Use of Estimates in the Preparation of the Consolidated Financial Statements

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.

Cost of Goods Sold

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.

Accounts Receivable

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.

Advertising Costs

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.

Disclosures About Fair Value of Financial Instruments

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.

Valuation of Long-Lived Assets

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.

Income Taxes

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.

Stock-Based Compensation

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.

Recent Accounting Pronouncements

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.