| New Accounting Standard - Sales Recognition | 2. New Accounting Standard – Sales Recognition
We adopted ASU No. 2014-09, 340-40,
We applied Topic 606 using the modified retrospective transition
method. Upon initially applying the new standard, the net
cumulative effect from prior periods of applying the guidance in
Topic 606 was recognized as a cumulative effect adjustment to the
opening balance of retained earnings in our consolidated balance
sheet as of January 1, 2018. Additionally, we have elected the
option to only account for contracts that remained open as of the
January 1, 2018 transition date in accordance with Topic 606.
Revenue recognition for contracts for which substantially all of
the revenue was recognized in accordance with the revenue guidance
in effect before January 1, 2018 has not been changed. The
comparative information as of December 31, 2017 and for the
years ended December 31, 2017 and 2016 have not been adjusted
and continue to be reported under the previously applicable
accounting standards. The details of the significant changes and
quantitative impact of the changes are set forth below.
•
In sales transactions for certain security software
products that are sold with integral third-party delivered software
maintenance, we changed our accounting to record both the software
license and the accompanying software maintenance on a net basis,
as the agent in the arrangement, given the predominant nature of
the goods and services provided to the customer. Under previous
guidance, we bifurcated the sale of the software license from the
sale of the maintenance contract, recorded the sale of the software
product on a gross sales recognition basis and recorded the sale of
the software maintenance on a net sales recognition basis. This
change has no effect on reported gross profit dollars associated
with these transactions.
•
The accounting for inventories not available for sale,
otherwise known as bill and hold arrangements, changed such that a
portion of revenue under the contracts is recognized earlier than
we were recognizing under previous accounting standards. Bill and
hold arrangements are inventory balances owned by our clients that
we are warehousing and will be deploying to the clients’
locations in a future period.
•
The accounting for renewals of certain software
term/usage licenses changed to delay or accelerate revenue
recognition to the renewal period. Under previous guidance, we
recognized revenue as the renewal order was completed.
•
The accounting for certain contracts with our clients
that include payment terms that exceed one year changed such that
we recognize revenue at the point in time when control of the
product is transferred to the client or over the period of time
that the service is provided to the client. To the extent that a
significant financing component exists in these arrangements, we
will record interest income associated with the financing component
of the arrangement over the payment terms of the arrangement. Under
previous guidance, we deferred revenue recognition under these
contracts until payments became due as a result of the extended
payment terms.
•
The timing of revenue recognition for certain services
contracts also changed to align with an appropriate input or output
method. For example, the timing of revenue recognition for certain
services contracts with stated milestone terms changed to an
earlier point in time when control transfers to the customer. Under
previous guidance, we recognized revenue based on the milestones
stated in the contract with our customer.
•
The accounting for recording sales returns allowance
changed from being recorded against accounts receivable to being
recorded as a refund liability. As a result, we reclassified our
sales returns allowance balance from accounts receivable, net to
accrued expenses and other current liabilities. Under previous
guidance, we recorded the sales returns allowance in accounts
receivable, net and not as a separately stated liability.
•
The accounting for sales commissions on contracts with
performance periods that exceed one year changed such that we
record such sales commissions as an asset and amortize them to
expense over the related contract performance period. Under
previous guidance, sales commissions were expensed in the period
the transaction was generated.
The total cumulative effect adjustment from prior periods that we
recognized in our consolidated balance sheet as of January 1,
2018 as an adjustment to retained earnings was $7,176,000,
including tax effects of these adjustments.
The following tables summarize the effects of adopting Topic 606 on
the Company’s consolidated financial statements as of
June 30, 2018 and for the three and six months then ended (in
thousands, except for per share data):
BALANCE SHEET AT JUNE 30, 2018
As Reported Adjustments Pre-Topic
Cash and cash equivalents $ 248,122 $
— $ 248,122
Accounts receivable, net 2,161,077 (111,728 ) 2,049,349
Inventories 174,099
— 174,099
Inventories not available for sale 4,528 78,607 83,135
Other current assets 122,397 35,618 158,015
Total current assets 2,710,223 2,497 2,712,720
Property and equipment, net 74,694
— 74,694
Goodwill 130,841
— 130,841
Intangible assets, net 93,300
— 93,300
Deferred income taxes 14,936
— 14,936
Other assets 68,736 (16,134 ) 52,602
$ 3,092,730 $ (13,637 ) $ 3,079,093
Accounts payable – trade $ 1,395,934 $ (55,105 ) $ 1,340,829
Accounts payable – inventory financing facility 303,702
— 303,702
Accrued expenses and other current liabilities 199,069 (14,191 ) 184,878
Current portion of long-term debt 16,924
— 16,924
Deferred revenue 66,179 78,966 145,145
Total current liabilities 1,981,808 9,670 1,991,478
Long-term debt 144,888
— 144,888
Deferred income taxes 588
— 588
Other liabilities 58,955 (14,328 ) 44,627
2,186,239 (4,658 ) 2,181,581
Stockholders’ equity:
Preferred stock
—
—
—
Common stock 355
— 355
Additional paid-in 315,619
— 315,619
Retained earnings 625,212 (8,916 ) 616,296
Accumulated other comprehensive loss – foreign currency
translation adjustments (34,695 ) (63 ) (34,758 )
Total stockholders’ equity 906,491 (8,979 ) 897,512
$ 3,092,730 $ (13,637 ) $ 3,079,093
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2018
As Reported Adjustments Pre-Topic 606 Adoption
Net sales:
Products $ 1,619,774 $ 12,822 $ 1,632,596
Services 217,146 (4,519 ) 212,627
Total net sales 1,836,920 8,303 1,845,223
Costs of goods sold:
Products 1,488,921 11,433 1,500,354
Services 83,622 (2,122 ) 81,500
Total costs of goods sold 1,572,543 9,311 1,581,854
Gross profit 264,377 (1,008 ) 263,369
Operating expenses:
Selling and administrative expenses 189,464 171 189,635
Severance and restructuring expenses 382
— 382
Acquisition-related expenses 94
— 94
Earnings from operations 74,437 (1,179 ) 73,258
Non-operating 4,981
— 4,981
Earnings before income taxes 69,456 (1,179 ) 68,277
Income tax expense 17,977 (254 ) 17,723
Net earnings $ 51,479 $ (925 ) $ 50,554
Net earnings per share:
Basic $ 1.45 $ (0.03 ) $ 1.42
Diluted $ 1.44 $ (0.03 ) $ 1.41
Shares used in per share calculations:
Basic 35,483
— 35,483
Diluted 35,815
— 35,815
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
2018
Pre-Topic 606
As Reported Adjustments Adoption
Net sales:
Products $ 3,201,929 $ 3,325 $ 3,205,254
Services 397,894 (6,515 ) 391,379
Total net sales 3,599,823 (3,190 ) 3,596,633
Costs of goods sold:
Products 2,927,655 364 2,928,019
Services 167,786 (1,606 ) 166,180
Total costs of goods sold 3,095,441 (1,242 ) 3,094,199
Gross profit 504,382 (1,948 ) 502,434
Operating expenses:
Selling and administrative expenses 377,644 249 377,893
Severance and restructuring expenses 2,026
— 2,026
Acquisition-related expenses 94
— 94
Earnings from operations 124,618 (2,197 ) 122,421
Non-operating 10,900
— 10,900
Earnings before income taxes 113,718 (2,197 ) 111,521
Income tax expense 29,494 (457 ) 29,037
Net earnings $ 84,224 $ (1,740 ) $ 82,484
Net earnings per share:
Basic $ 2.36 $ (0.05 ) $ 2.31
Diluted $ 2.34 $ (0.05 ) $ 2.29
Shares used in per share calculations:
Basic 35,698
— 35,698
Diluted 36,039
— 36,039
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30,
2018
The adoption of Topic 606 had no effect on net cash provided by
operating activities, net cash used in investing activities or net
cash used in financing activities for the six months ended
June 30, 2018. The adjustment to net earnings noted above in
reconciling our reported results of operations for the six months
ended June 30, 2018 under Topic 606
to pre-Topic
Significant Accounting Policy
Revenue is measured based on the consideration specified in a
contract with a client, and excludes any sales incentives and
amounts collected on behalf of third parties. The Company
recognizes revenue when it satisfies a performance obligation by
transferring control of a product or service to a client.
Taxes assessed by a governmental authority that are both imposed on
and concurrent with a specific revenue-producing transaction, that
are collected by the Company from a client, are excluded from
revenue. This is consistent with our accounting treatment prior to
the adoption of Topic 606, whereby we reported sales net of any
sales-based taxes assessed by governmental authorities that are
imposed on and concurrent with sales transactions.
We record the freight we bill to our clients as net sales and the
related freight costs we pay as costs of goods sold. This is
consistent with our accounting treatment prior to the adoption of
Topic 606.
Nature of Goods and Services
We sell hardware and software products on both a stand-alone basis
without any services and as solutions bundled with services.
When we provide a combination of hardware and software products
with the provision of services, we separately identify our
performance obligations under our contract with the client as the
distinct goods (hardware and/or software products) or services that
will be provided. The total transaction price for an arrangement
with multiple performance obligations is allocated at contract
inception to each distinct performance obligation in proportion to
its stand-alone selling price. The stand-alone selling price is the
price at which we would sell a promised good or service separately
to a client. Observable stand-alone prices are used when they are
available. If not available, we estimate the price based on
observable inputs, including direct labor hours and allocable
costs.
Hardware Offerings
We recognize hardware product revenue at the point in time when a
client takes control of the hardware, which typically occurs when
title and risk of loss have passed to the client at its
destination. Our selling terms and conditions were modified during
the fourth quarter of 2017 to specify F.O.B. destination
contractual terms such that control is transferred from the Company
at the point in time when the product is received by the client.
Prior to the adoption of Topic 606, because we either (i) had
a general practice of covering client losses while products were in
transit despite title and risk of loss contractually transferring
at the point of shipment or (ii) had specifically stated
F.O.B. destination contractual terms with the client, delivery was
not deemed to have occurred until the point in time when the
product was received by the client. The transaction price for
hardware sales is adjusted for estimated product returns that we
expect to occur under our return policy based upon historical
return rates.
We leverage drop-shipment arrangements with many of our partners
and suppliers to deliver products to our clients without having to
physically hold the inventory at our warehouses, thereby increasing
efficiency and reducing costs. We recognize revenue for
drop-shipment arrangements on a gross basis as the principal in the
transaction when the product is received by the client because we
control the product prior to transfer to the client. We also assume
primary responsibility for fulfillment in the arrangement, we
assume inventory risk if the product is returned by the client, we
set the price of the product charged to the client and we work
closely with our clients to determine their hardware and software
specifications. This is consistent with our accounting treatment
prior to the adoption of Topic 606.
Bill and Hold Transactions
We offer a service to our customers whereby clients may purchase
product that we procure on their behalf and, at our clients’
direction, store the product in our warehouse for a designated
period of time, with the intention of deploying the product to the
clients’ designated locations at a later date. These
warehousing services are designed to help our clients with
inventory management challenges associated with technology
roll-outs, product that is moving to end of life, and/or clients
needing integrated stock available for immediate deployment. In
some circumstances, we may also perform lab integration services on
a portion of the product prior to shipment to our clients for a
separate fee. The client is invoiced and title transfers to the
client upon receipt of the product at our warehouse. These product
contracts are non-cancelable
The warehousing services and lab integration fees are considered
separate performance obligations. Under previous accounting
guidance, prior to the adoption of Topic 606, it was determined
that these product sales transactions did not meet the revenue
recognition criteria under GAAP. Therefore, we did not record
product net sales, and the inventories were classified as
inventories not available for sale on our consolidated balance
sheet, until the product was delivered to the clients’
designated location. If clients remitted payment before we
delivered the product to them, we recorded the payments received as
deferred revenue on our consolidated balance sheet until such time
as the product was delivered.
Software Offerings
We recognize revenue from software sales at the point in time when
the client acquires the right to use or copy software under license
and control transfers to the client. Revenue is recognized upon the
commencement of the term of the software license agreement or when
the renewal term begins, as applicable. This is a change from our
accounting treatment prior to the adoption of Topic 606, whereby
revenue from renewals of software licenses was recognized when the
parties agreed to the renewal or extension, provided that all other
revenue recognition criteria had been met.
Although the revenue recognition treatment for term software
license renewals has changed as described above, a substantial
portion of the software licenses we sell are perpetual software
licenses and do not require renewal or extension after their
initial purchase by the client. Such perpetual licenses are
periodically subject to true-up, pre-existing true-ups true-up, true-up
Software Maintenance
Software maintenance agreements provide our clients with the right
to obtain any software upgrades, bug fixes and help desk and other
support services directly from the software publisher at no
additional charge during the term of the software maintenance
agreements. We act as the software publisher’s agent in
selling these software maintenance agreements and do not assume any
performance obligation to the client under the agreements. As a
result, we are the agent in these transactions and these sales are
recorded on a net sales recognition basis. Under net sales
recognition, the cost of the software maintenance agreement is
recorded as a reduction to sales, resulting in net sales equal to
the gross profit on the transaction, and there are no costs of
goods sold. Because we are acting as the software publisher’s
agent, revenue is recognized when the parties agree to the initial
purchase, renewal or extension as our agency services are then
complete. This is consistent with our accounting treatment prior to
the adoption of Topic 606. As discussed in Note 10, we report all
fees earned from activities reported net within our services net
sales category in our statements of operations.
Cloud / Software-as-a-Service
Cloud or software-as-a-service software-as-a
Services Sales
We design, procure, deploy, implement and manage solutions that
combine hardware, software and services to help businesses run
smarter. Such services are provided by us or
third-party sub-contract
We recognize revenue for sales of services by measuring progress
toward complete satisfaction of the related service performance
obligation. Billings for such services that are made in advance of
the related revenue recognized are recorded as a contract
liability.
Specific revenue recognition practices for certain of our services
offerings are described in further detail below.
Time and Materials Services
Contracts.
Fixed Fee Services Contracts.
OneCall Support Services
Contracts.
On our balance sheet, a significant portion of our contract
liabilities balance relates to OneCall support services agreements
for which clients have paid or have been invoiced but for which we
have not yet recognized the applicable services revenue. We also
defer incremental direct costs to fulfill our service contracts
that we prepay to third parties for direct support of our
fulfillment of the service contract to our clients under our
contract terms and amortize them into operations over the term of
the contracts.
The recognition of revenue and related costs for our stand ready
obligation under our OneCall service contracts on a straight-line
basis over the term of the contract is consistent with our
accounting treatment prior to the adoption of Topic 606.
Vendor Direct Support Services
Contracts. follow-up
Third-party Provided Services. sub-contractor sub-contractor
Disaggregation of Revenue
In the following table, revenue is disaggregated by our reportable
operating segments, which are primarily defined
by
Three Months Ended June 30,
2018
North EMEA APAC Consolidated
Major Product Offering
Hardware $ 898,144 $ 171,337 $ 9,317 $ 1,078,798
Software 308,269 193,116 39,591 540,976
Services 163,037 41,827 12,282 217,146
$ 1,369,450 $ 406,280 $ 61,190 $ 1,836,920
Major Client Groups
Large Enterprise / Corporate $ 1,007,090 $ 295,539 $ 13,776 $ 1,316,405
Public Sector 135,709 94,487 28,862 259,058
Small and Medium-Sized 226,651 16,254 18,552 261,457
$ 1,369,450 $ 406,280 $ 61,190 $ 1,836,920
Revenue Recognition based on acting as Principal or Agent in the
Transaction
Gross revenue recognition (Principal) $ 1,304,208 $ 378,079 $ 56,460 $ 1,738,747
Net revenue recognition (Agent) 65,242 28,201 4,730 98,173
$ 1,369,450 $ 406,280 $ 61,190 $ 1,836,920
Six Months Ended June 30,
2018
North EMEA APAC Consolidated
Major Product Offering
Hardware $ 1,771,485 $ 358,347 $ 16,477 $ 2,146,309
Software 598,745 378,034 78,841 1,055,620
Services 306,618 70,314 20,962 397,894
$ 2,676,848 $ 806,695 $ 116,280 $ 3,599,823
Major Client Groups
Large Enterprise / Corporate $ 1,986,984 $ 561,460 $ 26,810 $ 2,575,254
Public Sector 247,313 211,101 58,793 517,207
Small and Medium-Sized 442,551 34,134 30,677 507,362
$ 2,676,848 $ 806,695 $ 116,280 $ 3,599,823
Revenue Recognition based on acting as Principal or Agent in the
Transaction
Gross revenue recognition (Principal) $ 2,563,697 $ 761,156 $ 109,380 $ 3,434,233
Net revenue recognition (Agent) 113,151 45,539 6,900 165,590
$ 2,676,848 $ 806,695 $ 116,280 $ 3,599,823
Contract Balances
The following table provides information about receivables,
contract assets and contract liabilities as of June 30, 2018
and January 1, 2018 (in thousands):
June 30, January 1,
Current receivables, which are included in “Accounts
receivable, net” $ 2,161,077 $ 1,909,074
Non-current 27,703 32,227
Contract assets, which are included in “Other current
assets” 959 595
Contract liabilities, which are included in “Deferred
revenue” and “Other liabilities” 85,489 86,743
Significant changes in the contract assets and the contract
liabilities balances during the six months ended June 30, 2018
are as follows (in thousands):
Increase (Decrease)
Contract Contract
Balances at January 1, 2018 $ 595 $ 86,743
Reclassification of the beginning contract liabilities to revenue,
as the result of performance obligations satisfied
— (44,644 )
Cash received in advance and not recognized as revenue
— 43,865
Reclassification of the beginning contract assets to receivables,
as the result of rights to consideration becoming unconditional (590 )
—
Contract assets recognized, net of reclassification to
receivables 954
—
Cumulative catch-up
— (475 )
Balances at June 30, 2018 $ 959 $ 85,489
Transaction price allocated to the remaining performance
obligations
The following table includes estimated net sales related to
performance obligations that are unsatisfied (or partially
unsatisfied) as of June 30, 2018 that are expected to be
recognized in the future (in thousands):
Products Services Total
Remaining six months of 2018 $ 6 $ 66,087 $ 66,093
2019 13 54,389 54,402
2020 6 23,201 23,207
2021
— 8,154 8,154
2022
— 3,715 3,715
2023
— 1,350 1,350
2024 and thereafter
— 138 138
Total remaining performance obligations $ 25 $ 157,034 $ 157,059
Topic 606 allows for certain practical expedients which we have
elected to apply. As a result, we do not disclose information about
remaining performance obligations that have original expected
durations of one year or less in the table above. Amounts not
included in the table above have an average original expected
duration of eight months. Additionally, for our time and material
contracts, whereby we have the right to consideration from a client
in an amount that corresponds directly with the value to the client
of our performance completed to date, we recognized revenue in the
amount to which we have a right to invoice as of June 30, 2018
and do not disclose information about related remaining performance
obligations in the table above. Our time and material contracts
have an average expected duration of 13 months.
The majority of our backlog historically has been and continues to
be open cancelable purchase orders. We do not believe that backlog
as of any particular date is predictive of future results,
therefore we do not include performance obligations under open
cancelable purchase orders, which do not qualify for revenue
recognition in accordance with Topic 606 as of June 30, 2018,
in the table above.
Assets recognized for costs of obtaining a contract with a
customer
We believe that the only significant incremental costs incurred to
obtain contracts with our clients within the scope of Topic 606 are
sales commissions. The majority of our contracts are completed
within a one-year |
