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Exhibit 99.2

 

LOGO

Quarterly Report — June 30, 2017

CompuCom Systems, Inc. & Subsidiaries


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Table of Contents

 

     Page  

I. Financial Statements (unaudited)

  

Consolidated Balance Sheets

     3  

Consolidated Statements of Operations

     4  

Consolidated Statements of Comprehensive Income

     5  

Consolidated Statements of Cash Flows

     6  

Notes to Consolidated Financial Statements

     7  

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

     34  

III. Reconciliation of Net Loss to Adjusted EBITDA

     44  


CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend” and similar expressions. These statements include, among other items, statements regarding our expected business outlook, anticipated financial position and operating results, our business strategy and means to implement our strategy, our objectives, industry trends, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. You should not put undue reliance on our forward-looking statements. These statements are based on our management’s beliefs and assumptions, which, in turn, are based on currently available information. These assumptions could prove inaccurate. Forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from these forward-looking statements as a result of a wide variety of factors, including various risks discussed in “Risk Factors” in our Offering Memorandum dated May 2, 2013 and elsewhere in this quarterly report.

Accordingly, we urge you to read this quarterly report completely and with the understanding that actual future results may be materially different from our plans or expectations, including the forward-looking statements in this quarterly report. In addition, these forward-looking statements present our estimates and assumptions only as of the date of this quarterly report. Except as required by applicable law, including the federal securities laws, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.

In this quarterly report, references to “CompuCom,” the “Company,” “we,” “us” and “our” refer to CompuCom Systems, Inc. and its subsidiaries unless expressly stated otherwise or unless the context indicates otherwise.


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share amounts)

 

     June 30,
2017
    December 31,
2016
 
     (unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 24,620       64,943  

Receivables, net

     231,309       263,336  

Inventories

     21,672       24,961  

Deferred income taxes

     11,063       11,004  

Prepaids and other current assets

     26,343       20,428  
  

 

 

   

 

 

 

Total current assets

     315,007       384,672  

Property and equipment, net

     72,873       60,257  

Goodwill

     177,848       174,048  

Other intangible assets, net

     436,934       448,257  

Deferred income taxes

     2,414       2,282  

Other long-term assets

     13,077       12,800  
  

 

 

   

 

 

 

Total assets

   $ 1,018,153       1,082,316  
  

 

 

   

 

 

 
Liabilities, Redeemable Noncontrolling Interest and Stockholder’s Deficit     

Current liabilities:

    

Accounts payable

   $ 83,682       143,333  

Accrued liabilities

     107,147       121,942  

Current portion of long-term debt

     9,832       6,595  
  

 

 

   

 

 

 

Total current liabilities

     200,661       271,870  

Long-term debt, less current portion

     765,744       763,785  

Deferred income taxes

     129,482       132,993  

Obligations under build-to-suit lease transactions

     22,148       9,626  

Other long-term liabilities

     10,864       14,123  
  

 

 

   

 

 

 

Total liabilities

     1,128,899       1,192,397  
  

 

 

   

 

 

 

Redeemable noncontrolling interest

     10,761       13,895  

Stockholder’s deficit:

    

Common stock, $0.01 par value; 1,000 shares authorized; 100 shares issued and outstanding

     —         —    

Additional paid-in capital

     317,075       317,007  

Accumulated other comprehensive loss

     (2,396     (5,988

Accumulated deficit

     (436,186     (434,995
  

 

 

   

 

 

 

Total stockholder’s deficit

     (121,507     (123,976
  

 

 

   

 

 

 

Total liabilities, redeemable noncontrolling interest, and stockholder’s deficit

   $ 1,018,153       1,082,316  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands)

(unaudited)

 

    

Three months

ended June 30,

   

Six months

ended June 30,

 
     2017     2016     2017     2016  

Revenue:

        

Service

   $ 212,013       229,352       421,808       449,241  

Product

     57,403       54,372       106,883       106,415  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     269,416       283,724       528,691       555,656  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Service

     146,314       157,306       294,781       314,205  

Product

     39,584       39,802       73,929       78,818  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     185,898       197,108       368,710       393,023  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     83,518       86,616       159,981       162,633  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling, general and administrative

     67,639       71,574       137,339       141,211  

Restructuring costs

     672       628       1,990       1,174  

Acquisition related costs

     268       —         301       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     68,579       72,202       139,630       142,385  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     14,939       14,414       20,351       20,248  

Gain on debt extinguishment

     —         5,299       —         5,299  

Other income

     1,065       484       990       392  

Financing expenses, net

     (11,585     (11,171     (23,202     (22,472
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     4,419       9,026       (1,861     3,467  

Income tax expense (benefit)

     (2,329     5,473       (113     2,281  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     6,748       3,553       (1,748     1,186  

Less: Net income attributable to noncontrolling interest

     506       —         941       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to CompuCom

   $ 6,242       3,553       (2,689     1,186  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)

 

     Three months
ended June 30,
    Six months
ended June 30,
 
     2017      2016     2017     2016  

Net income (loss)

   $ 6,748        3,553       (1,748     1,186  

Other comprehensive gain (loss), net of tax

         

Foreign currency translation adjustment

     1,495        (404     2,465       2,144  

Net unrealized gain (loss) on foreign currency hedges

     99        (136     1,127       50  
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive gain (loss), net of tax

     1,594        (540     3,592       2,194  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income

     8,342        3,013       1,844       3,380  

Less: Comprehensive income attributable to noncontrolling interest

     506        —         941       —    
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to CompuCom

   $ 7,836        3,013       903       3,380  
  

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

    

Six months

ended June 30,

 
     2017     2016  

Cash flows from operating activities:

    

Net income (loss)

   $ (1,748     1,186  

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Depreciation and amortization

     18,229       16,931  

Amortization of debt issuance costs and debt discount

     2,162       2,165  

Loss (gain) from equity method investments, net

     (164     77  

Amortization of capital lease asset

     —         157  

Gain from foreign currency transactions

     (477     (917

Amortization of vendor financed costs

     3,860       2,357  

Stock compensation expense

     68       96  

Gain on extinguishment of debt

     —         (5,299

Deferred income taxes

     (3,543     586  

Changes in assets and liabilities:

    

Receivables

     29,785       12,155  

Inventories

     3,521       (7,062

Other assets

     (1,223     1,700  

Accounts payable

     (58,526     (22,270

Accrued liabilities and other

     (13,483     (6,667
  

 

 

   

 

 

 

Net cash used in operating activities

     (21,539     (4,805
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (6,805     (13,929

Business acquisitions, net of cash acquired

     (3,796     —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,601     (13,929
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payment for mandatorily redeemable noncontrolling interest

     (5,987     —    

Proceeds from receivables Securitization

     22,000       —    

Repayment of receivables Securitization

     (22,000     —    

Repayment of long-term borrowings

     —         (13,527

Repayment of notes payable

     (4,436     (1,862

Distribution to noncontrolling interest

     (2,578     —    

Proceeds received from landlord under build-to-suit financing

     3,690       —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (9,311     (15,389
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1,128       1,299  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (40,323     (32,824

Cash and cash equivalents at beginning of period

     64,943       95,899  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 24,620       63,075  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(1) Description of Business and Summary of Significant Accounting Policies

 

  (a) Description of Business

Throughout this report, the terms “we,” “our,” “CompuCom,” and the “Company” refer to CompuCom Systems, Inc. and its subsidiaries. We are a leading provider of information technology (IT) outsourcing services and products to North American enterprise organizations. We offer a broad range of solutions that includes end user computing (tablets, smartphones, laptops and desktops), data center management, service desk, network infrastructure and IT workforce solutions. Our largest service offering is end user computing, which provides on-site services to assist corporate end users with their IT needs. Over the last few years, we have expanded into emerging areas which require platform expertise and management, including mobile device management and cloud services.

We were incorporated in Delaware on March 23, 1989, and our corporate headquarters are located in Charlotte, North Carolina. We operate our business in two segments: Service and Product.

 

    Through our Service segment, we deliver innovative services through a customer-centric sales and delivery model. Our expertise enables us to deliver a comprehensive IT infrastructure management solution to our customers.

 

    Through our Product segment, we offer broad vendor-neutral product and product-related service offerings, which enables our enterprise customers to turn to a trusted party to procure and deploy hardware and software.

As a result of a merger transaction completed in September 2007, CompuCom became a wholly owned subsidiary of CompuCom Systems Holding Corp. (Parent). Parent was in turn owned by Court Square Capital Partners (Court Square) and certain members of the Company’s management.

On April 5, 2013, Compiler Holdings LLC (Super Holdings), Compiler Merger Sub Inc. (Merger Sub) and Compiler Finance Sub. Inc. (Finance Sub), each of which is an affiliate of Thomas H. Lee Partners, L.P. (together with its controlled affiliates and funds managed or advised by it or its controlled affiliates, THL), Parent, the Company and CSC Shareholder Services LLC, entered into an Agreement and Plan of Merger (as amended or restated, the Merger). On May 9, 2013, Finance Sub merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent, and Merger Sub merged with and into Parent, with Parent surviving (the Merger). Upon consummation of the Merger, Parent was owned approximately 99.3% by Super Holdings and 0.7% by certain members of the Company’s management, whereas Super Holdings is a wholly-owned subsidiary of THL Portfolio Holdings Corp. (THL Holdings). Immediately after the consummation of the Merger, the holders of Parent’s common stock transferred such common stock to CompuCom Intermediate Holdings, Inc., a newly formed Delaware corporation (Intermediate Holdings) in exchange for Intermediate Holdings common stock, and immediately following such transfer, Parent converted into a Delaware limited liability company and changed its name to CompuCom Systems Holding LLC (these transactions, together with the Merger, are herein referred to as the Acquisition).

 

7


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

  (b) Basis of Presentation

The interim-period financial information presented in the consolidated financial statements included in this report is unaudited and, in the opinion of management, includes all adjustments of a normal recurring nature necessary to present fairly the consolidated financial position as of June 30, 2017, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, and our consolidated cash flows for the six months ended June 30, 2017 and 2016.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and on the same basis as the audited financial statements included in our annual report for the year ended December 31, 2016. Certain information and note disclosures normally included in annual consolidated financial statements have been omitted. Because the consolidated interim financial statements do not include all of the information and notes required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report for the year ended December 31, 2016.

 

  (c) Consolidation

The consolidated financial statements include the accounts of CompuCom and its wholly-owned subsidiaries, and a certain variable interest entity where CompuCom is the primary beneficiary. For consolidated entities, where the Company owns less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in the statement of operations equal to the percentage of the ownership interest retained in such entities by the respective noncontrolling parties. All significant intercompany balances and transactions have been eliminated. The Company accounts for investments over which it has significant influence but not controlling financial interest using the equity method of accounting.

 

  (d) Accounting Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. CompuCom bases its estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

 

8


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

  (e) Accounting Standards

Recently Issued Accounting Standards

In May 2017, The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The Board is issuing this Update to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. This ASU is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently assessing the impact of this guidance on the consolidated financial statements.

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350 currently requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 addresses concerns over the cost and complexity of the two-step goodwill impairment test by removing the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU will become effective for goodwill impairment tests in fiscal years beginning after December 15, 2021, with early adoption permitted beginning with impairment tests performed after January 1, 2017. The Company is currently assessing the impact of this guidance on the consolidated financial statements.

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which adds guidance to assist companies in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as businesses, and provides for a screen to determine when a transaction should be accounted for as the acquisition or disposal of assets and not of a business, potentially reducing the number of transactions that need to be further evaluated. This ASU will become effective in fiscal year 2019, applied on a prospective basis, and early application is allowed for certain transactions. The Company is currently assessing the impact of this guidance on the consolidated financial statements.

 

9


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-05 will addresses eight specific cash flow issues to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim reporting periods. The Company is currently assessing the impact of this guidance on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. ASU 2014-09 provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts with customers to provide goods and services. ASU 2014-09 also requires entities to disclose both quantitative and qualitative information to enable users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted for annual reporting periods beginning after December 15, 2017. We are currently assessing the guidance prescribed by ASU 2014-09, and we have not yet determined the impact the adoption of this standard will have on our consolidated financial statements.

The FASB has issued several more amendments to the new revenue standard ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date):

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. ASU 2016-20 represents changes for minor corrections or minor improvements to the Codification that are not expected to have a significant effect on the current accounting practice or create a significant administrative cost to most entities.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients. ASU 2016-12 clarifies certain core recognition principles including collectability, sales tax presentation, noncash consideration, evaluating contract modifications and completed contracts at transition, and the disclosure requirement for the effect of the accounting change for the period of adoption.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 covers two specific topics: performance obligations and licensing. This amendment includes guidance on immaterial promised goods or services, shipping or handling activities, separately identifiable performance obligations, functional or symbolic intellectual property licenses, sales-based and usage-based royalties, license restrictions and licensing renewals.

 

10


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross verses Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist any entity in determining whether it controls a specified good or service before it is transferred to the customers.

This guidance is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted for annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact that adopting these new accounting standards will have on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU requires excess tax benefits and tax deficiencies, which arise due to differences between the measure of compensation expense and the amount deductible for tax purposes, to be recorded directly through the income statement as a component of income tax expense. Under current GAAP, these differences are generally recorded in additional paid-in capital and thus have no impact on net income. The change in treatment of excess tax benefits and tax deficiencies will also impact the computation of diluted earnings per share, and the cash flows associated with those items will be classified as operating activities on the statement of cash flows. The ASU will permit certain elective changes associated with stock compensation accounting. For example, companies can elect to account for forfeitures of awards as they occur rather than projecting forfeitures in the accrual of compensation expense. In addition, the ASU increases the proportion of shares an employer is permitted (though not required) to withhold on behalf of an employee to satisfy the employee’s income tax burden on a share-based award without causing the award to become subject to liability accounting. This ASU will become effective for the Company on January 1, 2018 and the Company is in the process of evaluating its impact. Upon adoption, the cumulative amounts associated with previous excess tax benefits will be reclassified from additional paid-in capital to retained earnings.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as lease assets and lease liabilities. The new standard requires the lessee to classify leases as either finance or operating based on the principle of whether or not the lease is effectively a financed purchase by the lessee. The classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. This ASU will become effective for the Company on January 1, 2020 and the Company is currently assessing the impact of this guidance on its consolidated financial statements.

 

11


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 will address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company adopted the provision of the standard which permits the omission of fair value disclosures for financial instruments carried at amortized cost. The remaining provisions of the standard become effective in the annual reporting period beginning after December 15, 2018, including interim reporting periods. The Company does not expect the remaining provisions of ASU 2016-01 to have a material effect on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The guidance in ASU 2015-17 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2017, with early adoption permitted. The guidance is a change in financial statement presentation only and will not have a material impact on the consolidated financial position, results of operations, or cash flows.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to account for adjustments identified during the measurement-period in a business combination retrospectively. Instead, the acquirer must recognize measurement-period adjustments during the period in which they are identified, including the effect on earnings of any amounts that would have been recorded in previous periods had the purchase accounting been completed at the acquisition date. This ASU will be effective for the Company for the fiscal year beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The adoption of ASU 2015-16 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 changes the measurement principle for inventories valued under the First-In, First-Out (FIFO) or weighted-average methods from the lower of cost or market to the lower of cost or net realizable value. Net realizable value is defined by the FASB as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The adoption of this standard will not have a material impact on the consolidated financial statements.

 

  (f) Revisions to Prior Year Financial Statements

Subsequent to the issuance of the consolidated financial statements, the Company concluded that it did not properly record foreign currency gains and losses on intercompany balances for the three and six months ended June 30, 2016. The Company concluded the effects of this error to the consolidated financial statements were not material to the accounts as previously presented and has revised the previously reported consolidated financial statements for the three and six months ended June 30, 2016 to appropriately correct this error. As a result of the revision, the Company is adjusting June 30, 2016 financial results to record this and additional inconsequential miscellaneous errors in the correct period.

 

12


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

The tables below present the impact of the adjustments recorded to correct the Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income, and Consolidated Statements of Cash Flows for the three and six months ended June 30, 2016 (in thousands):

 

     For the three months ended June 30, 2016  
     As previously
reported
    Impact of
revision
    As revised  

Consolidated Statements of Operations

      

Total revenue

   $ 283,720     $ 4     $ 283,724  

Total cost of revenue

     (197,177     69       (197,108
  

 

 

   

 

 

   

 

 

 

Gross margin

     86,543       73       86,616  

Selling, general and administrative expenses

     (71,461     (113     (71,574

Total operating expenses

     (72,089     (113     (72,202

Income from operations

     14,454       (40     14,414  

Income before income taxes

     9,066       (40     9,026  

Income tax expense

     (5,564     91       (5,473
  

 

 

   

 

 

   

 

 

 

Net income

     3,502       51       3,553  
  

 

 

   

 

 

   

 

 

 

Consolidated Statements of Comprehensive Income

      

Net income

     3,502       51       3,553  

Foreign currency translation adjustment

     (409     5       (404

Other comprehensive income (loss), net of taxes

     (545     5       (540

Total comprehensive income

     2,957       56       3,013  

 

13


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

     For the six months ended June 30, 2016  
     As previously
reported
    Impact of
revision
    As revised  

Consolidated Statements of Operations

      

Total revenue

   $ 555,148     $ 508     $ 555,656  

Total cost of revenue

     (393,160     137       (393,023
  

 

 

   

 

 

   

 

 

 

Gross margin

     161,988       645       162,633  

Selling, general and administrative expenses

     (141,912     701       (141,211

Total operating expenses

     (143,086     701       (142,385

Income from operations

     18,902       1,346       20,248  

Income before income taxes

     2,120       1,347       3,467  

Income tax expense

     (1,507     (774     (2,281
  

 

 

   

 

 

   

 

 

 

Net income

     613       573       1,186  
  

 

 

   

 

 

   

 

 

 

Consolidated Statements of Comprehensive Income

      

Net income

     613       573       1,186  

Foreign currency translation adjustment

     3,061       (917     2,144  

Other comprehensive income, net of taxes

     3,111       (917     2,194  

Total comprehensive income

     3,724       (344     3,380  

Consolidated Statements of Cash Flows

      

Net income

     613       573       1,186  

Gain from foreign currency transactions

     —         (917     (917

Receivables

     12,751       (596     12,155  

Deferred income taxes

     339       246       585  

Accrued liabilities and other

     (7,361     694       (6,667
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (4,805     —         (4,805

 

14


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(2) Acquisitions

On January 19, 2017, the Company acquired 100% of the membership interests in EXT-IOT, LLC, a company engaged in the business of the development, marketing, sales and implementation of an internet of things offering and portfolio in Florida and across the United States. The total purchase price of EXT-IOT consisted of cash consideration of $2.0 million and potential future cash consideration contingent on earnings targets. The estimated fair value of the consideration paid on the acquisition date has been allocated as $1.2 million to goodwill, $0.8 million to identifiable intangible assets, and an insignificant portion to property and equipment.

On May 1, 2017, the Company acquired 100% of the membership interests in LNS Technologies, Inc. (LNS), a company engaged in the business of providing information technology support, cloud solutions and information security solutions to small businesses. The total purchase price of LNS included cash consideration of $1.8 million and potential future cash consideration contingent on earnings targets. The fair value of the consideration paid has been allocated to goodwill.

On August 1, 2016, the Company acquired 40% of the membership interests in ClearPath Holdings, LLC (ClearPath), a regional value added reseller and integrator of data center-focused technologies. Under the terms of the agreement, the Company assumed an obligation to purchase an additional 15% of the membership interests in ClearPath in the second quarter of 2017. On June 16, 2017, the Company completed the mandatory obligation to purchase an additional 15% by redeeming a portion of the noncontrolling interest for a cash consideration of $6.0 million.

The process for estimating the fair values of identified intangible assets and assumed liabilities requires the use of judgment to determine the appropriate assumptions. The Company’s purchase price allocations are preliminary and subject to revision as more detailed analyses are completed and additional information about the fair value of the assets and liabilities becomes available. ASC 805 defines the measurement period by which purchase price adjustments should be finalized as not to exceed one year from the acquisition date. The amounts related to the acquisitions are allocated to the assets acquired and the liabilities assumed and are included in the Company’s unaudited Consolidated Balance Sheet as of June 30, 2017. The Company incurred $0.3 million of acquisition costs for both the three months and six months ended June 30, 2017, and an insignificant amount of acquisition related costs for the three and six months ended June 30, 2016, which are included in Acquisition related costs in the Consolidated Statements of Operations.

 

15


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(3) Stock Compensation Expense

In August 2013, Intermediate Holdings implemented a management stock compensation plan, whereby certain members of the Company’s management were granted nonqualified employee stock options. Total stock compensation expense for both the three and six months ended June 30, 2017 was $0.1 million, and for the three and six months ended June 30, 2016 was ($0.1) million and $0.1 million, respectively, and is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.

 

(4) Inventories

Inventories consist of inventory held for resale to our Product customers, as well as spare parts maintained to perform future repair services for our Service customers. We value our inventory at the lower of average cost or market through the establishment of loss reserves. The Company continually assesses the appropriateness of inventory valuations giving consideration to obsolete and slow-moving inventory. Net Product inventories were $15.7 million and $19.3 million at June 30, 2017 and December 31, 2016, respectively. Net Service inventories were $6.0 million and $5.7 million at June 30, 2017 and December 31, 2016, respectively. All inventory held as of June 30, 2017 and December 31, 2016 was considered to be finished goods inventory.

 

(5) Property and Equipment

The following is a summary of property and equipment at June 30, 2017 and December 31, 2016 (in thousands):

 

     June 30,
2017
     December 31,
2016
 

Computer equipment

   $ 23,602        23,662  

Computer software and licenses

     42,271        42,148  

Leasehold improvements

     18,112        14,913  

Furniture and other equipment

     9,088        7,731  

Buildings

     12,570        12,570  

Construction in progress

     13,042        —    
  

 

 

    

 

 

 

Subtotal

     118,685        101,024  

Less accumulated depreciation

     (45,812      (40,767
  

 

 

    

 

 

 

Total

   $ 72,873        60,257  
  

 

 

    

 

 

 

 

16


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

For build-to-suit lease arrangements, the Company evaluates lease terms to assess whether, for accounting purposes, it should be “deemed owner” of the construction project. Under build-to-suit lease arrangements, the Company establishes an asset and a corresponding financing obligation for the estimated construction costs of the shell facility. Improvements to the facilities during the construction project are capitalized, and, to the extent funded by a tenant improvement allowance, the financing obligation is increased. Upon completion of construction and occupancy of the facility, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company does not comply with the provisions needed for sale-leaseback accounting, the lease will be accounted for as a financing obligation and lease payments will be attributed to 1) a reduction of the principal financing obligation; 2) imputed interest expense; and 3) land lease expense representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over the building’s useful life and at the conclusion of the lease term, the Company would de-recognize the net book values of both the asset and financing obligation.

Construction began on a newly leased office space in January 2017 that has a term of 15 years with the option to extend the lease for four consecutive terms of five years each. As a result of our involvement during the construction period of the building, we were “deemed owner” of the construction project. As of June 30, 2017, in accordance with the build-to-suit lease accounting rules discussed above, the Company has recorded estimated project construction costs incurred by the landlord of $12.5 million as an asset and a corresponding long term liability in Property and equipment, net and Obligations under build-to-suit lease transactions, respectively, on our Consolidated Balance Sheets. The estimated project construction costs incurred by the landlords and subsequent costs incurred by the Company to improve the facilities are included in Construction in progress in the above table. Upon completion of the project, the Company will assess whether these assets and liabilities qualify for derecognition under the sale-leaseback accounting guidance.

Depreciation expense related to property and equipment was $3.1 million and $6.1 million for the three and six months ended June 30, 2017, respectively, and it was $2.3 million $4.7 million for the three and six months ended June 30, 2016, respectively, and is included in Selling, general, and administrative expenses in the Consolidated Statements of Operations.

 

17


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(6) Identifiable Intangible Assets

Identifiable intangible assets result from the purchase price allocations of the Company’s business combinations. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. Indefinite-lived intangible assets are evaluated for impairment annually or when events or circumstances warrant a valuation analysis. The following tables provide a summary of CompuCom’s identifiable intangible assets as of June 30, 2017 and December 31, 2016 (in thousands):

 

            June 30, 2017  
     Amortization
period
     Gross
carrying
value
     Accumulated
amortization
     Net  

Amortizable intangible assets:

           

Customer-related

     1 – 20 years      $ 538,267        (226,559      311,708  

Indefinite-lived intangible assets:

           

Trade name

     N/A        125,226        N/A        125,226  
     

 

 

    

 

 

    

 

 

 

Total net identifiable intangible assets

      $ 663,493        (226,559      436,934  
     

 

 

    

 

 

    

 

 

 
            December 31, 2016  
     Amortization
period
     Gross
carrying
value
     Accumulated
amortization
     Net  

Amortizable intangible assets:

           

Customer-related

     1 – 20 years      $ 537,700        (214,443      323,257  

Indefinite-lived intangible assets:

           

Trade name

     N/A        125,000        N/A        125,000  
     

 

 

    

 

 

    

 

 

 

Total net identifiable intangible assets

      $ 662,700        (214,443      448,257  
     

 

 

    

 

 

    

 

 

 

Amortization expense related to intangible assets with definite useful lives was $6.0 million and $12.1 million for the three and six months ended June 30, 2017, respectively, and it was $6.1 million and $12.2 million for the three and six months ended June 30, 2016, respectively. Expected amortization expense related to intangible assets with definite useful lives subsequent to June 30, 2017 is as follows (in thousands):

 

2017 (remaining)

     12,115  

2018

     24,230  

2019

     24,133  

2020

     23,808  

2021

     23,808  

2022 and after

     203,614  
  

 

 

 
     $311,708  
  

 

 

 

 

18


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(7) Equity Method Investments

In December of 2015, the Company purchased an undivided 20% interest in each of the assets of High Performance Technologies, LLC (HPT) via the acquisition of 2,000,000 units for $1.8 million. HPT is a regional value added reseller specializing in the delivery of high performance data solutions. The carrying amount in the investment in HPT was $1.6 million and $1.4 million at June 30, 2017 and December 31, 2016, respectively, and is included in Other long-term assets on the Consolidated Balance Sheet and accounted for as an equity method investment. Under this method of accounting, the Company recognizes its share of the investments’ earnings and losses, which is included in Other loss in the Consolidated Statements of Operations.

 

(8) Accrued Liabilities

The following is a summary of accrued liabilities at June 30, 2017 and December 31, 2016 (in thousands):

 

     June 30,
2017
     December 31,
2016
 

Employee related accruals

   $ 38,606        40,402  

Deferred revenue

     16,067        19,547  

Accrued vendor refunds

     4,233        3,706  

Accrued interest

     3,633        3,531  

Accrued sales and property tax

     5,722        6,101  

Accrued sub-contractor expense

     6,980        9,094  

Accrued customer rebates and reimbursements

     1,493        2,675  

Vendor contracts accrual

     6,381        6,472  

Accrued occupancy costs

     631        481  

Accrued federal and state income taxes

     1,829        514  

Accrued professional services

     3,695        4,529  

Accrued freight

     777        1,352  

Lease termination accrual

     3,459        5,503  

Mandatorily redeemable noncontrolling interest liability

     —          5,189  

Other

     13,641        12,846  
  

 

 

    

 

 

 

Total

   $ 107,147        121,942  
  

 

 

    

 

 

 

 

19


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(9) Financing Arrangements

The following is a summary of amounts outstanding under CompuCom’s financing arrangements at June 30, 2017 and December 31, 2016 (in thousands):

 

     June 30,
2017
     December 31,
2016
 

Long-term debt:

     

Term Loan

   $ 559,983        559,983  

Senior Notes

     215,000        215,000  

Securitization

     —          —    

Notes payable

     10,776        7,543  

Other debt

     2,245        2,342  
  

 

 

    

 

 

 

Total debt obligations

     788,004        784,868  

Less unamortized discount on Term Loan

     (1,261      (1,471

Less unamortized debt issuance costs

     (11,167      (13,016

Less current portion of notes payable

     (7,813      (4,581

Less current portion of other debt

     (2,019      (2,015
  

 

 

    

 

 

 

Total long-term debt

   $ 765,744        763,785  
  

 

 

    

 

 

 

Interest expense on long-term debt borrowings was $11.7 million and $23.4 million for the three and six months ended June 30, 2017, respectively, and it was $11.3 million and $22.6 million for the three and six months ended June 30, 2016, respectively, and is included in Financing expenses, net, in the Consolidated Statements of Operations.

There was an immaterial amount of interest income earned for all periods presented, which is included in Financing expenses, net, in the Consolidated Statements of Operations.

Expected maturities of long-term debt subsequent to June 30, 2017 are as follows (in thousands):

 

2017 (remaining)

   $ 7,794  

2018

     2,142  

2019

     639  

2020

     561,153  

2021

     216,276  
  

 

 

 
     $788,004  
  

 

 

 

 

20


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

  (a) Term Loan

On May 9, 2013, the Company entered into a new $605.0 million Term Loan in connection with the Acquisition. The Term loan was issued at 99.5% of face value, resulting in net proceeds of $602.0 million. Amortization of the debt discount was $0.1 million and $0.2 million for both the three and six months ended June 30, 2017 and 2016, respectively, which is included in Financing expenses, net, in the Consolidated Statements of Operations. The Term Loan accrues interest at a rate of 3.25%, plus the greater of 1% or an adjusted LIBOR rate. In addition, the Company is required to make annual principal payments based on an excess cash flow calculation defined in the debt agreement. The excess cash flow calculation is the maximum mandatory prepayment for which the Company is obligated; however, each lender can elect to decline all of its applicable percentage of such prepayment. These payments are due five business days after the date on which the consolidated financial statements are required to be delivered. In accordance with the cash flow calculation based on the Company’s results for the year ended December 31, 2016, the Company is not required to make a principal payment in 2017. Any mandatory prepayments made by the Company shall be applied against the remaining scheduled quarterly principal payments. Due to the mandatory prepayments discussed above, we are not required to make any quarterly principal payments for the remainder of the Term Loan. The weighted average annualized interest rate was 4.3% for all periods presented.

The Term Loan has a maturity date of May 9, 2020 and is unconditionally guaranteed by Parent and each of its direct and indirect present and future domestic subsidiaries, except for certain excluded subsidiaries. The Term Loan is collateralized by a grant of security interest in, subject to certain customary exceptions, each credit party’s present and future tangible and intangible assets as noted in the agreement.

 

  (b) Senior Notes

On May 9, 2013, in connection with the Acquisition, the Company issued senior notes (Senior Notes) via an initial purchaser to qualified institutional buyers in an aggregate principal amount of $225.0 million under the terms of an indenture (Indenture) pursuant to Rule 144A under the Securities Act of 1933 (the Securities Act) and outside the United States in accordance with Regulation S under the Securities Act. The Senior Notes are exempt from registration under the Securities Act or any state securities laws. The Senior Notes bear interest at a rate of 7.0% per year, and interest is payable on May 1 and November 1 of each year. The Senior Notes have a maturity date of May 1, 2021, and they are fully and unconditionally guaranteed, jointly and severally on a senior unsecured basis by each of the Company’s subsidiaries that guarantee the Term Loan. These Senior Notes provide optional redemption privileges at redemption prices as set forth in the Indenture.

In May 2016, the Company entered into a transaction with a Senior Note holder to purchase an aggregate principal amount of $10.0 million of Senior Notes for $4.5 million. In connection with this transaction, the Company recorded a gain on debt extinguishment of $5.3 million comprised of a $5.5 million gain from the Senior Notes purchased, offset by a write-off of $0.2 million of unamortized debt issuance costs related to the purchased Senior Notes. The Company funded the transaction using cash on hand.

 

21


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

  (c) Receivables Securitization Facility

The receivables securitization facility (Securitization) is a financing vehicle utilized by the Company because it offers attractive rates relative to other financing sources. The Securitization’s pricing is based on LIBOR plus 1.5%. The short-term interest rate, inclusive of the spread, was 2.7% and 2.3% as of June 30, 2017 and December 31, 2016, respectively. Under this arrangement, the Company and its wholly owned Canadian subsidiary sell their respective US and Canadian eligible trade accounts receivable, not to exceed $150.0 million, to their respective wholly owned, consolidated, special purpose finance corporations, CSI Funding, Inc. and CSI Funding Canada Co. (the SPCs). The SPCs have sold and, subject to certain conditions, may from time to time sell an undivided ownership interest in the pool of purchased receivables to financial institutions. As collections reduce receivable balances sold, CompuCom may sell interests in new receivables to bring the amount sold up to the maximum allowed. The proceeds from the sale of receivables are used primarily to fund working capital requirements. CompuCom is retained as servicer of the receivables; however, the cost of servicing is not material. All securitized accounts receivable, which approximate fair value due to the short-term nature of the instruments, as well as the related debt, are reflected on the Company’s Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, respectively.

The Company also has outstanding letters of credit totaling $24.0 million and $27.3 million at June 30, 2017 and December 31, 2016, respectively. These letters of credit are issued in connection with our self-insurance programs, as well as certain vendors and customers. We have elected to pledge a portion of the line under the Securitization as collateral for our letters of credit. As such, the availability under the Securitization was $54.7 million and $79.6 million at June 30, 2017 and December 31, 2016, respectively.

 

  (d) Debt Covenants

The Securitization requires the Company to comply with a minimum interest coverage ratio covenant when the Securitization is 90% utilized for 30 consecutive days. The Company is not required to comply with the minimum interest coverage ratio covenant if the utilization of the Securitization falls below 90% for 10 consecutive days. We are not subject to the minimum interest coverage ratio covenant as of June 30, 2017.

We are not subject to any other financial covenants on our Term Loan, Senior Notes, and Receivables Securitization Facility as of June 30, 2017.

 

  (e) Notes Payable

In 2015, the Company issued two notes for a total of $6.0 million from a third party financing company in order to purchase software licenses and equipment. The Company made principal and interest payments of $1.0 million for both the three and six months ended June 30, 2017, and $0.9 million and $1.9 million for the three and six months ended June 30, 2016, respectively, and we are required to make future principal and interest payments of $0.3 million in 2017. The notes bear a weighted average interest rate of 6.0%.

 

22


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

In 2016, the Company issued two notes for $11.8 million from vendors in order to finance warranty service and software costs. The Company made principal and interest payments of $3.3 million during both the three and six months ended June 30, 2017, respectively. We are required to make future principal and interest payments of $4.2 million in 2019 and beyond. The notes bear a weighted average interest rate of approximately 8.0%.

In April 2017, the Company issued an additional note for $7.3 million from a vendor in order to finance software maintenance costs. The Company made no principal and interest payments on this note for the three and six months ended June 30, 2017. We are required to make future principal and interest payments of $5.9 million and $2.0 million in 2017 and 2018, respectively. The note bears an interest rate of approximately 7.0%.

 

  (f) Other debt

In connection with the acquisition of 40% of the membership interests in ClearPath in the third quarter of 2016, the Company consolidated ClearPath’s outstanding bank debt, consisting of a line of credit facility and a note payable. As of June 30, 2017, the outstanding balances on the credit facility and note were $1.8 million and $0.4 million, respectively. The credit facility matures in July 2017 and pricing is based on Wall Street Journal Prime. The note matures on July 20, 2019 and bears a weighted average interest rate of 4.25%. The Company made an insignificant amount of principal and interest payments related to these debt obligations for the three and six months ended June 30, 2017.

The line of credit facility requires ClearPath to comply with a minimum adjusted tangible net worth of $2.2 million. As of June 30, 2017, ClearPath is in compliance with all debt covenants and is not subject to any other financial covenants on its debt instruments.

 

(10) Segment Information

Operating segments are components of an enterprise for which separate discrete financial information is available for evaluation by the Company’s Chief Operating Decision Maker in making decisions on how to allocate resources and assess performance. The Company’s Chief Executive Officer is the Chief Operating Decision Maker.

 

23


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

CompuCom measures segment earnings as operating income, defined as income before financing expenses, net, and income taxes. All significant inter-segment activity has been eliminated. Amounts included in the “Other” column include all items not specifically allocated to each segment, including but not limited to, acquisition related costs, management fees paid to Parent and other miscellaneous expenses of a non-recurring nature.

 

     Three months ended June 30, 2017  

Operating results

   Service      Product      Other      Total  
     (In thousands)  

Revenue

   $ 212,013        57,403        —          269,416  

Gross margin

     65,699        17,819        —          83,518  

Income (loss) from operations

   $ 7,913        7,869        (843      14,939  

Other income

     —          —          1,065        1,065  

Financing expenses, net

     —          —          (11,585      (11,585
           

 

 

 

Income before taxes

            $ 4,419  
           

 

 

 
     Three months ended June 30, 2016  

Operating results

   Service      Product      Other      Total  
     (In thousands)  

Revenue

   $ 229,352        54,372        —          283,724  

Gross margin

     72,046        14,570        —          86,616  

Income (loss) from operations

   $ 12,021        4,726        (2,333      14,414  

Gain on debt extinguishment

     —          —          5,299        5,299  

Other income

     —          240        244        484  

Financing expenses, net

     —          —          (11,171      (11,171
           

 

 

 

Income before taxes

            $ 9,026  
           

 

 

 

 

24


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

     Six months ended June 30, 2017  

Operating results

   Service      Product      Other      Total  
     (In thousands)  

Revenue

   $ 421,808        106,883        —          528,691  

Gross margin

     127,027        32,954        —          159,981  

Income (loss) from operations

   $ 9,257        12,616        (1,522      20,351  

Other income

     —          —          990        990  

Financing expenses, net

     —          —          (23,202      (23,202
           

 

 

 

Loss before income taxes

            $ (1,861
           

 

 

 
     Six months ended June 30, 2016  

Operating results

   Service      Product      Other      Total  
     (In thousands)  

Revenue

   $ 449,241        106,415        —          555,656  

Gross margin

     135,036        27,597        —          162,633  

Income (loss) from operations

   $ 16,042        7,637        (3,431      20,248  

Gain on debt extinguishment

     —          —          5,299        5,299  

Other income

     —          240        152        392  

Financing expenses, net

     —          —          (22,472      (22,472
           

 

 

 

Income before taxes

            $ 3,467  
           

 

 

 

Revenue from foreign sources is primarily generated in Canada. Revenue, classified by the major geographic areas in which CompuCom operates, was as follows (in thousands):

 

    

Three months

ended June 30,

    

Six months

ended June 30,

 
     2017      2016      2017      2016  

U.S.

   $ 221,623        227,590        432,899        447,910  

Non-U.S.

     47,793        56,134        95,792        107,746  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 269,416        283,724        528,691        555,656  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Net property and equipment, classified by the major geographic areas in which CompuCom operates, were as follows as of June 30, 2017 and December 31, 2016 (in thousands):

 

     June 30,
2017
     December 31,
2016
 

U.S.

   $ 59,231        46,295  

Non-U.S.

     13,642        13,962  
  

 

 

    

 

 

 

Total net property and equipment

   $ 72,873        60,257  
  

 

 

    

 

 

 

 

(11) Income Taxes

The Company has gross unrecognized tax benefits of approximately $8.6 million at both June 30, 2017 and December 31, 2016, respectively, all of which is included in Other long-term liabilities, in the Consolidated Balance Sheets. Approximately $3.3 million of the unrecognized tax benefit is currently covered under an indemnification agreement with the predecessor owner, Court Square. The Company does not believe it is reasonably possible that the total amount of unrecognized tax benefits will materially change in the next twelve months. The majority of the unrecognized tax benefits at June 30, 2017, if recognized, would affect the tax rate.

The Company’s policy with respect to recognition of interest and penalties on uncertain tax positions is to assess the likelihood, for each uncertain tax position, that any interest and penalties may be assessed by the relevant taxing authorities and, based on such assessment, record any significant interest and penalties as a component of income tax expense. In relation to the Company’s unrecognized tax positions, the Company has recorded $1.2 million of accrued interest and penalties as of both June 30, 2017 and December 31, 2016, respectively.

The Company’s US federal income tax returns are closed to examination through the tax year ended May 8, 2013, not including amended returns filed for tax years ended December 31, 2009 and 2010, as well as tax years with net operating losses. State and other income tax returns are generally subject to examination for a period of three to five years after the filing of the respective returns. The Company and its subsidiaries have various state and other income tax returns in the process of examination or administrative appeal.

Our effective tax rates were (52.7)% and 6.1% for the three and six months ended June 30, 2017, and it was 60.6% and 65.8% for the three and six months ended June 30, 2016, respectively. The effective rate for the three and six months ended June 30, 2017 differs significantly from the statutory rate due to various permanent differences, a loss limitation in the US and an increase in the valuation allowance for foreign tax credits. The effective rate for the three and six months ended June 30, 2016 differs significantly from the statutory rate due to various permanent differences and an increase in the valuation allowance for foreign tax credits.

 

26


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(12) Related Party Transactions

The Company conducts business with eight portfolio companies of THL. For the three and six months ended June 30, 2017 the Company recognized $5.6 million and $10.9 million in total revenue for these related parties, respectively, and the Company recognized $2.9 million and $5.8 million in total revenue for the three and six months ended June 30, 2016, respectively. At June 30, 2017 and December 31, 2016, $1.7 million and $1.9 million, respectively, remained outstanding from these related parties and is reflected as Receivables, net on the Consolidated Balance Sheets. At both June 30, 2017 and December 31, 2016, $0.1 million remained due to these related parties and is reflected as Accounts payable on the Consolidated Balance Sheets.

In connection with the equity investments at the closing of THL’s acquisition of CompuCom’s Parent, CompuCom entered into a management agreement (the Services Agreement) with THL Managers VI, LLC, an affiliate of THL. Under terms of the Services Agreement, THL provides the Company with certain general business, management, administrative and financial advice. In consideration of these and other services, the Company pays an annual fee to THL in an amount per year equal to the greater of 1) $1.5 million or 2) 1.0% of Consolidated Adjusted EBITDA (as defined in the Services Agreement) for the immediately preceding fiscal year. The management fee is paid in quarterly increments. The total expense recorded for these services was $0.4 million and $0.8 million for both the three and six months ended June 30, 2017 and 2016, respectively, and is included in Selling, general and administrative expenses, in the Consolidated Statements of Operations.

 

(13) Restructuring Activities

In January 2016, the Company adopted a restructuring plan designed to lower costs and drive operational efficiency (the Restructuring Plan). As of June 30, 2017, the Company estimates that it will incur aggregate pre-tax charges pursuant to the Restructuring Plan of approximately $27.0 million throughout 2016 and 2017, consisting of approximately $17.9 million related to facilities costs, $6.4 million of employee-related costs, and $2.7 million of other miscellaneous costs. The Company expects most Restructuring Plan charges will be allocated to the Service segment. The Company incurred Restructuring Plan charges of $0.7 million and $2.0 million for the three and six months ended June 30, 2017, respectively, $0.6 million and $1.2 million for the three and six months ended June 30, 2016, respectively, and a cumulative $18.3 million as of June 30, 2017 since inception of the plan. These amounts are included in the total estimated $27.0 million Restructuring Plan charges disclosed above.

 

27


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

The following table summarizes the Restructuring Plan activity incurred to date, including accrued balances, as of June 30, 2017 and June 30, 2016, which is included in Accounts Payable and Accrued liabilities, in the Consolidated Balance Sheet (in thousands):

 

     For the three months ended June 30, 2017  
     Facilities      Employee-related      Other      Total  

Liability as of March 31, 2017

   $ 8,448        2,699        629        11,776  

Gross charges

     534        —          138        672  

Cash payments

     (1,658      (1,829      (629      (4,116
  

 

 

    

 

 

    

 

 

    

 

 

 

Liability as of June 30, 2017

   $ 7,324        870        138        8,332  
  

 

 

    

 

 

    

 

 

    

 

 

 
     For the three months ended June 30, 2016  
     Facilities      Employee-related      Other      Total  

Liability as of March 31, 2016

   $ 115        —          12        127  

Gross charges

     427        108        93        628  

Cash payments

     (393      (98      (2      (493
  

 

 

    

 

 

    

 

 

    

 

 

 

Liability as of June 30, 2016

   $ 149        10        103        262  
  

 

 

    

 

 

    

 

 

    

 

 

 
     For the six months ended June 30, 2017  
     Facilities      Employee-related      Other      Total  

Liability as of December 31, 2016

   $ 9,728        3,490        545        13,763  

Gross charges

     1,071        50        869        1,990  

Cash payments

     (3,475      (2,670      (1,276      (7,421
  

 

 

    

 

 

    

 

 

    

 

 

 

Liability as of June 30, 2017

   $ 7,324        870        138        8,332  
  

 

 

    

 

 

    

 

 

    

 

 

 
     For the six months ended June 30, 2016  
     Facilities      Employee-related      Other      Total  

Liability as of December 31, 2015

   $ —          —          —          —    

Gross charges

     787        207        180        1,174  

Cash payments

     (638      (197      (77      (912
  

 

 

    

 

 

    

 

 

    

 

 

 

Liability as of June 30, 2016

   $ 149        10        103        262  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

28


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(14) Contingencies

 

  (a) Routine Litigation

CompuCom is involved in various claims and legal actions arising in the ordinary course of business. CompuCom records a provision for a liability when management believes that it is both probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. In the opinion of management, CompuCom has adequate provisions for any such matters, and the ultimate liability, if any, resulting from such claims and pending actions will not have a material adverse effect on the Company’s consolidated results of operations or financial position.

 

  (b) Security Interests

In the normal course of business, the Company may provide liens, encumbrances, and pledges against certain inventory and vendor receivable balances.

 

(15) Concentration Risks

CompuCom maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

Receivables from customers are generally unsecured. To reduce the concentration risk and overall risk of collection, CompuCom performs ongoing evaluations of its customers’ financial condition. To ensure a receivable balance is not overstated due to uncollectibility, an allowance for doubtful accounts is maintained as required under GAAP. At June 30, 2017 and December 31, 2016, no customer accounted for more than 10% of accounts receivable. No single customer accounted for more than 10% of total revenue for all periods presented.

CompuCom has relationships with numerous original equipment manufacturers (OEM) in support of its Product business. The loss of a single OEM as a supplier, the deterioration of its relationship with a single OEM, or any unilateral modification of the contractual terms under which CompuCom is supplied equipment and components by a single OEM could adversely affect CompuCom’s revenue and gross margin.

 

29


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(16) Supplemental Information about Changes to Accumulated Other Comprehensive Loss

An analysis in the change in balance by component of Accumulated Other Comprehensive Loss is as follows (in thousands):

 

Components of Accumulated Other Comprehensive Loss

 
     For the three months ended June 30, 2017  
     Foreign
Currency
Translation
     Foreign
Currency
Hedges
     Other
gain
     Total  

Balance at March 31, 2017

   $ (4,549      516        43        (3,990

Other comprehensive gain before reclassifications, net of tax

     1,495        190        —          1,685  

Reclassifications, net of tax

     —          (91      —          (91
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive gain

     1,495        99        —          1,594  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2017

   $ (3,054      615        43        (2,396
  

 

 

    

 

 

    

 

 

    

 

 

 

Components of Accumulated Other Comprehensive Loss

 
     For the three months ended June 30, 2016  
     Foreign
Currency
Translation
     Foreign
Currency
Hedges
     Other
gain
     Total  

Balance at March 31, 2016

   $ (3,214      (125      43        (3,296

Other comprehensive loss before reclassifications, net of tax

     (404      (232      —          (636

Reclassifications, net of tax

     —          96        —          96  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive loss

     (404      (136      —          (540
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

   $ (3,618      (261      43        (3,836
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Components of Accumulated Other Comprehensive Loss

 
     For the six months ended June 30, 2017  
     Foreign
Currency
Translation
     Foreign
Currency
Hedges
     Other
gain
     Total  

Balance at December 31, 2016

   $ (5,519      (512      43        (5,988

Other comprehensive gain before reclassifications, net of tax

     2,465        1,071        —          3,536  

Reclassifications, net of tax

     —          56        —          56  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive gain

     2,465        1,127        —          3,592  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2017

   $ (3,054      615        43        (2,396
  

 

 

    

 

 

    

 

 

    

 

 

 

Components of Accumulated Other Comprehensive Loss

 
     For the six months ended June 30, 2016  
     Foreign
Currency
Translation
     Foreign
Currency
Hedges
     Other
gain
     Total  

Balance at December 31, 2015

   $ (5,762      (311      43        (6,030

Other comprehensive gain (loss) before reclassifications, net of tax

     2,144        (217      —          1,927  

Reclassifications, net of tax

     —          267        —          267  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive gain

     2,144        50        —          2,194  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

   $ (3,618      (261      43        (3,836
  

 

 

    

 

 

    

 

 

    

 

 

 

Reclassifications out of Accumulated Other Comprehensive Loss are presented below (in thousands):

 

Reclassification Adjustments

    

Three months

ended June 30,

     Affected line items in the

Component Line Item

   2017      2016     

Statement of Operations

Foreign currency hedges

        

Loss (gain) on settled hedges

   $ (140      148      Selling, general and administrative

Tax impact

     49        (52    Income taxes
  

 

 

    

 

 

    

Total reclassifications, net of tax

   $ (91      96     
  

 

 

    

 

 

    

 

31


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Reclassification Adjustments

     Six months
ended June 30,
     Affected line items in the

Component Line Item

   2017      2016     

Statement of Operations

Foreign currency hedges

        

Loss on settled hedges

   $ 86        411      Selling, general and administrative

Tax impact

     (30      (144    Income taxes
  

 

 

    

 

 

    

Total reclassifications, net of tax

   $ 56        267     
  

 

 

    

 

 

    

 

(17) Supplemental Cash Flow Information

Supplemental disclosure of cash flow information was as follows (in thousands):

 

    

Three months

ended June 30,

    

Six months

ended June 30,

 
     2017      2016      2017      2016  

Cash received (paid) for income taxes, net

   $ (3,467      (2,948      (7,726      (4,503

Cash paid for interest, net of amounts capitalized

     (15,937      (14,192      (24,843      (20,596

Supplemental disclosure of non-cash investing and financing activities was as follows (in thousands):

 

     Three months
ended June 30,
    

Six months

ended June 30,

 
     2017      2016      2017      2016  

Note issued by vendor to finance service costs (a)

   $ 7,316        9,426        7,316        9,426  

Property and equipment additions incurred during the period but not paid at period end

     191        4,069        191        4,069  

Property and equipment additions due to build-to-suit lease transactions (b)

     6,100        28,491        12,522        28,491  

 

  (a) The note issued by a vendor during the period is to finance service costs that are operational in nature to better align the cash outflows with the corresponding cash inflows from the customer. However, as the costs were financed through a note payable, the principal repayments will be classified in the financing section of the statement of cash flows in subsequent periods.

 

  (b) The non-cash additions to property and equipment due to build-to-suit lease transactions are the result of the accounting requirements of ASC 840, Leases for those construction projects for which we are the “deemed owner” of the constuction project as discussed more fully in Note 5, Property and equipment .

 

32


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(18) Subsequent Events

The Company has evaluated all subsequent events through July 28, 2017, which represents the issuance date of this report, to ensure that this report includes appropriate disclosure of events both recognized in the consolidated financial statements as of June 30, 2017, and events which occurred subsequent to June 30, 2017 but were not recognized in the consolidated financial statements. As of July 28, 2017, the date of the issuance of this report, there were no subsequent events which require recognition or disclosure.

 

33


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

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

June 30, 2017

(unaudited)

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Our MD&A is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) unless specifically noted in the report. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. This information should be read in conjunction with the consolidated financial statements and notes thereto included in this quarterly report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2016. Our MD&A is presented in the following sections:

 

    Overview

 

    Business Update

 

    Results of Operations

 

    Liquidity and Capital Resources

 

    Off-Balance Sheet Arrangements and Contractual Obligations

 

    Critical Accounting Policies

 

    Recent Accounting Pronouncements

 

    Quantitative and Qualitative Disclosures About Market Risk

 

    Guarantor/Non-Guarantor Information

Overview

We are a leading provider of information technology (IT) outsourcing services and products to North American enterprise organizations. We offer a broad range of solutions that includes end user computing (tablets, smartphones, laptops and desktops), data center management, service desk, network infrastructure and IT workforce solutions. Our largest service offering is end user computing, which provides on-site services to assist corporate end users with their IT needs. Over the last few years, we have expanded into emerging areas which require platform expertise and management, including mobile device management and cloud services. We have consistently been ranked as a “leader” in the North American managed workplace services market by a leading technology and independent research firm. We provide a single point of contact for the management of our customers’ IT infrastructure including platform selection, provisioning, deployment and maintenance.

 

34


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

We operate our business in two segments: Service and Product.

 

    Through our Service segment, we deliver innovative services through a customer-centric sales and delivery model. Our expertise enables us to deliver a comprehensive IT infrastructure management solution to our customers. For the six months ended June 30, 2017, our Service segment generated approximately 79.8% of our total revenue and 79.4% of our gross margin.

 

    Through our Product segment, we offer a broad vendor-neutral product offering, which enables our customers to turn to a trusted party for hardware and software procurement and deployment solutions. For the six months ended June 30, 2017, our Product segment generated approximately 20.2% of our total revenue and 20.6% of our gross margin.

Our business is subject to seasonality. Our Service margins are negatively impacted in the first quarter of each year due to a higher proportion of state and federal unemployment taxes paid for our Service personnel. Within our Product segment, hardware sales are driven primarily by our customers’ refresh cycles.

Business Update

Internet of Things Acquisition

On January 19, 2017, the Company acquired certain assets of EXT-IOT, LLC, a company engaged in the business of the development, marketing, sales and implementation of an internet of things (IOT) offering and portfolio in Florida and across the United States. IOT is expected to be a major area of growth for retail and financial services companies providing additional touch points for our go-to-market strategy. The total purchase price consisted of cash consideration of $2.0 million and potential future cash consideration contingent on earnings targets.

LNS Technologies Acquisition

On May 1, 2017, the Company acquired certain assets of LNS Technologies, Inc., a company engaged in the business of providing information technology support, cloud solutions and information security solutions to small businesses. LNS was acquired in order to incorporate their managed services solution into Tech Zone’s service offerings. The total purchase price included cash consideration of $1.8 million and potential future cash consideration contingent on earnings targets.

Results of Operations

Subsequent to the issuance of the consolidated financial statements, the Company concluded that it did not properly record foreign currency gains and losses on intercompany balances for the three and six months ended June 30, 2016. The Company concluded the effects of this error to the consolidated financial statements were not material to the accounts as previously presented and has revised the previously reported quarterly earnings for the three and six months ended June 30, 2016 to appropriately correct this error, as well as other inconsequential, miscellaneous errors. These adjustments did not have a material impact on Adjusted EBITDA. See Note 1(f), Revisions to Prior Year Financial Statements, of the accompanying consolidated financial statements for more information related to these errors.

 

35


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

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

June 30, 2017

(unaudited)

 

Results of operations in dollars and as a percentage of total revenue as revised were as follows (in thousands):

 

           Three months ended June 30,                 Six months ended June 30,        
     2017     %
Change
    2016     2017     %
Change
    2016  
     Dollars     % of
Revenue
      Dollars     % of
Revenue
    Dollars     % of
Revenue
      Dollars     % of
Revenue
 

Revenue:

                    

Service

   $ 212,013       78.7     -7.6   $ 229,352       80.8   $ 421,808       79.8     -6.1   $ 449,241       80.8

Product

     57,403       21.3     5.6     54,372       19.2     106,883       20.2     0.4     106,415       19.2
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total revenue

     269,416       100.0     -5.0     283,724       100.0     528,691       100.0     -4.9     555,656       100.0

Gross margin:

                    

Service

     65,699       24.4     -8.8     72,046       25.4     127,027       24.0     -5.9     135,036       24.3

Product

     17,819       6.6     22.3     14,570       5.1     32,954       6.2     19.4     27,597       5.0
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total gross margin

     83,518       31.0     -3.6     86,616       30.5     159,981       30.3     -1.6     162,633       29.3
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Segment gross margin percentage

                    

Service

       31.0     -0.4       31.4       30.1     0.0       30.1

Product

       31.0     4.2       26.8       30.8     4.9       25.9
    

 

 

       

 

 

     

 

 

       

 

 

 

Total gross margin percentage

       31.0     0.5       30.5       30.3     1.0       29.3
    

 

 

       

 

 

     

 

 

       

 

 

 

Operating expenses:

                    

Selling, general and administrative

     67,639       25.1     -5.5     71,574       25.2     137,339       26.0     -2.7     141,211       25.4

Restructuring costs

     672       0.2     7.0     628       0.2     1,990       0.4     69.5     1,174       0.2

Acquisition related costs

     268       0.1     100.0     —         0.0     301       0.1     100.0     —         0.0
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

     68,579       25.5     -5.0     72,202       25.4     139,630       26.4     -1.9     142,385       25.6
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Income from operations

     14,939       5.5     3.6     14,414       5.1     20,351       3.8     0.5     20,248       3.6

Gain on debt extinguishment

     —         0.0     -100.0     5,299       1.9     —         0.0     -100.0     5,299       1.0

Other income

     1,065       0.4     120.0     484       0.2     990       0.2     152.6     392       0.1

Financing expenses, net

     (11,585     -4.3     3.7     (11,171     -3.9     (23,202     -4.4     3.2     (22,472     -4.0
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Income (loss) before income taxes

     4,419       1.6     -51.0     9,026       3.2     (1,861     -0.4     -153.7     3,467       0.6
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Income tax expense (benefit)

     (2,329     -0.9     -142.6     5,473       1.9     (113     0.0     -105.0     2,281       0.4
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Net income (loss)

     6,748       2.5     89.9     3,553       1.3     (1,748     -0.3     -247.4     1,186       0.2

Less: Net income attributable to NCI

   $ 506       0.2     100.0   $ —         0.0   $ 941       0.2     100.0   $ —         0.0
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Net income (loss) attributable to CompuCom

   $ 6,242       2.3     75.7   $ 3,553       1.3   $ (2,689     -0.5     -326.7   $ 1,186       0.2
  

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

 

36


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

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

June 30, 2017

(unaudited)

 

Three months ended June 30, 2017 compared to three months ended June 30, 2016

Revenue

Service revenue decreased $17.3 million, or 7.6%, during the three months ended June 30, 2017 compared to prior year, primarily due to a decrease in end user computing as a result of lower annuity related services.

Product revenue increased $3.0 million, or 5.6%, during the three months ended June 30, 2017 compared to prior year. Product revenue is comprised of sales of hardware and software. Hardware revenue increased $4.3 million, or 8.3%, primarily due to increased demand in our enterprise business, offset by a decrease in our software business.

Product revenue classification is dependent on the nature of the underlying transaction. When CompuCom is deemed to be the principal in the transaction, revenue is recorded on a gross basis. However, when CompuCom’s role in the transaction is that of an agent, revenue is presented net of cost of sales. The assessment of whether we are acting as a principal in a given transaction, or whether our role in the transaction is more akin to that of an agent, requires significant judgment. There is no impact to our gross margin whether our role in the transaction is that of a principal or a procurement agent; however, as a procurement agent, our working capital investments in inventory are lower. A presentation of both Product billings and revenue for the three months ended June 30, 2017 and 2016 is presented below (in thousands):

 

     For the three months         
     ended June 30,      %  
     2017      2016      Change  

Hardware billings

     149,633        133,916        11.7

Software billings

     2,273        23,344        -90.3
  

 

 

    

 

 

    

Product billings *

   $ 151,906        157,260        -3.4

Hardware revenue

     56,446        52,127        8.3

Software revenue

     957        2,245        -57.4
  

 

 

    

 

 

    

Product revenue

   $ 57,403        54,372        5.6

 

* Product billings is an alternative view of performance used by management in order to assess total transaction volume during a period. Product billings does not represent and should not be considered as an alternative to Product revenue, as determined by GAAP, and our presentation thereof may not be comparable to measures reported by other companies.

Product billings decreased $5.4 million, or 3.4%, during the three months ended June 30, 2017, as compared to prior year. Hardware billings increased $15.7 million, or 11.7%, due to the aforementioned increase in revenue and software billings decreased $21.1 million due to the transition of the majority of our customers to Software ONE, Inc. under the strategic alliance discussed in the 2016 Annual Report.

Gross Margin

Gross margin from service decreased $6.3 million, or 8.8%, during the three months ended June 30, 2017, as compared to prior year primarily due to the aforementioned decrease in Service revenue. Gross margin percentage remained flat at 31.0% compared to 31.4% in the prior year.

 

37


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Gross margin from product increased $3.3 million, or 22.3%, during the three months ended June 30, 2017, as compared to prior year. This increase in Product margin is primarily due to an increase in hardware billings and better pricing in our hardware business. Gross margin percentage increased from 26.8% to 31.0% when compared to prior year primarily due to better pricing in our hardware business and an increase in the proportion of hardware resale transactions for which we act as an agent, which are recorded on a net basis.

Selling, General, and Administrative Expenses

Selling, general and administrative (SG&A) expenses consist of all indirect costs associated with the support of our Service and Product business offerings. Approximately 56.1% percent of our SG&A expenses consist of salary and benefit costs for our executive management team, sales force, product distribution, Service and Product operations, information services, finance, human resources, administrative, and other back-office personnel. The remainder of our SG&A expenses consist of rent and other costs associated with our headquarters, distribution, and service and sales office facilities, as well as depreciation of our property and equipment, amortization of our identifiable intangibles, professional and other third party costs, and various other indirect costs.

SG&A expenses decreased $3.9 million, or 5.5%, during the three months ended June 30, 2017, as compared to prior year. Excluding the impact of depreciation and amortization, SG&A expenses decreased from prior year by $4.6 million, or 7.3%, and SG&A as a percentage of total revenue remained relatively flat, decreasing from 22.3% to 21.7%. This year-over-year dollar decrease is primarily due to a decrease in employee related expenses as a result of reductions in headcount.

Acquisition Related Expenses

The Company recognized $0.3 million in acquisition-related expenses during 2017. See Note 2, Acquisitions, of the accompanying consolidated financial statements for more information about acquisition related expenses.

Restructuring Costs

For the three months ended June 30, 2017, we incurred $0.7 million in restructuring charges. See Note 13, Restructuring Activities, of the accompanying consolidated financial statements for more information related to these costs.

Other loss / income

Other income increased $0.6 million during the three months ended June 30, 2017, as compared to prior year primarily due to favorable legal settlements

Financing Expenses

Financing expenses consist of costs incurred on borrowings under CompuCom’s financing arrangements, net of interest earnings from the investment of available cash. Financing expenses decreased $0.4 million, or 3.7%, during the three months ended June 30, 2017, as compared to prior year primarily due to a decrease in notes payable.

 

38


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Income Taxes

The Company recognized an income tax benefit of $2.3 million for the three months ended June 30, 2017, compared to an income tax expense of $5.5 million for the three months ended June 30, 2016. See Note 11, Income Taxes, of the accompanying consolidated financial statements for more information related to our tax provision.

Six months ended June 30, 2017 compared to six months ended June 30, 2016

Revenue

Service revenue decreased $27.4 million, or 6.1%, during the six months ended June 30, 2017 compared to prior year, primarily due to a decrease in end user computing as a result of lower annuity related services.

Product revenue increased $0.5 million, or 0.4%, during the three months ended June 30, 2017 compared to prior year. Product revenue is comprised of sales of hardware and software. Hardware revenue increased $1.7 million, or 1.6%, primarily due to increased demand in our enterprise business, offset by a decrease in our software business.

Product revenue classification is dependent on the nature of the underlying transaction. When CompuCom is deemed to be the principal in the transaction, revenue is recorded on a gross basis. However, when CompuCom’s role in the transaction is that of an agent, revenue is presented net of cost of sales. The assessment of whether we are acting as a principal in a given transaction, or whether our role in the transaction is more akin to that of an agent, requires significant judgment. There is no impact to our gross margin whether our role in the transaction is that of a principal or a procurement agent; however, as a procurement agent, our working capital investments in inventory are lower. A presentation of both Product billings and revenue for the six months ended June 30, 2017 and 2016 is presented below (in thousands):

 

     For the six months         
     ended June 30,      %  
     2017      2016      Change  

Hardware billings

     282,903        263,933        7.2

Software billings

     7,472        49,725        -85.0
  

 

 

    

 

 

    

Product billings *

   $ 290,375        313,658        -7.4

Hardware revenue

     104,673        103,024        1.6

Software revenue

     2,210        3,391        -34.8
  

 

 

    

 

 

    

Product revenue

   $ 106,883        106,415        0.4

 

* Product billings is an alternative view of performance used by management in order to assess total transaction volume during a period. Product billings does not represent and should not be considered as an alternative to Product revenue, as determined by GAAP, and our presentation thereof may not be comparable to measures reported by other companies.

 

39


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Product billings decreased $23.3 million, or 7.4%, during the six months ended June 30, 2017, as compared to prior year. Hardware billings increased $19.0 million, or 7.2%, primarily due to in the aforementioned increase in revenue and software billings decreased $42.3 million due to the transition of the majority of our customers to Software ONE, Inc. under the strategic alliance discussed in the 2016 Annual Report.

Gross Margin

Gross margin from service decreased $8.0 million, or 5.9%, during the six months ended June 30, 2017, as compared to prior year primarily due to the aforementioned decrease in Service revenue. Gross margin percentage remained flat at 30.1% when compared to prior year.

Gross margin from product increased $5.4 million, or 19.4%, during the six months ended June 30, 2017, as compared to prior year. This increase in Product margin is primarily due to an increase in hardware billings and better pricing in our hardware business. Gross margin percentage increased from 25.9% to 30.8% when compared to prior year primarily due to better pricing in our hardware business and an increase in the proportion of hardware resale transactions for which we act as an agent, which are recorded on a net basis.

Selling, General, and Administrative Expenses

Selling, general and administrative (SG&A) expenses consist of all indirect costs associated with the support of our Service and Product business offerings. Approximately 55.6% percent of our SG&A expenses consist of salary and benefit costs for our executive management team, sales force, product distribution, Service and Product operations, information services, finance, human resources, administrative, and other back-office personnel. The remainder of our SG&A expenses consist of rent and other costs associated with our headquarters, distribution, and service and sales office facilities, as well as depreciation of our property and equipment, amortization of our identifiable intangibles, professional and other third party costs, and various other indirect costs.

SG&A expenses decreased $3.8 million, or 2.7%, during the six months ended June 30, 2017, as compared to prior year. Excluding the impact of depreciation and amortization, SG&A expenses decreased from prior year by $5.2 million, or 4.2%, and SG&A as a percentage of total revenue increased from 22.4% to 22.5%. This year-over-year dollar decrease is primarily due to a decrease in employee related expenses as a result of reductions in headcount.

Acquisition Related Expenses

The Company recognized $0.3 million in acquisition-related expenses during 2017. See Note 2, Acquisitions, of the accompanying consolidated financial statements for more information about acquisition related expenses.

Restructuring Costs

For the six months ended June 30, 2017, we incurred $2.0 million in restructuring charges. See Note 13, Restructuring Activities, of the accompanying consolidated financial statements for more information related to these costs.

 

40


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Other loss / income

Other income increased $0.6 million during the six months ended June 30, 2017, as compared to prior year primarily due to favorable legal settlements.

Financing Expenses

Financing expenses consist of costs incurred on borrowings under CompuCom’s financing arrangements, net of interest earnings from the investment of available cash. Financing expenses decreased $0.7 million, or 3.2%, during the six months ended June 30, 2017, as compared to prior year primarily due to a decrease in notes payable.

Income Taxes

The Company recognized an income tax benefit of $0.1 million for the six months ended June 30, 2017, compared to and income tax expense of $2.3 million for the six months ended June 30, 2016. See Note 11, Income Taxes, of the accompanying consolidated financial statements for more information related to our tax provision.

Liquidity and Capital Resources

Liquidity

Our primary liquidity requirements are to service and repay our financing arrangements and to meet our capital expenditure and operating needs. We and our subsidiaries, affiliates and significant shareholders may from time to time seek to retire or purchase our outstanding debt (including our outstanding notes) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements and cash on hand, contractual restrictions and other factors. The amounts involved may be material.

Our working capital is generally funded through our financing arrangements and internally generated funds. We believe we have sufficient liquidity to meet currently anticipated growth plans, including capital investments and working capital expenditures for at least the next twelve months. However, in the event our liquidity is insufficient, we may not be able to pursue promising new business opportunities. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our receivables securitization facility (Securitization) or obtain additional financing, if necessary, on favorable terms. Our primary exposures to operational liquidity risk are from delayed receivable collections.

Below is a summary of our liquidity at June 30, 2017 and December 31, 2016 (in thousands):

 

     June 30,
2017
     December 31,
2016
 

Cash and cash equivalents

   $ 24,620        64,943  

Availability under Securitization

     54,700        79,600  
  

 

 

    

 

 

 

Total liquidity

   $ 79,320        144,543  
  

 

 

    

 

 

 

 

41


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Under our Securitization arrangement, funds available are based on our eligible trade accounts receivable, not to exceed $150 million. Additionally, our liquidity is affected by letters of credit that reduce our availability under the Securitization. These letters of credit are issued in connection with our self-insurance programs, as well as certain vendors and customers. Outstanding letters of credit were $24.0 million and $27.3 million at June 30, 2017 and December 31, 2016.

Cash Flows

The following table summarizes our cash flows from operating, investing, and financing activities (in thousands):

 

     For the six months ended June
30,
 
     2017      2016  

Net cash used in operating activities

   $ (21,539    $ (4,805

Net cash used in investing activities

     (10,601      (13,929

Net cash used in financing activities

     (9,311      (15,389

Cash effect of exchange rate changes

     1,128        1,299  
  

 

 

    

 

 

 

Net decrease in cash and cash equivalents

   $ (40,323    $ (32,824
  

 

 

    

 

 

 

Operating Activities

Operating cash outflow increased $16.7 million during the six months ended June 30, 2017, as compared to prior year. This year-over-year increase in operating cash outflow is primarily due to a $17.8 million increased use of cash due to timing of our normal working capital cycle offset partially by an increase in adjusted EBITDA.

Investing Activities

Net cash used in investing activities consists primarily of capital expenditures. Our business is not capital asset-intensive, and capital expenditures in any year normally would not be significant in relation to our overall financial position. Generally, our capital expenditures relate to information technology hardware and software and improvements in our distribution center. Capital expenditures decreased $7.1 million during the six months ended June 30, 2017, as compared to prior year. This decrease is offset by the $2.0 million and $1.8 million acquisitions of EXT-IOT, LLC and LNS Technologies, respectively, as discussed more fully in the business update section above.

Financing Activities

Net cash used in financing activities consists primarily of the borrowing and repayment of long-term debt during the six months ended June 30, 2017 and 2016. We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), overall cost of capital, and targeted capital structure. During the six months ended June 30, 2017, we made principal payments on our notes payable of $4.4 million, received $3.7 million in proceeds from the landlord under build-to-suit financing, made a $2.6 million distribution to noncontrolling interest, and paid $6.0 million to complete the mandatory noncontrolling interest purchase obligation.

 

42


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Off-Balance Sheet Arrangements and Contractual Obligations

The impact that we expect our contractual obligations as of June 30, 2017 to have on our liquidity and cash flow in future periods is as follows (in thousands):

 

            (remaining)                                     
     Total      2017      2018      2019      2020      2021      Thereafter  

Long-term debt obligations (a)

   $ 924,650        27,306        44,136        43,476        585,878        223,854        —    

Operating lease obligations

     115,558        15,570        18,365        13,364        11,498        8,771        47,990  

Build-to-suit lease obligations (b )

     17,883        865        1,763        1,798        1,834        1,870        9,753  

Uncertain tax positions (c)

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,058,091        43,741        64,264        58,638        599,210        234,495        57,743  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Our long-term debt obligations include both our expected principal and interest obligations. Our calculations of expected future interest payments on our variable rate debt is based on a rate of 4.3% for our Term Loan and 3.5% for the ClearPath credit facility.

 

(b) Represents lease payments on build-to-suit lease arrangements. See Note 5, Property and Equipment, of the accompanying consolidated financial statements for more information.

 

(c) Excludes the $4.2 million liability recorded for uncertain tax positions that would be settled by cash payments to the respective taxing authorities. This liability is excluded from the table above because we are unable to make reliable estimates of the period of settlement with the respective taxing authorities.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

There have been no significant changes during the six months ended June 30, 2017 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report for the year ended December 31, 2016.

Recent Accounting Pronouncements

Recent accounting guidance that has been issued and that will be adopted in a future period is included in Note 1 (e), Accounting Standards, of the accompanying consolidated financial statements.

 

43


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

In the normal course of business we are exposed to interest rate risks that could impact our financial position and results of operation and we do not currently hedge this risk. We are exposed to interest rate risk primarily through our Term Loan and our Securitization. We utilize the Securitization for our working capital and other financing needs. If our effective interest rate on our variable debt were to increase by 100 basis points (1.00%), financing expense for the year ended December 31, 2017 would increase by approximately $4.1 million, based on the outstanding amounts of our Term Loan, Senior Notes, and our Securitization as of June 30, 2017.

Foreign Currency Exchange Rate Risk

We have market risk arising from changes in foreign currency exchange rates related to our international subsidiaries’ operations. On a limited basis, we use forward foreign exchange contracts to hedge the impact of fluctuations in foreign currency exchange rates. The aggregate notional amount related to our foreign exchange forward contracts outstanding at June 30, 2017 is insignificant. Management will continue to review the Company’s exposure to currency fluctuations. This exposure may change over time as business practices evolve and could have a material effect on the Company’s financial results in the future. As a result, we may enter into additional contracts in the future to manage foreign currency exchange rate exposure.

Guarantor/Non-Guarantor Information

For the six months ended June 30, 2017, our non-guarantor subsidiaries under the Indenture represented approximately 16.9% of our total revenue and as of June 30, 2017, approximately 54.1% of our total assets (excluding intercompany balances) and 5.0% of our total liabilities.

Reconciliation of Net Loss to Adjusted EBITDA

We present EBITDA and Adjusted EBITDA (collectively, Alternative Operating Metrics) as supplemental measures of our performance. We define EBITDA as net income (loss) before financing expenses (net), income tax expense (benefit) and depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to exclude certain non-recurring or unusual items. These adjustments are itemized below. Adjusted EBITDA, as presented in this quarterly report is determined to be in accordance with the definition in the Term Loan and Senior Notes. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating our Alternative Operating Metrics, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Alternative Operating Metrics should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

44


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

We present our Alternative Operating Metrics because we believe they assist investors, including lenders, in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Furthermore, we believe Alternative Operating Metrics provide useful information about our past operating performance and our capacity to incur and service debt and to fund capital and other corporate expenditures. Alternative Operating Metrics have limitations as analytical tools. Some of these limitations are:

 

    Alternative Operating Metrics do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    Alternative Operating Metrics do not reflect changes in, or cash requirements for, our working capital needs;

 

    Alternative Operating Metrics do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Alternative Operating Metrics do not reflect any cash requirements for such replacements;

 

    Alternative Operating Metrics do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

 

    Other companies in our industry may calculate Alternative Operating Metrics differently than we do, limiting their usefulness as a comparative measure.

Because of these limitations, Alternative Operating Metrics should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.

 

45


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

The following is a reconciliation of the Company’s net income (loss) to Alternative Operating Metrics for the periods presented is as follows (in thousands):

 

     Six months ended
June 30,
     TTM ended
June 30,
 
     2017      2016      2017  

Net income (loss)

   $ (1,748      1,186        (130,599

Financing expenses, net

     23,202        22,472        46,669  

Income taxes

     (113      2,281        7,351  

Depreciation and amortization

     18,229        16,931        36,108  
  

 

 

    

 

 

    

 

 

 

EBITDA

     39,570        42,870        (40,471

Impairments (a)

     —          —          109,569  

Acquisition expenses (b)

     301        —          492  

Legal settlements (c)

     (654      (240      (2,913

Non-recurring legal fees

     —          40        —    

Equity sponsor fees

     750        750        1,500  

Non-cash stock compensation expense

     68        96        364  

Transition costs (d)

     —          64        —    

Severance (e)

     —          146        7  

Restructuring costs (f)

     1,990        1,174        17,109  

Non-recurring expenses on legacy commission plan (g)

     2,038        —          2,038  

Debt extinguishment gain

     —          (5,299      —    

ClearPath Acquisition Adjusted EBITDA (h)

     (1,898      —          (4,368

Impact of foreign currency gains

     (477      (917      (48

Other (i)

     358        2,413        (36
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (j)

   $ 42,046        41,097        83,243  

 

(a) Represents goodwill impairment of $109.6 million related to the Service segment in 2016

 

(b) Represents various costs incurred in connection with acquisitions such as legal, tax, consulting, and other miscellaneous expenses

 

(c) Represents settlement proceeds and payments related to non-recurring legal matters.

 

(d) Represents set-up costs incurred for new system implementations.

 

(e) Represents severance costs primarily related to executive employees.

 

(f) Represents costs associated with the restructuring actions as discussed more fully at Note 13, Restructuring Activities of the accompanying consolidated financial statements.

 

46


COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2017

(unaudited)

 

(g) Represents the costs incurred on a legacy commission plan that was restructured, resulting in operating improvements to the business. Additional non-recurring costs on the legacy plan will continue throughout 2017 subject to continued service of the associate.

 

(h) Represents the Adjusted EBITDA net of dividend impact from ClearPath. See further discussion at (j) below.

 

(i) Other expenses consist of miscellaneous costs and adjustments incurred.

 

(j) ClearPath’s results are not included in Adjusted EBITDA for the period from August 1, 2016 through June 15, 2017, during which the Company owned 40% of Clearpath, which does not meet the definition of a subsidiary under both the Term Loan and Senior Notes. However, we have consolidated their results under GAAP within the same period as ClearPath met the definition of a variable interest entity and we have the right to direct the activities that most significantly impact the entity’s economic performance. Upon the mandatory purchase of an additional 15% of ClearPath on June 16, 2017, our 55% membership interest and ability to control the activities of the entity qualified ClearPath as a subsidiary, and for such period we have included their results in Adjusted EBITDA. If the Company included ClearPath’s results for the entire six and trailing twelve months ended June 30, 2017, the Company’s Adjusted EBITDA would be $43.9 million and $87.6 million, respectively.

 

47