22,953

Deferred income taxes

 

15,696

 

429

 

16,125

 

 

  

 

  

 

  

 

 

 

 

 

 

 

Stockholders' Equity

 

  

 

  

 

  

Retained earnings

$

383,673

$

1,197

$

384,870

 

 

In addition to the timing of revenue recognition impacted by the above described transactions, upon adoption of ASC 606, the amount of revenue to be recognized prospectively was affected by the presentation of revenue transactions as an agent instead of principal in the following transactions:

 

Revenue related to the sale of cloud products as well as certain security software is now being recognized net of costs of sales as we determined that we act as an agent in these transactions.  These sales are recorded on a net basis at a point in time when our vendor and the customer accept the terms and conditions in the sales arrangement.  In addition, we sell third-party software maintenance that is delivered over time either separately or bundled with the software

8


 

license. We have determined that software maintenance is a distinct performance obligation that we do not control, and accordingly, we act as an agent in these transactions and will recognize the related revenue on a net basis under ASC 606. We previously recognized revenue for cloud products, security software, and software maintenance on a gross basis (i.e., acting as a principal). This change reduced both net sales and cost of sales with no impact on reported gross profit as compared to our prior accounting policies.

 

The following tables present the effect of the adoption of ASC 606 on our condensed consolidated income statement and balance sheet and for the three and six months ended June 30, 2018 and as of June 30, 2018, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2018

 

    

 

    

 

    

Balances without

 

    

 

    

 

    

Balances without

 

 

As 

 

 

 

Adoption of

 

 

As 

 

 

 

Adoption of

 

 

Reported

 

Adjustments

 

ASC 606

 

 

Reported

 

Adjustments

 

ASC 606

Income statement

 

  

 

  

 

  

 

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

 

 

  

 

  

 

  

Net sales

$

706,570

$

113,199

$

819,769

 

$

1,331,465

$

188,757

$

1,520,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

  

 

  

 

  

 

 

  

 

  

 

  

Cost of sales

 

599,102

 

111,797

 

710,899

 

 

1,127,625

 

187,965

 

1,315,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

24,947

 

1,081

 

26,028

 

 

40,419

 

584

 

41,003

Income before taxes

 

25,129

 

1,081

 

26,210

 

 

40,717

 

584

 

41,301

Net income

 

18,226

 

784

 

19,010

 

 

29,526

 

422

 

29,948

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

 

    

 

    

Balances without

 

 

As

 

 

 

Adoption of

 

 

Reported

 

Adjustments

 

ASC 606

Balance Sheet

 

 

 

  

 

 

Assets

 

  

 

  

 

  

Accounts receivable, net

$

463,994

$

(11,014)

$

452,980

Inventories

 

107,449

 

10,301

 

117,750

Prepaid expenses and other current assets

 

6,279

 

125

 

6,404

Long-term receivables

 

1,890

 

(1,890)

 

 —

Other assets

 

1,831

 

3,464

 

5,295

 

 

 

 

 

 

 

Liabilities

 

  

 

  

 

  

Accrued expenses and other liabilities

$

28,915

$

2,613

$

31,528

Accrued payroll

 

23,458

 

(134)

 

23,324

Deferred income taxes

 

16,125

 

(267)

 

15,858

 

 

 

 

 

 

 

Stockholders' Equity

 

  

 

  

 

  

Retained earnings

$

414,396

$

(775)

$

413,621

 

We have elected the use of certain practical expedients in our adoption of the new standard, which includes continuing to record revenue reported net of applicable taxes imposed on the related transaction and the application of the new standard to all arrangements not completed as of the adoption date. We have also elected to use the practical expedient to not account for the shipping and handling as separate performance obligations.  Adoptions of the standard related to revenue recognition had no net impact on our condensed consolidated statement of cash flows.

 

 

Recently Issued Financial Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period

9


 

presented in the financial statements, with certain practical expedients available. We are currently assessing the potential impact of the adoption of ASU 2016-02 on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test.  Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.  ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  The new standard is effective for fiscal years beginning January 1, 2020 for both interim and annual reporting periods.  We are currently assessing the potential impact of the adoption of ASC 2017-04 on our consolidated financial statements.

 

Note 2–Earnings Per Share

 

Basic earnings per common share is computed using the weighted average number of shares outstanding.  Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to non-vested stock units and stock options outstanding, if dilutive.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 

    

2018

    

2017

    

2018

    

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

18,226

 

$

13,585

 

$

29,526

 

$

21,017

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

 

26,685

 

 

26,761

 

 

26,760

 

 

26,729

 

Dilutive effect of employee stock awards

 

 

135

 

 

132

 

 

108

 

 

150

 

Denominator for diluted earnings per share

 

 

26,820

 

 

26,893

 

 

26,868

 

 

26,879

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

$

0.51

 

$

1.10

 

$

0.79

 

Diluted

 

$

0.68

 

$

0.51

 

$

1.10

 

$

0.78

 

 

For the three and six months ended June 30, 2018 and 2017, we had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

 

 

 

 

 

k

 

Note 3–Segment and Related Disclosures

 

The internal reporting structure used by our chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments.  Our CODM is our Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.

 

Our operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions.  In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management.  Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions.  We report these charges to the operating segments as “Allocations.”  Certain headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below.

 

   

10


 

   

Segment information applicable to our reportable operating segments for the three and six months ended June 30, 2018 and 2017 is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Solutions

 

$

270,042

 

$

296,420

 

$

533,320

 

$

570,053

 

Enterprise Solutions

 

 

301,065

 

 

302,077

 

 

558,309

 

 

554,995

 

Public Sector Solutions

 

 

135,463

 

 

151,295

 

 

239,836

 

 

295,338

 

Total net sales

 

$

706,570

 

$

749,792

 

$

1,331,465

 

$

1,420,386

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Solutions

 

$

10,648

 

$

11,280

 

$

20,130

 

$

19,887

 

Enterprise Solutions

 

 

17,291

 

 

14,331

 

 

29,969

 

 

23,388

 

Public Sector Solutions

 

 

514

 

 

(11)

 

 

(2,611)

 

 

(2,624)

 

Headquarters/Other

 

 

(3,506)

 

 

(3,160)

 

 

(7,069)

 

 

(6,759)

 

Total operating income

 

 

24,947

 

 

22,440

 

 

40,419

 

 

33,892

 

Interest income, net

 

 

182

 

 

 9

 

 

298

 

 

28

 

Income before taxes

 

$

25,129

 

$

22,449