Acquisition

9 Months Ended

Sep. 30, 2015

Business Combinations [Abstract]

Acquisition

3. Acquisition

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. As of September 30, 2015, we have estimated that the fair value of contingent consideration to be paid throughout the earn-out period ending March 31, 2018 to be approximately $32.5 million. The fair value of this contingent consideration is determined and accrued based on a probability weighted average of possible outcomes that would occur should certain financial metrics be reached. Because there is no market data available to use in valuing the contingent consideration, the Company developed its own assumptions related to the future financial performance of the businesses to determine the fair value of this liability. As such, the valuation of the contingent consideration is determined using Level 3 inputs. The significant inputs into the calculation of the contingent consideration as of September 30, 2015 include projected gross profit values of En Pointe and the weighted average cost of capital, which is preliminarily determined to be 13%. The undiscounted estimate of the range of outcomes for the earn-out liability is approximately $10.5 million to $120.7 million.

The accounting for the acquisition of En Pointe is currently preliminary and we continue to obtain information relative to the fair values of certain assets acquired and certain liabilities assumed in the transaction. The purchase price has been allocated to the acquired assets and assumed liabilities, which include, but are not limited to, fixed assets, licenses, intangible assets and professional liabilities, based on estimated fair values as of the date of acquisition. The final fair value determination of the acquired assets and assumed liabilities will be based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques. We expect to finalize the final fair value determination and purchase price allocation for En Pointe within a year of the closing of the acquisition.

During the three months ended September 30, 2015, we reduced the acquisition date fair value of goodwill by $1.4 million due to revisions that adjusted the acquisition date fair value of various assets and liabilities by the same amount. The adjustments did not have a material effect on our consolidated financial statements.

Based on a preliminary purchase price allocation as described above, we recorded the following estimated fair values of the certain assets acquired and liabilities assumed at the date of the En Pointe acquisition (in thousands):

Purchase price paid	$	17,295
Inventories		4,004
Prepaid expenses and other current assets		1,598
Property and equipment		439
Intangible assets:
Customer relationships(1)		4,500
Trademarks and trade names(2)		2,000
Non-compete agreements(3)		1,860
Total intangible assets		8,360
Other long-term assets		115
Total assets acquired		14,516
Accounts payable		2,157
Accrued liabilities		1,489
Earn-out liabilities		32,500
Deferred revenue		276
Total liabilities assumed		36,422
Goodwill(4)	$	39,201

(1)	Estimated useful life of this asset is 20 years.
(2)	Estimated useful life of this asset is 3 years.
(3)	Estimated useful life of this asset is 4 years.
(4)	This goodwill acquired as part of the En Pointe acquisition is recorded as part of our Commercial and Public Sector segments.
	See Note 5 below for more information.

During the three and nine months ended September 30, 2015, we made $3.5 million and $5.4 million, respectively, of earn-out payments to the sellers of En Pointe. As of September 30, 2015, we had $10.8 million and $16.2 million of accrued earn-out liability included in “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, on our Condensed Consolidated Balance Sheets. We recorded approximately $0.3 million and $0.7 million of amortization expense during the three months and nine months ended September 30, 2015 related to the $8.4 million of intangible assets acquired in the En Pointe transaction. The goodwill resulting from the En Pointe acquisition is deductible for tax purposes.

The following table sets forth our results of operations on a pro forma basis as though the En Pointe acquisition had been completed as of the beginning of the periods presented (in thousands, except per share amounts):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
Net sales	$	404,933		$	453,785	$	1,297,790		$	1,301,031
Operating profit (loss)		956			3,677		(2,450	)		16,693
Income (loss) from continuing operations		(483	)		1,569		(3,281	)		7,774
Net income (loss)		(785	)		1,312		(3,540	)		6,672
Basic and Diluted Earnings (Loss) Per Common Share
Basic	$	(0.07	)	$	0.11	$	(0.29	)	$	0.55
Diluted		(0.07	)		0.10		(0.29	)		0.52
Weighted average number of common shares outstanding:
Basic		11,976			12,367		12,101			12,217
Diluted		11,976			12,954		12,101			12,871

Real Estate Transactions

In March 2015, we completed the purchase of real property in Irvine, California (the “Irvine Property”) for approximately $5.8 million and financed $4.9 million with a long-term note. The real property includes approximately 60,000 square feet of office and warehouse space and land. Certain of our subsidiaries were tenants of the building, which are continuing to use the office and warehouse space. In September 2015, we listed the Irvine Property for sale. See Note 4 below for more information.

In January 2015, we completed the purchase of certain real property in Lewis Center, Ohio for approximately $6.6 million and financed $4.575 million with a long-term note. The real property includes approximately 12.4 acres of land together with a building for office and warehouse space of approximately 144,000 square feet. Certain of our subsidiaries were tenants of the building, which are continuing to use the office and warehouse space.

For more information on the financing arrangements on the real estate transactions discussed above, see Note 7 below.